[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2016 Edition]
[From the U.S. Government Publishing Office]
[[Page i]]
Title 12
Banks and Banking
________________________
Parts 230 to 299
Revised as of January 1, 2016
Containing a codification of documents of general
applicability and future effect
As of January 1, 2016
Published by the Office of the Federal Register
National Archives and Records Administration as a
Special Edition of the Federal Register
[[Page ii]]
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[[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........................ 627
Alphabetical List of Agencies Appearing in the CFR...... 647
List of CFR Sections Affected........................... 657
[[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 231.1 refers
to title 12, part 231,
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
regulation. Each title is divided into chapters which usually bear the
name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
volume.
LEGAL STATUS
The contents of the Federal Register are required to be judicially
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie
evidence of the text of the original documents (44 U.S.C. 1510).
HOW TO USE THE CODE OF FEDERAL REGULATIONS
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To determine whether a Code volume has been amended since its
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EFFECTIVE AND EXPIRATION DATES
Each volume of the Code contains amendments published in the Federal
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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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PAST PROVISIONS OF THE CODE
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``[RESERVED]'' TERMINOLOGY
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(b) The matter incorporated is in fact available to the extent
necessary to afford fairness and uniformity in the administrative
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(c) The incorporating document is drafted and submitted for
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What if the material incorporated by reference cannot be found? If
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CFR INDEXES AND TABULAR GUIDES
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alphabetical list of agencies publishing in the CFR are also included in
this volume.
[[Page vii]]
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Oliver A. Potts,
Director,
Office of the Federal Register.
January 1, 2016.
[[Page ix]]
THIS TITLE
Title 12--Banks and Banking is composed of ten volumes. The parts in
these volumes are arranged in the following order: Parts 1-199, 200-219,
220-229, 230-299, 300-499, 500-599, 600-899, 900-1025, 1026-1099, and
1100-end. The contents of these volumes represent all current
regulations codified under this title of the CFR as of January 1, 2016.
For this volume, Ann Worley was Chief Editor. The Code of Federal
Regulations publication program is under the direction of John Hyrum
Martinez, assisted by Stephen J. Frattini.
[[Page 1]]
TITLE 12--BANKS AND BANKING
(This book contains parts 230 to 299)
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Part
chapter ii--Federal Reserve System (Continued).............. 220
[[Page 3]]
CHAPTER II--FEDERAL RESERVE SYSTEM (CONTINUED)
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SUBCHAPTER A--BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
(CONTINUED)
Part Page
230
[Reserved]
231 Netting eligibility for financial
institution (Regulation EE)............. 5
232 Obtaining and using medical information in
connection with credit (Regulation FF).. 6
233 Prohibition on funding of unlawful internet
gambling (Regulation GG)................ 11
234 Designated financial market utilities
(Regulation HH)......................... 21
235 Debit card interchange fees and routing..... 33
237 Swaps margin and swaps push-out............. 52
238 Savings and loan holding companies
(Regulation LL)......................... 75
239 Mutual holding companies (Regulation MM).... 119
240 Retail foreign exchange transactions
(Regulation NN)......................... 194
241 Securities holding companies (Regulation OO) 208
242 Definitions relating to Title I of the Dodd-
Frank Act (Regulation PP)............... 209
243 Resolution plans............................ 217
244 Credit risk retention (Regulation RR)....... 228
246 Supervision and regulation assessments of
fees (Regulation TT).................... 270
248 Proprietary trading and certain interests in
and relationships with covered funds.... 276
249 Liquidity risk measurement standards
(Regulation WW)......................... 320
250 Miscellaneous interpretations............... 349
251 Concentration limit (Regulation XX)......... 378
252 Enhanced prudential standards (Regulation
YY)..................................... 383
261 Rules regarding availability of information. 454
261a Rules regarding access to personal
information under the Privacy Act 1974.. 471
[[Page 4]]
261b Rules regarding public observation of
meetings................................ 476
262 Rules of procedure.......................... 481
263 Rules of practice for hearings.............. 489
264 Employee responsibilities and conduct....... 536
264a Post-employment restrictions for senior
examiners............................... 536
264b Rules regarding foreign gifts and
decorations............................. 538
265 Rules regarding delegation of authority..... 541
266 Limitations on activities of former members
and employees of the Board.............. 560
267
[Reserved]
268 Rules regarding equal opportunity........... 561
269 Policy on labor relations for the Federal
Reserve banks........................... 596
269a Definitions................................. 601
269b Charges of unfair labor practices........... 602
SUBCHAPTER B--FEDERAL OPEN MARKET COMMITTEE
270 Open market operations of Federal Reserve
banks................................... 611
271 Rules regarding availability of information. 612
272 Rules of procedure.......................... 619
281 Statements of policy........................ 621
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
(CONTINUED)
PART 230 [RESERVED]
PART 231_NETTING ELIGIBILITY FOR FINANCIAL INSTITUTION
(REGULATION EE)--Table of Contents
Sec.
231.1 Authority, purpose, and scope.
231.2 Definitions.
231.3 Qualification as a financial institution.
Authority: 12 U.S.C. 4402(1)(B) and 4402(9).
Source: Reg. EE, 59 FR 4784, Feb. 2, 1994, unless otherwise noted.
Sec. 231.1 Authority, purpose, and scope.
(a) Authority. This part (Regulation EE; 12 CFR part 231) is issued
by the Board of Governors of the Federal Reserve System under the
authority of sections 402(1)(B) and 402(9) of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4402(1)(B) and
4402(9)).
(b) Purpose and scope. The purpose of the Act and this part is to
enhance efficiency and reduce systemic risk in the financial markets.
This part expands the Act's definition of ``financial institution'' to
allow more financial market participants to avail themselves of the
netting provisions set forth in sections 401-407 of the Act (12 U.S.C.
4401-4407). This part does not affect the status of those financial
institutions specifically defined in the Act.
Sec. 231.2 Definitions.
As used in this part, unless the context requires otherwise:
(a) Act means the Federal Deposit Insurance Corporation Improvement
Act of 1991 (Pub. L. 102-242, 105 Stat. 2236), as amended.
(b) Affiliate, with respect to a person, means any other person that
controls, is controlled by, or is under common control with the person.
(c) Financial contract means a qualified financial contract as
defined in section 11(e)(8)(D) of the Federal Deposit Insurance Act (12
U.S.C. 1821(e)(8)(D)), as amended, except that a forward contract
includes a contract with a maturity date two days or less after the date
the contract is entered into (i.e., a ``spot'' contract).
(d) Financial market means a market for a financial contract.
(e) Gross mark-to-market positions in one or more financial
contracts means the sum of the absolute values of positions in those
contracts, adjusted to reflect the market values of those positions in
accordance with the methods used by the parties to each contract to
value the contract.
(f) Person means any legal entity, foreign or domestic, including a
corporation, unincorporated company, partnership, government unit or
instrumentality, trust, natural person, or any other entity or
organization.
Sec. 231.3 Qualification as a financial institution.
(a) A person qualifies as a financial institution for purposes of
sections 401-407 of the Act if it represents, orally or in writing, that
it will engage in financial contracts as a counterparty on both sides of
one or more financial markets and either--
(1) Had one or more financial contracts of a total gross dollar
value of at least $1 billion in notional principal amount outstanding on
any day during the previous 15-month period with counterparties that are
not its affiliates; or
(2) Had total gross mark-to-market positions of at least $100
million (aggregated across counterparties) in one or more financial
contracts on any day during the previous 15-month period with
counterparties that are not its affiliates.
(b) If a person qualifies as a financial institution under paragraph
(a) of this section, that person will be considered a financial
institution for the purposes of any contract entered into during the
period it qualifies, even if the person subsequently fails to qualify.
(c) If a person qualifies as a financial institution under paragraph
(a) of this section on March 7, 1994, that person
[[Page 6]]
will be considered a financial institution for the purposes of any
outstanding contract entered into prior to March 7, 1994.
[Reg. EE, 59 FR 4784, Feb. 2, 1994, as amended at 61 FR 1274, Jan. 19,
1996]
PART 232_OBTAINING AND USING MEDICAL INFORMATION IN CONNECTION WITH
CREDIT (REGULATION FF)--Table of Contents
Sec.
232.1 Scope, General Prohibition and Definitions
232.2 Rule of Construction for Obtaining and Using Unsolicited Medical
Information
232.3 Financial Information Exception for Obtaining and Using Medical
Information
232.4 Specific Exceptions for Obtaining and Using Medical Information
Authority: 15 U.S.C. 1681b.
Source: 70 FR 70682, Nov. 22, 2005, unless otherwise noted.
Sec. 232.1 Scope, General Prohibition and Definitions
(a) Scope. This part applies to creditors, as defined in paragraph
(c)(3) of this section, except for creditors that are subject to
Sec. Sec. 41.30, 222.30, 334.30, 571.30, or 717.30.
(b) 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.
(c) Definitions. (1) Consumer means an individual.
(2) Credit has the same meaning as in section 702 of the Equal
Credit Opportunity Act, 15 U.S.C. 1691a.
(3) Creditor has the same meaning as in section 702 of the Equal
Credit Opportunity Act, 15 U.S.C. 1691a.
(4) 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:
(i) 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;
(ii) 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
(iii) 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.
(5) Medical information means:
(i) 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--
(A) The past, present, or future physical, mental, or behavioral
health or condition of an individual;
(B) The provision of health care to an individual; or
(C) The payment for the provision of health care to an individual.
(ii) The term does not include:
(A) The age or gender of a consumer;
(B) Demographic information about the consumer, including a
consumer's residence address or e-mail address;
(C) 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
(D) Information that does not identify a specific consumer.
(6) Person means any individual, partnership, corporation, trust,
estate cooperative, association, government or governmental subdivision
or agency, or other entity.
Sec. 232.2 Rule of construction for obtaining and using unsolicited
medical information.
(a) In general. A creditor does not obtain medical information in
violation of the prohibition if it receives medical information
pertaining to a consumer in connection with any determination of the
consumer's eligibility, or continued eligibility, for credit without
specifically requesting medical information.
[[Page 7]]
(b) Use of unsolicited medical information. A creditor that receives
unsolicited medical information in the manner described in paragraph (a)
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. 232.3 or Sec. 232.4.
(c) Examples. A creditor does not obtain medical information in
violation of the prohibition if, for example:
(1) 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.
(2) In a conversation with the creditor's loan officer, the consumer
informs the creditor that the consumer has a particular medical
condition.
(3) 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.
Sec. 232.3 Financial information exception for obtaining and using
medical information.
(a) 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:
(1) 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;
(2) 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
(3) 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.
(b) Examples--(1) Examples of the types of information routinely
used in making credit eligibility determinations. Paragraph (a)(1) of
this section permits a creditor, for example, to obtain and use
information about:
(i) 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;
(ii) The value, condition, and lien status of a medical device that
may serve as collateral to secure a loan;
(iii) 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
(iv) 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.
(2) Examples of uses of medical information consistent with the
exception. (i) 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.
(ii) A consumer indicates on an application for a $200,000 mortgage
loan that she receives $15,000 in long-term disability income each year
from her former employer and has no other income. Annual income of
$15,000, regardless of source, would not be sufficient
[[Page 8]]
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.
(iii) 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.
(3) Examples of uses of medical information inconsistent with the
exception. (i) 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.
(ii) 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.
(iii) 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.
Sec. 232.4 Specific exceptions for obtaining and using medical
information.
(a) In general. A creditor may obtain and use medical information
pertaining to a consumer in connection
[[Page 9]]
with any determination of the consumer's eligibility, or continued
eligibility, for credit:
(1) 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;
(2) To comply with applicable requirements of local, state, or
Federal laws;
(3) 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--
(i) Designed to meet the special needs of consumers with medical
conditions; and
(ii) Established and administered pursuant to a written plan that--
(A) Identifies the class of persons that the program is designed to
benefit; and
(B) Sets forth the procedures and standards for extending credit or
providing other credit-related assistance under the program;
(4) To the extent necessary for purposes of fraud prevention or
detection;
(5) 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;
(6) 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;
(7) 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;
(8) 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
(9) 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.
(b) 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.
(c) Examples of verifying the medical purpose of the loan or the use
of proceeds. (1) 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.
[[Page 10]]
(2) If a consumer applies for $10,000 of credit for the purpose of
financing cosmetic surgery, the creditor may confirm the cost of the
procedure with the surgeon. If the surgeon reports that the cost of the
procedure is $5,000, the creditor may use that medical information to
offer the consumer only $5,000 of credit.
(3) 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.
(d) Examples of obtaining and using medical information at the
request of the consumer. (1) 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.
(2) 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 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.
(3) 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.
(4) 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.
(5) 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
[[Page 11]]
credit, the consumer has not specifically requested that the creditor
obtain and use medical information to accommodate the consumer's
particular circumstances.
(e) 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.
PART 233_PROHIBITION ON FUNDING OF UNLAWFUL INTERNET GAMBLING
(REGULATION GG)--Table of Contents
Sec.
233.1 Authority, purpose, collection of information, and incorporation
by reference.
233.2 Definitions.
233.3 Designated payment systems.
233.4 Exemptions.
233.5 Policies and procedures required.
233.6 Non-exclusive examples of policies and procedures.
233.7 Regulatory enforcement.
Appendix A to Part 233--Model Notice
Authority: 31 U.S.C. 5364.
Source: Reg. GG, 73 FR 69405, Nov. 18, 2008, unless otherwise noted.
Sec. 233.1 Authority, purpose, collection of information, and
incorporation by reference.
(a) Authority. This part is issued jointly by the Board of Governors
of the Federal Reserve System (Board) and the Secretary of the
Department of the Treasury (Treasury) under section 802 of the Unlawful
Internet Gambling Enforcement Act of 2006 (Act) (enacted as title VIII
of the Security and Accountability For Every Port Act of 2006, Pub. L.
No. 109-347, 120 Stat. 1884, and codified at 31 U.S.C. 5361-5367). The
Act states that none of its provisions shall be construed as altering,
limiting, or extending any Federal or State law or Tribal-State compact
prohibiting, permitting, or regulating gambling within the United
States. See 31 U.S.C. 5361(b). In addition, the Act states that its
provisions are not intended to change which activities related to
horseracing may or may not be allowed under Federal law, are not
intended to change the existing relationship between the Interstate
Horseracing Act of 1978 (IHA) (15 U.S.C. 3001 et seq.) and other Federal
statutes in effect on October 13, 2006, the date of the Act's enactment,
and are not intended to resolve any existing disagreements over how to
interpret the relationship between the IHA and other Federal statutes.
See 31 U.S.C. 5362(10)(D)(iii). This part is intended to be consistent
with these provisions.
(b) Purpose. The purpose of this part is to issue implementing
regulations as required by the Act. The part sets out necessary
definitions, designates payment systems subject to the requirements of
this part, exempts certain participants in designated payment systems
from certain requirements of this part, provides nonexclusive examples
of policies and procedures reasonably designed to identify and block, or
otherwise prevent and prohibit, restricted transactions, and sets out
the Federal entities that have exclusive regulatory enforcement
authority with respect to the designated payments systems and non-exempt
participants therein.
(c) Collection of information. The Office of Management and Budget
(OMB) has approved the collection of information requirements in this
part for the
[[Page 12]]
Department of the Treasury and assigned OMB control number 1505-0204.
The Board has approved the collection of information requirements in
this part under the authority delegated to the Board by OMB, and
assigned OMB control number 7100-0317.
(d) Incorporation by reference--relevant definitions from ACH rules.
(1) This part incorporates by reference the relevant definitions of ACH
terms as published in the ``2008 ACH Rules: A Complete Guide to Rules &
Regulations Governing the ACH Network'' (the ``ACH Rules''). The
Director of the Federal Register approves this incorporation by
reference in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. Copies
of the ``2008 ACH Rules'' are available from the National Automated
Clearing House Association, Suite 100, 13450 Sunrise Valley Drive,
Herndon, Virginia 20171, http://nacha.org, (703) 561-1100. Copies also
are available for public inspection at the Department of Treasury
Library, Room 1428, Main Treasury Building, 1500 Pennsylvania Avenue,
NW., Washington, DC 20220, and the National Archives and Records
Administration (NARA). Before visiting the Treasury library, you must
call (202) 622-0990 for an appointment. For information on the
availability of this material at NARA, call (202) 741-6030, or go to:
http://www.archives.gov/federal--register/code--of--federal--
regulations/ibr--locations.html 20002.
(2) Any amendment to definitions of the relevant ACH terms in the
ACH Rules shall not apply to this part unless the Treasury and the Board
jointly accept such amendment by publishing notice of acceptance of the
amendment to this part in the Federal Register. An amendment to the
definition of a relevant ACH term in the ACH Rules that is accepted by
the Treasury and the Board shall apply to this part on the effective
date of the rulemaking specified by the Treasury and the Board in the
joint Federal Register notice expressly accepting such amendment.
Sec. 233.2 Definitions.
The following definitions apply solely for purposes of this part:
(a) Actual knowledge with respect to a transaction or commercial
customer means when a particular fact with respect to that transaction
or commercial customer is known by or brought to the attention of:
(1) An individual in the organization responsible for the
organization's compliance function with respect to that transaction or
commercial customer; or
(2) An officer of the organization.
(b) Automated clearing house system or ACH system means a funds
transfer system, primarily governed by the ACH Rules, which provides for
the clearing and settlement of batched electronic entries for
participating financial institutions. When referring to ACH systems, the
terms in this regulation (such as ``originating depository financial
institution,'' ``operator,'' ``originating gateway operator,''
``receiving depository financial institution,'' ``receiving gateway
operator,'' and ``third-party sender'') are defined as those terms are
defined in the ACH Rules.
(c) Bet or wager:
(1) Means the staking or risking by any person of something of value
upon the outcome of a contest of others, a sporting event, or a game
subject to chance, upon an agreement or understanding that the person or
another person will receive something of value in the event of a certain
outcome;
(2) Includes the purchase of a chance or opportunity to win a
lottery or other prize (which opportunity to win is predominantly
subject to chance);
(3) Includes any scheme of a type described in 28 U.S.C. 3702;
(4) Includes any instructions or information pertaining to the
establishment or movement of funds by the bettor or customer in, to, or
from an account with the business of betting or wagering (which does not
include the activities of a financial transaction provider, or any
interactive computer service or telecommunications service); and
(5) Does not include--
(i) Any activity governed by the securities laws (as that term is
defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(47)) for the purchase or sale of securities (as that term
is defined in section 3(a)(10) of that act (15 U.S.C. 78c(a)(10));
[[Page 13]]
(ii) Any transaction conducted on or subject to the rules of a
registered entity or exempt board of trade under the Commodity Exchange
Act (7 U.S.C. 1 et seq.);
(iii) Any over-the-counter derivative instrument;
(iv) Any other transaction that--
(A) Is excluded or exempt from regulation under the Commodity
Exchange Act (7 U.S.C. 1 et seq.); or
(B) Is exempt from State gaming or bucket shop laws under section
12(e) of the Commodity Exchange Act (7 U.S.C. 16(e)) or section 28(a) of
the Securities Exchange Act of 1934 (15 U.S.C. 78bb(a));
(v) Any contract of indemnity or guarantee;
(vi) Any contract for insurance;
(vii) Any deposit or other transaction with an insured depository
institution;
(viii) Participation in any game or contest in which participants do
not stake or risk anything of value other than--
(A) Personal efforts of the participants in playing the game or
contest or obtaining access to the Internet; or
(B) Points or credits that the sponsor of the game or contest
provides to participants free of charge and that can be used or redeemed
only for participation in games or contests offered by the sponsor; or
(ix) Participation in any fantasy or simulation sports game or
educational game or contest in which (if the game or contest involves a
team or teams) no fantasy or simulation sports team is based on the
current membership of an actual team that is a member of an amateur or
professional sports organization (as those terms are defined in 28
U.S.C. 3701) and that meets the following conditions:
(A) All prizes and awards offered to winning participants are
established and made known to the participants in advance of the game or
contest and their value is not determined by the number of participants
or the amount of any fees paid by those participants.
(B) All winning outcomes reflect the relative knowledge and skill of
the participants and are determined predominantly by accumulated
statistical results of the performance of individuals (athletes in the
case of sports events) in multiple real-world sporting or other events.
(C) No winning outcome is based--
(1) On the score, point-spread, or any performance or performances
of any single real-world team or any combination of such teams, or
(2) Solely on any single performance of an individual athlete in any
single real-world sporting or other event.
(d) Block means to reject a particular transaction before or during
processing, but it does not require freezing or otherwise prohibiting
subsequent transfers or transactions regarding the proceeds or account.
(e) Card issuer means any person who issues a credit card, debit
card, pre-paid card, or stored value card, or the agent of such person
with respect to such card.
(f) Card system means a system for authorizing, clearing and
settling transactions in which credit cards, debit cards, pre-paid
cards, or stored value cards (such cards being issued or authorized by
the operator of the system), are used to purchase goods or services or
to obtain a cash advance. The term includes systems both in which the
merchant acquirer, card issuer, and system operator are separate
entities and in which more than one of these roles are performed by the
same entity.
(g) Check clearing house means an association of banks or other
payors that regularly exchange checks for collection or return.
(h) Check collection system means an interbank system for
collecting, presenting, returning, and settling for checks or intrabank
system for settling for checks deposited in and drawn on the same bank.
When referring to check collection systems, the terms in this regulation
(such as ``paying bank,'' ``collecting bank,'' ``depositary bank,''
``returning bank,'' and ``check'') are defined as those terms are
defined in 12 CFR 229.2. For purposes of this part, ``check'' also
includes an electronic representation of a check that a bank agrees to
handle as a check.
(i) Commercial customer means a person that is not a consumer and
that contracts with a non-exempt participant in a designated payment
system
[[Page 14]]
to receive, or otherwise accesses, payment transaction services through
that non-exempt participant.
(j) Consumer means a natural person.
(k) Designated payment system means a system listed in Sec. 233.3.
(l) Electronic fund transfer has the same meaning given the term in
section 903 of the Electronic Fund Transfer Act (15 U.S.C. 1693a),
except that such term includes transfers that would otherwise be
excluded under section 903(6)(E) of that act (15 U.S.C. 1693a(6)(E)),
and includes any funds transfer covered by Article 4A of the Uniform
Commercial Code, as in effect in any State.
(m) Financial institution means a State or national bank, a State or
Federal savings and loan association, a mutual savings bank, a State or
Federal credit union, or any other person that, directly or indirectly,
holds an account belonging to a consumer. The term does not include a
casino, sports book, or other business at or through which bets or
wagers may be placed or received.
(n) Financial transaction provider means a creditor, credit card
issuer, financial institution, operator of a terminal at which an
electronic fund transfer may be initiated, money transmitting business,
or international, national, regional, or local payment network utilized
to effect a credit transaction, electronic fund transfer, stored value
product transaction, or money transmitting service, or a participant in
such network, or other participant in a designated payment system.
(o) Foreign banking office means:
(1) Any non-U.S. office of a financial institution; and
(2) Any non-U.S. office of a foreign bank as described in 12 U.S.C.
3101(7).
(p) Interactive computer service means any information service,
system, or access software provider that provides or enables computer
access by multiple users to a computer server, including specifically a
service or system that provides access to the Internet and such systems
operated or services offered by libraries or educational institutions.
(q) Internet means the international computer network of
interoperable packet switched data networks.
(r) Internet gambling business means the business of placing,
receiving or otherwise knowingly transmitting a bet or wager by any
means which involves the use, at least in part, of the Internet, but
does not include the performance of the customary activities of a
financial transaction provider, or any interactive computer service or
telecommunications service.
(s) Intrastate transaction means placing, receiving, or otherwise
transmitting a bet or wager where--
(1) The bet or wager is initiated and received or otherwise made
exclusively within a single State;
(2) The bet or wager and the method by which the bet or wager is
initiated and received or otherwise made is expressly authorized by and
placed in accordance with the laws of such State, and the State law or
regulations include--
(i) Age and location verification requirements reasonably designed
to block access to minors and persons located out of such State; and
(ii) Appropriate data security standards to prevent unauthorized
access by any person whose age and current location has not been
verified in accordance with such State's law or regulations; and
(3) The bet or wager does not violate any provision of--
(i) The Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et seq.);
(ii) 28 U.S.C. chapter 178 (professional and amateur sports
protection);
(iii) The Gambling Devices Transportation Act (15 U.S.C. 1171 et
seq.); or
(iv) The Indian Gaming Regulatory Act (25 U.S.C. 2701 et seq.).
(t) Intratribal transaction means placing, receiving or otherwise
transmitting a bet or wager where--
(1) The bet or wager is initiated and received or otherwise made
exclusively--
(i) Within the Indian lands of a single Indian tribe (as such terms
are defined under the Indian Gaming Regulatory Act (25 U.S.C. 2703)); or
(ii) Between the Indian lands of two or more Indian tribes to the
extent that intertribal gaming is authorized
[[Page 15]]
by the Indian Gaming Regulatory Act (25 U.S.C. 2701 et seq.);
(2) The bet or wager and the method by which the bet or wager is
initiated and received or otherwise made is expressly authorized by and
complies with the requirements of--
(i) The applicable tribal ordinance or resolution approved by the
Chairman of the National Indian Gaming Commission; and
(ii) With respect to class III gaming, the applicable Tribal-State
compact;
(3) The applicable tribal ordinance or resolution or Tribal-State
compact includes--
(i) Age and location verification requirements reasonably designed
to block access to minors and persons located out of the applicable
Tribal lands; and
(ii) Appropriate data security standards to prevent unauthorized
access by any person whose age and current location has not been
verified in accordance with the applicable tribal ordinance or
resolution or Tribal-State Compact; and
(4) The bet or wager does not violate any provision of--
(i) The Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et seq.);
(ii) 28 U.S.C. chapter 178 (professional and amateur sports
protection);
(iii) The Gambling Devices Transportation Act (15 U.S.C. 1171 et
seq.); or
(iv) The Indian Gaming Regulatory Act (25 U.S.C. 2701 et seq.).
(u) Money transmitting business has the meaning given the term in 31
U.S.C. 5330(d)(1) (determined without regard to any regulations
prescribed by the Secretary of the Treasury thereunder).
(v) Operator of a designated payment system means an entity that
provides centralized clearing and delivery services between participants
in the designated payment system and maintains the operational framework
for the system. In the case of an automated clearinghouse system, the
term ``operator'' has the same meaning as provided in the ACH Rules.
(w) Participant in a designated payment system means an operator of
a designated payment system, a financial transaction provider that is a
member of, or has contracted for financial transaction services with, or
is otherwise participating in, a designated payment system, or a third-
party processor. This term does not include a customer of the financial
transaction provider, unless the customer is also a financial
transaction provider otherwise participating in the designated payment
system on its own behalf.
(x) Reasoned legal opinion means a written expression of
professional judgment by a State-licensed attorney that addresses the
facts of a particular client's business and the legality of the client's
provision of its services to relevant customers in the relevant
jurisdictions under applicable federal and State law, and, in the case
of intratribal transactions, applicable tribal ordinances, tribal
resolutions, and Tribal-State compacts. A written legal opinion will not
be considered ``reasoned'' if it does nothing more than recite the facts
and express a conclusion.
(y) Restricted transaction means any of the following transactions
or transmittals involving any credit, funds, instrument, or proceeds
that the Act prohibits any person engaged in the business of betting or
wagering (which does not include the activities of a financial
transaction provider, or any interactive computer service or
telecommunications service) from knowingly accepting, in connection with
the participation of another person in unlawful Internet gambling--
(1) Credit, or the proceeds of credit, extended to or on behalf of
such other person (including credit extended through the use of a credit
card);
(2) An electronic fund transfer, or funds transmitted by or through
a money transmitting business, or the proceeds of an electronic fund
transfer or money transmitting service, from or on behalf of such other
person; or
(3) Any check, draft, or similar instrument that is drawn by or on
behalf of such other person and is drawn on or payable at or through any
financial institution.
(z) State means any State of the United States, the District of
Columbia, or any commonwealth, territory, or other possession of the
United States, including the Commonwealth of Puerto Rico, the
Commonwealth of the
[[Page 16]]
Northern Mariana Islands, American Samoa, Guam, and the Virgin Islands.
(aa) Third-party processor means a service provider that--
(1) In the case of a debit transaction payment, such as an ACH debit
entry or card system transaction, has a direct relationship with the
commercial customer that is initiating the debit transfer transaction
and acts as an intermediary between the commercial customer and the
first depository institution to handle the transaction;
(2) In the case of a credit transaction payment, such as an ACH
credit entry, has a direct relationship with the commercial customer
that is to receive the proceeds of the credit transfer and acts as an
intermediary between the commercial customer and the last depository
institution to handle the transaction; and
(3) In the case of a cross-border ACH debit or check collection
transaction, is the first service provider located within the United
States to receive the ACH debit instructions or check for collection.
(bb) Unlawful Internet gambling means to place, receive, or
otherwise knowingly transmit a bet or wager by any means which involves
the use, at least in part, of the Internet where such bet or wager is
unlawful under any applicable Federal or State law in the State or
Tribal lands in which the bet or wager is initiated, received, or
otherwise made. The term does not include placing, receiving, or
otherwise transmitting a bet or wager that is excluded from the
definition of this term by the Act as an intrastate transaction or an
intra-tribal transaction, and does not include any activity that is
allowed under the Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et
seq.; see Sec. 233.1(a)). The intermediate routing of electronic data
shall not determine the location or locations in which a bet or wager is
initiated, received, or otherwise made.
(cc) Wire transfer system means a system through which an
unconditional order to a bank to pay a fixed or determinable amount of
money to a beneficiary upon receipt, or on a day stated in the order, is
transmitted by electronic or other means through the network, between
banks, or on the books of a bank. When referring to wire transfer
systems, the terms in this regulation (such as ``bank,'' ``originator's
bank,'' ``beneficiary's bank,'' and ``intermediary bank'') are defined
as those terms are defined in 12 CFR part 210, appendix B.
Sec. 233.3 Designated payment systems.
The following payment systems could be used by participants in
connection with, or to facilitate, a restricted transaction:
(a) Automated clearing house systems;
(b) Card systems;
(c) Check collection systems;
(d) Money transmitting businesses solely to the extent they
(1) Engage in the transmission of funds, which does not include
check cashing, currency exchange, or the issuance or redemption of money
orders, travelers' checks, and other similar instruments; and
(2) Permit customers to initiate transmission of funds transactions
remotely from a location other than a physical office of the money
transmitting business; and
(e) Wire transfer systems.
Sec. 233.4 Exemptions.
(a) Automated clearing house systems. The participants processing a
particular transaction through an automated clearing house system are
exempt from this regulation's requirements for establishing written
policies and procedures reasonably designed to prevent or prohibit
restricted transactions with respect to that transaction, except for--
(1) The receiving depository financial institution and any third-
party processor receiving the transaction on behalf of the receiver in
an ACH credit transaction;
(2) The originating depository financial institution and any third-
party processor initiating the transaction on behalf of the originator
in an ACH debit transaction; and
(3) The receiving gateway operator and any third-party processor
that receives instructions for an ACH debit transaction directly from a
foreign sender (which could include a foreign banking office, a foreign
third-party
[[Page 17]]
processor, or a foreign originating gateway operator).
(b) Check collection systems. The participants in a particular check
collection through a check collection system are exempt from this
regulation's requirements for establishing written policies and
procedures reasonably designed to prevent or prohibit restricted
transactions with respect to that check collection, except for the
depositary bank.
(c) Money transmitting businesses. The participants in a money
transmitting business are exempt from this regulation's requirements for
establishing written policies and procedures reasonably designed to
prevent or prohibit restricted transactions, except for the operator.
(d) Wire transfer systems. The participants in a particular wire
transfer through a wire transfer system are exempt from this
regulation's requirements for establishing written policies and
procedures reasonably designed to prevent or prohibit restricted
transactions with respect to that transaction, except for the
beneficiary's bank.
Sec. 233.5 Policies and procedures required.
(a) All non-exempt participants in designated payment systems shall
establish and implement written policies and procedures reasonably
designed to identify and block or otherwise prevent or prohibit
restricted transactions.
(b) A non-exempt financial transaction provider participant in a
designated payment system shall be considered to be in compliance with
the requirements of paragraph (a) of this section if--
(1) It relies on and complies with the written policies and
procedures of the designated payment system that are reasonably designed
to--
(i) Identify and block restricted transactions; or
(ii) Otherwise prevent or prohibit the acceptance of the products or
services of the designated payment system or participant in connection
with restricted transactions; and
(2) Such policies and procedures of the designated payment system
comply with the requirements of this part.
(c) For purposes of paragraph (b)(2) in this section, a participant
in a designated payment system may rely on a written statement or notice
by the operator of that designated payment system to its participants
that states that the operator has designed or structured the system's
policies and procedures for identifying and blocking or otherwise
preventing or prohibiting restricted transactions to comply with the
requirements of this part as conclusive evidence that the system's
policies and procedures comply with the requirements of this part,
unless the participant is notified otherwise by its Federal functional
regulator or, in the case of participants that are not directly
supervised by a Federal functional regulator, the Federal Trade
Commission.
(d) As provided in the Act, a person that identifies and blocks a
transaction, prevents or prohibits the acceptance of its products or
services in connection with a transaction, or otherwise refuses to honor
a transaction, shall not be liable to any party for such action if--
(1) The transaction is a restricted transaction;
(2) Such person reasonably believes the transaction to be a
restricted transaction; or
(3) The person is a participant in a designated payment system and
blocks or otherwise prevents the transaction in reliance on the policies
and procedures of the designated payment system in an effort to comply
with this regulation.
(e) Nothing in this part requires or is intended to suggest that
designated payment systems or participants therein must or should block
or otherwise prevent or prohibit any transaction in connection with any
activity that is excluded from the definition of ``unlawful Internet
gambling'' in the Act as an intrastate transaction, an intratribal
transaction, or a transaction in connection with any activity that is
allowed under the Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et
seq.; see Sec. 233.1(a)).
(f) Nothing in this part modifies any requirement imposed on a
participant by other applicable law or regulation
[[Page 18]]
to file a suspicious activity report to the appropriate authorities.
(g) The requirement of this part to establish and implement written
policies and procedures applies only to the U.S. offices of participants
in designated payment systems.
Sec. 233.6 Non-exclusive examples of policies and procedures.
(a) In general. The examples of policies and procedures to identify
and block or otherwise prevent or prohibit restricted transactions set
out in this section are non-exclusive. In establishing and implementing
written policies and procedures to identify and block or otherwise
prevent or prohibit restricted transactions, a non-exempt participant in
a designated payment system is permitted to design and implement
policies and procedures tailored to its business that may be different
than the examples provided in this section. In addition, non-exempt
participants may use different policies and procedures with respect to
different business lines or different parts of the organization.
(b) Due diligence. If a non-exempt participant in a designated
payment system establishes and implements procedures for due diligence
of its commercial customer accounts or commercial customer relationships
in order to comply, in whole or in part, with the requirements of this
regulation, those due diligence procedures will be deemed to be
reasonably designed to identify and block or otherwise prevent or
prohibit restricted transactions if the procedures include the steps set
out in paragraphs (b)(1), (b)(2), and (b)(3) of this section and subject
to paragraph (b)(4) of this section.
(1) At the establishment of the account or relationship, the
participant conducts due diligence of a commercial customer and its
activities commensurate with the participant's judgment of the risk of
restricted transactions presented by the customer's business.
(2) Based on its due diligence, the participant makes a
determination regarding the risk the commercial customer presents of
engaging in an Internet gambling business and follows either paragraph
(b)(2)(i) or (b)(2)(ii) of this section.
(i) The participant determines that the commercial customer presents
a minimal risk of engaging in an Internet gambling business.
(ii) The participant cannot determine that the commercial customer
presents a minimal risk of engaging in an Internet gambling business, in
which case it obtains the documentation in either paragraph
(b)(2)(ii)(A) or (b)(2)(ii)(B) of this section--
(A) Certification from the commercial customer that it does not
engage in an Internet gambling business; or
(B) If the commercial customer does engage in an Internet gambling
business, each of the following--
(1) Evidence of legal authority to engage in the Internet gambling
business, such as--
(i) A copy of the commercial customer's license that expressly
authorizes the customer to engage in the Internet gambling business
issued by the appropriate State or Tribal authority or, if the
commercial customer does not have such a license, a reasoned legal
opinion that demonstrates that the commercial customer's Internet
gambling business does not involve restricted transactions; and
(ii) A written commitment by the commercial customer to notify the
participant of any changes in its legal authority to engage in its
Internet gambling business.
(2) A third-party certification that the commercial customer's
systems for engaging in the Internet gambling business are reasonably
designed to ensure that the commercial customer's Internet gambling
business will remain within the licensed or otherwise lawful limits,
including with respect to age and location verification.
(3) The participant notifies all of its commercial customers,
through provisions in the account or commercial customer relationship
agreement or otherwise, that restricted transactions are prohibited from
being processed through the account or relationship.
(4) With respect to the determination in paragraph (b)(2)(i) of this
section, participants may deem the following commercial customers to
present a minimal risk of engaging in an Internet gambling business--
[[Page 19]]
(i) An entity that is directly supervised by a Federal functional
regulator as set out in Sec. 233.7(a); or
(ii) An agency, department, or division of the Federal government or
a State government.
(c) Automated clearing house system examples. (1) The policies and
procedures of the originating depository financial institution and any
third party processor in an ACH debit transaction, and the receiving
depository financial institution and any third party processor in an ACH
credit transaction, are deemed to be reasonably designed to identify and
block or otherwise prevent or prohibit restricted transactions if they--
(i) Address methods to conduct due diligence in establishing a
commercial customer account or relationship as set out in Sec.
233.6(b);
(ii) Address methods to conduct due diligence as set out in Sec.
233.6(b)(2)(ii)(B) in the event that the participant has actual
knowledge that an existing commercial customer of the participant
engages in an Internet gambling business; and
(iii) Include procedures to be followed with respect to a commercial
customer if the originating depository financial institution or third-
party processor has actual knowledge that its commercial customer has
originated restricted transactions as ACH debit transactions or if the
receiving depository financial institution or third-party processor has
actual knowledge that its commercial customer has received restricted
transactions as ACH credit transactions, such as procedures that
address--
(A) The circumstances under which the commercial customer should not
be allowed to originate ACH debit transactions or receive ACH credit
transactions; and
(B) The circumstances under which the account should be closed.
(2) The policies and procedures of a receiving gateway operator and
third-party processor that receives instructions to originate an ACH
debit transaction directly from a foreign sender are deemed to be
reasonably designed to prevent or prohibit restricted transactions if
they include procedures to be followed with respect to a foreign sender
if the receiving gateway operator or third-party processor has actual
knowledge, obtained through notification by a government entity, such as
law enforcement or a regulatory agency, that such instructions included
instructions for restricted transactions. Such procedures may address
sending notification to the foreign sender, such as in the form of the
notice contained in appendix A to this part.
(d) Card system examples. The policies and procedures of a card
system operator, a merchant acquirer, third-party processor, or a card
issuer, are deemed to be reasonably designed to identify and block or
otherwise prevent or prohibit restricted transactions, if the policies
and procedures--
(1) Provide for either--
(i) Methods to conduct due diligence--
(A) In establishing a commercial customer account or relationship as
set out in Sec. 233.6(b); and
(B) As set out in Sec. 233.6(b)(2)(ii)(B) in the event that the
participant has actual knowledge that an existing commercial customer of
the participant engages in an Internet gambling business; or
(ii) Implementation of a code system, such as transaction codes and
merchant/business category codes, that are required to accompany the
authorization request for a transaction, including--
(A) The operational functionality to enable the card system operator
or the card issuer to reasonably identify and deny authorization for a
transaction that the coding procedure indicates may be a restricted
transaction; and
(B) Procedures for ongoing monitoring or testing by the card system
operator to detect potential restricted transactions, including--
(1) Conducting testing to ascertain whether transaction
authorization requests are coded correctly; and
(2) Monitoring and analyzing payment patterns to detect suspicious
payment volumes from a merchant customer; and
(2) For the card system operator, merchant acquirer, or third-party
processor, include procedures to be followed
[[Page 20]]
when the participant has actual knowledge that a merchant has received
restricted transactions through the card system, such as--
(i) The circumstances under which the access to the card system for
the merchant, merchant acquirer, or third-party processor should be
denied; and
(ii) The circumstances under which the merchant account should be
closed.
(e) Check collection system examples. (1) The policies and
procedures of a depositary bank are deemed to be reasonably designed to
identify and block or otherwise prevent or prohibit restricted
transactions, if they--
(i) Address methods for the depositary bank to conduct due diligence
in establishing a commercial customer account or relationship as set out
in Sec. 233.6(b);
(ii) Address methods for the depositary bank to conduct due
diligence as set out in Sec. 233.6(b)(2)(ii)(B) in the event that the
depositary bank has actual knowledge that an existing commercial
customer engages in an Internet gambling business; and
(iii) Include procedures to be followed if the depositary bank has
actual knowledge that a commercial customer of the depositary bank has
deposited checks that are restricted transactions, such as procedures
that address--
(A) The circumstances under which check collection services for the
customer should be denied; and
(B) The circumstances under which the account should be closed.
(2) The policies and procedures of a depositary bank that receives
checks for collection from a foreign banking office are deemed to be
reasonably designed to identify and block or otherwise prevent or
prohibit restricted transactions if they include procedures to be
followed by the depositary bank when it has actual knowledge, obtained
through notification by a government entity, such as law enforcement or
a regulatory agency, that a foreign banking office has sent checks to
the depositary bank that are restricted transactions. Such procedures
may address sending notification to the foreign banking office, such as
in the form of the notice contained in the appendix to this part.
(f) Money transmitting business examples. The policies and
procedures of an operator of a money transmitting business are deemed to
be reasonably designed to identify and block or otherwise prevent or
prohibit restricted transactions if they--
(1) Address methods for the operator to conduct due diligence in
establishing a commercial customer relationship as set out in Sec.
233.6(b);
(2) Address methods for the operator to conduct due diligence as set
out in Sec. 233.6(b)(2)(ii)(B) in the event that the operator has
actual knowledge that an existing commercial customer engages in an
Internet gambling business;
(3) Include procedures regarding ongoing monitoring or testing by
the operator to detect potential restricted transactions, such as
monitoring and analyzing payment patterns to detect suspicious payment
volumes to any recipient; and
(4) Include procedures when the operator has actual knowledge that a
commercial customer of the operator has received restricted transactions
through the money transmitting business, that address--
(i) The circumstances under which money transmitting services should
be denied to that commercial customer; and
(ii) The circumstances under which the commercial customer account
should be closed.
(g) Wire transfer system examples. The policies and procedures of
the beneficiary's bank in a wire transfer are deemed to be reasonably
designed to identify and block or otherwise prevent or prohibit
restricted transactions if they--
(1) Address methods for the beneficiary's bank to conduct due
diligence in establishing a commercial customer account as set out in
Sec. 233.6(b);
(2) Address methods for the beneficiary's bank to conduct due
diligence as set out in Sec. 233.6(b)(2)(ii)(B) in the event that the
beneficiary's bank has actual knowledge that an existing commercial
customer of the bank engages in an Internet gambling business;
(3) Include procedures to be followed if the beneficiary's bank
obtains actual knowledge that a commercial customer of the bank has
received restricted
[[Page 21]]
transactions through the wire transfer system, such as procedures that
address
(i) The circumstances under which the beneficiary bank should deny
wire transfer services to the commercial customer; and
(ii) The circumstances under which the commercial customer account
should be closed.
Sec. 233.7 Regulatory enforcement.
The requirements under this part are subject to the exclusive
regulatory enforcement of--
(a) The Federal functional regulators, with respect to the
designated payment systems and participants therein that are subject to
the respective jurisdiction of such regulators under section 505(a) of
the Gramm-Leach-Bliley Act (15 U.S.C. 6805(a)) and section 5g of the
Commodity Exchange Act (7 U.S.C. 7b-2); and
(b) The Federal Trade Commission, with respect to designated payment
systems and participants therein not otherwise subject to the
jurisdiction of any Federal functional regulators (including the
Commission) as described in paragraph (a) of this section.
Sec. Appendix A to Part 233--Model Notice
[Date]
[Name of foreign sender or foreign banking office]
[Address]
Re: U.S. Unlawful Internet Gambling Enforcement Act Notice
Dear [Name of foreign counterparty]:
On [date], U.S. government officials informed us that your
institution processed payments through our facilities for Internet
gambling transactions restricted by U.S. law on [dates, recipients, and
other relevant information if available].
We provide this notice to comply with U.S. Government regulations
implementing the Unlawful Internet Gambling Enforcement Act of 2006
(Act), a U.S. federal law. Our policies and procedures established in
accordance with those regulations provide that we will notify a foreign
counterparty if we learn that the counterparty has processed payments
through our facilities for Internet gambling transactions restricted by
the Act. This notice ensures that you are aware that we have received
information that your institution has processed payments for Internet
gambling restricted by the Act.
The Act is codified in subchapter IV, chapter 53, title 31 of the
U.S. Code (31 U.S.C. 5361 et seq.). Implementing regulations that
duplicate one another can be found at part 233 of title 12 of the U.S.
Code of Federal Regulations (12 CFR part 233) and part 132 of title 31
of the U.S. Code of Federal Regulations (31 CFR part 132).
PART 234_DESIGNATED FINANCIAL MARKET UTILITIES
(REGULATION HH)--Table of Contents
Sec.
234.1 Authority, purpose, and scope.
234.2 Definitions.
234.3 Standards for payment systems.
234.4 Changes to rules, procedures, or operations.
234.5 Access to Federal Reserve Bank accounts and services.
234.6 Interest on balances.
Authority: 12 U.S.C. 5461 et seq.
Source: 77 FR 45919, Aug. 2, 2012, unless otherwise noted.
Sec. 234.1 Authority, purpose, and scope.
(a) Authority. This part is issued under the authority of sections
805, 806, and 810 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) (Pub. L. 111-203, 124 Stat. 1376; 12
U.S.C. 5464, 5465, and 5469).
(b) Purpose and scope. This part establishes risk-management
standards governing the operations related to the payment, clearing, and
settlement activities of designated financial market utilities. In
addition, this part sets out requirements and procedures for a
designated financial market utility that proposes to make a change to
its rules, procedures, or operations that could materially affect the
nature or level of risks presented by the designated financial market
utility and for which the Board is the Supervisory Agency (as defined
below). The risk management standards do not apply, however, to a
designated financial market utility that is a derivatives clearing
organization registered under section 5b of the Commodity Exchange Act
(7 U.S.C. 7a-1) or a clearing agency registered with the Securities and
Exchange Commission under section 17A of the Securities Exchange Act of
1934 (15 U.S.C. 78q-1), which are governed by the risk-management
standards promulgated by
[[Page 22]]
the Commodity Futures Trading Commission or the Securities and Exchange
Commission, respectively, for which each is the Supervisory Agency. This
part also sets out standards, restrictions, and guidelines regarding a
Federal Reserve Bank establishing and maintaining an account for, and
providing services to, a designated financial market utility. In
addition, this part sets forth the terms under which a Reserve Bank may
pay a designated financial market utility interest on the designated
financial market utility's balances held at the Reserve Bank.
[77 FR 45919, Aug. 2, 2012, as amended at 78 FR 76979, Dec. 20, 2013]
Sec. 234.2 Definitions.
(a) Backtest means the ex post comparison of realized outcomes with
margin model forecasts to analyze and monitor model performance and
overall margin coverage.
(b) Central counterparty means an entity that interposes itself
between counterparties to contracts traded in one or more financial
markets, becoming the buyer to every seller and the seller to every
buyer.
(c) Central securities depository means an entity that provides
securities accounts and central safekeeping services.
(d) Designated financial market utility means a financial market
utility that is currently designated by the Financial Stability
Oversight Council under section 804 of the Dodd-Frank Act (12 U.S.C.
5463).
(e) Financial market utility has the same meaning as the term is
defined in section 803(6) of the Dodd-Frank Act (12 U.S.C. 5462(6)).
(f) Link means, for purposes of Sec. 234.3(a)(20), a set of
contractual and operational arrangements between two or more central
counterparties, central securities depositories, or securities
settlement systems, or between one or more of these financial market
utilities and one or more trade repositories, that connect them directly
or indirectly, such as for the purposes of participating in settlement,
cross margining, or expanding their services to additional instruments
and participants.
(g) Orderly wind-down means the actions of a designated financial
market utility to effect the permanent cessation, sale, or transfer of
one or more of its critical operations or services in a manner that
would not increase the risk of significant liquidity or credit problems
spreading among financial institutions or markets and thereby threaten
the stability of the U.S. financial system.
(h) Recovery means, for purposes of Sec. 234.3(a)(3) and (15), the
actions of a designated financial market utility, consistent with its
rules, procedures, and other ex ante contractual arrangements, to
address any uncovered loss, liquidity shortfall, or capital inadequacy,
whether arising from participant default or other causes (such as
business, operational, or other structural weaknesses), including
actions to replenish any depleted prefunded financial resources and
liquidity arrangements, as necessary to maintain the designated
financial market utility's viability as a going concern and to continue
its provision of critical services.
(i) Securities settlement system means an entity that enables
securities to be transferred and settled by book entry and allows
transfers of securities free of or against payment.
(j) Stress test means the estimation of credit or liquidity
exposures that would result from the realization of potential stress
scenarios, such as extreme price changes, multiple defaults, and changes
in other valuation inputs and assumptions.
(k) Supervisory Agency has the same meaning as the term is defined
in section 803(8) of the Dodd-Frank Act (12 U.S.C. 5462(8)).
(l) Trade repository means an entity that maintains a centralized
electronic record of transaction data, such as a swap data repository or
a security-based swap data repository.
[79 FR 65557, Nov. 5, 2014]
Sec. 234.3 Standards for payment systems.
(a) A designated financial market utility must implement rules,
procedures, or operations designed to ensure that it meets or exceeds
the following risk-management standards with respect to its payment,
clearing, and settlement activities.
[[Page 23]]
(1) Legal basis. The designated financial market utility has a well-
founded, clear, transparent, and enforceable legal basis for each
material aspect of its activities in all relevant jurisdictions.
(2) Governance. The designated financial market utility has
governance arrangements that--
(i) Are clear, transparent, and documented;
(ii) Promote the safety and efficiency of the designated financial
market utility;
(iii) Support the stability of the broader financial system, other
relevant public interest considerations such as fostering fair and
efficient markets, and the legitimate interests of relevant
stakeholders, including the designated financial market utility's
owners, participants, and participants' customers; and
(iv) Are designed to ensure--
(A) Lines of responsibility and accountability are clear and direct;
(B) The roles and responsibilities of the board of directors and
senior management are clearly specified;
(C) The board of directors consists of suitable individuals having
appropriate skills to fulfill its multiple roles;
(D) The board of directors includes a majority of individuals who
are not executives, officers, or employees of the designated financial
market utility or an affiliate of the designated financial market
utility;
(E) The board of directors establishes policies and procedures to
identify, address, and manage potential conflicts of interest of board
members and to review its performance and the performance of individual
board members on a regular basis;
(F) The board of directors establishes a clear, documented risk-
management framework that includes the designated financial market
utility's risk-tolerance policy, assigns responsibilities and
accountability for risk decisions, and addresses decisionmaking in
crises and emergencies;
(G) Senior management has the appropriate experience, skills, and
integrity necessary to discharge operational and risk-management
responsibilities;
(H) The risk-management function has sufficient authority,
resources, and independence from other operations of the designated
financial market utility, and has a direct reporting line to and is
overseen by a committee of the board of directors;
(I) The internal audit function has sufficient authority, resources,
and independence from management, and has a direct reporting line to and
is overseen by a committee of the board of directors; and
(J) Major decisions of the board of directors are clearly disclosed
to relevant stakeholders, including the designated financial market
utility's owners, participants, and participants' customers, and, where
there is a broad market impact, the public.
(3) Framework for the comprehensive management of risks. The
designated financial market utility has a sound risk-management
framework for comprehensively managing legal, credit, liquidity,
operational, general business, custody, investment, and other risks that
arise in or are borne by the designated financial market utility. This
framework is subject to periodic review and includes--
(i) Risk-management policies, procedures, and systems that enable
the designated financial market utility to identify, measure, monitor,
and manage the risks that arise in or are borne by the designated
financial market utility, including those posed by other entities as a
result of interdependencies;
(ii) Risk-management policies, procedures, and systems that enable
the designated financial market utility to identify, measure, monitor,
and manage the material risks that it poses to other entities, such as
other financial market utilities, settlement banks, liquidity providers,
or service providers, as a result of interdependencies; and
(iii) Integrated plans for the designated financial market utility's
recovery and orderly wind-down that--
(A) Identify the designated financial market utility's critical
operations and services related to payment, clearing, and settlement;
(B) Identify scenarios that may potentially prevent it from being
able to provide its critical operations and services as a going concern,
including uncovered credit losses (as described in
[[Page 24]]
paragraph (a)(4)(vi)(A) of this section), uncovered liquidity shortfalls
(as described in paragraph (a)(7)(viii)(A) of this section), and general
business losses (as described in paragraph (a)(15) of this section);
(C) Identify criteria that could trigger the implementation of the
recovery or orderly wind-down plan;
(D) Include rules, procedures, policies, and any other tools the
designated financial market utility would use in a recovery or orderly
wind-down to address the scenarios identified under paragraph
(a)(3)(iii)(B) of this section;
(E) Include procedures to ensure timely implementation of the
recovery and orderly wind-down plans in the scenarios identified under
paragraph (a)(3)(iii)(B) of this section;
(F) Include procedures for informing the Board, as soon as
practicable, if the designated financial market utility is considering
initiating recovery or orderly wind-down; and
(G) Are reviewed the earlier of every two years or following changes
to the system or the environment in which the designated financial
market utility operates that would significantly affect the viability or
execution of the plans.
(4) Credit risk. The designated financial market utility effectively
measures, monitors, and manages its credit exposures to participants and
those arising from its payment, clearing, and settlement processes. In
this regard, the designated financial market utility maintains
sufficient financial resources to cover its credit exposure to each
participant fully with a high degree of confidence. In addition, the
designated financial market utility--
(i) If it operates as a central counterparty, maintains additional
prefunded financial resources that are sufficient to cover its credit
exposure under a wide range of significantly different stress scenarios
that includes the default of the participant and its affiliates that
would potentially cause the largest aggregate credit exposure to the
designated financial market utility in extreme but plausible market
conditions;
(ii) If it operates as a central counterparty, may be directed by
the Board to maintain additional prefunded financial resources that are
sufficient to cover its credit exposure under a wide range of
significantly different stress scenarios that includes the default of
the two participants and their affiliates that would potentially cause
the largest aggregate credit exposure to the designated financial market
utility in extreme but plausible market conditions. The Board may
consider such a direction if the central counterparty--
(A) Is involved in activities with a more-complex risk profile, such
as clearing financial instruments characterized by discrete jump-to-
default price changes or that are highly correlated with potential
participant defaults, or
(B) Has been determined by another jurisdiction to be systemically
important in that jurisdiction;
(iii) If it operates as a central counterparty, determines the
amount and regularly tests the sufficiency of the total financial
resources available to meet the requirements of this paragraph by--
(A) On a daily basis, conducting a stress test of its total
financial resources using standard and predetermined stress scenarios,
parameters, and assumptions;
(B) On at least a monthly basis, and more frequently when the
products cleared or markets served experience high volatility or become
less liquid, or when the size or concentration of positions held by the
central counterparty's participants increases significantly, conducting
a comprehensive and thorough analysis of the existing stress scenarios,
models, and underlying parameters and assumptions such that the
designated financial market utility meets its required level of default
protection in light of current and evolving market conditions; and
(C) Having clear procedures to report the results of its stress
tests to decisionmakers at the central counterparty and using these
results to evaluate the adequacy of and adjust its total financial
resources;
(iv) If it operates as a central counterparty, excludes assessments
for additional default or guaranty fund contributions (that is, default
or guaranty fund contributions that are not
[[Page 25]]
prefunded) in its calculation of financial resources available to meet
the total financial resource requirement under this paragraph;
(v) At least annually, provides for a validation of the designated
financial market utility's risk-management models used to determine the
sufficiency of its total financial resources that--
(A) Includes the designated financial market utility's models used
to comply with the collateral provisions under paragraph (a)(5) of this
section and models used to determine initial margin under paragraph
(a)(6) of this section; and
(B) Is performed by a qualified person who does not perform
functions associated with the model (except as part of the annual model
validation), does not report to such a person, and does not have a
financial interest in whether the model is determined to be valid; and
(vi) Establishes rules and procedures that explicitly--
(A) Address allocation of credit losses the designated financial
market utility may face if its collateral and other financial resources
are insufficient to cover fully its credit exposures, including the
repayment of any funds a designated financial market utility may borrow
from liquidity providers; and
(B) Describe the designated financial market utility's process to
replenish any financial resources that the designated financial market
utility may employ during a stress event, including a participant
default.
(5) Collateral. If it requires collateral to manage its or its
participants' credit exposure, the designated financial market utility
accepts collateral with low credit, liquidity, and market risks and sets
and enforces conservative haircuts and concentration limits, in order to
ensure the value of the collateral in the event of liquidation and that
the collateral can be used in a timely manner. In this regard, the
designated financial market utility--
(i) Establishes prudent valuation practices and develops haircuts
that are tested regularly and take into account stressed market
conditions;
(ii) Establishes haircuts that are calibrated to include relevant
periods of stressed market conditions to reduce the need for procyclical
adjustments;
(iii) Provides for annual validation of its haircut procedures, as
part of its risk-management model validation under paragraph (a)(4)(v)
of this section;
(iv) Avoids concentrated holdings of any particular type of asset
where the concentration could significantly impair the ability to
liquidate such assets quickly without significant adverse price effects;
(v) Uses a collateral management system that is well-designed and
operationally flexible such that it, among other things,--
(A) Accommodates changes in the ongoing monitoring and management of
collateral; and
(B) Allows for the timely valuation of collateral and execution of
any collateral or margin calls.
(6) Margin. If it operates as a central counterparty, the designated
financial market utility covers its credit exposures to its participants
for all products by establishing a risk-based margin system that--
(i) Is conceptually and methodologically sound for the risks and
particular attributes of each product, portfolio, and markets it serves,
as demonstrated by documented and empirical evidence supporting design
choices, methods used, variables selected, theoretical bases, key
assumptions, and limitations;
(ii) Establishes margin levels commensurate with the risks and
particular attributes of each product, portfolio, and market it serves;
(iii) Has a reliable source of timely price data;
(iv) Has procedures and sound valuation models for addressing
circumstances in which pricing data are not readily available or
reliable;
(v) Marks participant positions to market and collects variation
margin at least daily and has the operational capacity to make intraday
margin calls and payments, both scheduled and unscheduled, to
participants;
(vi) Generates initial margin requirements sufficient to cover
potential changes in the value of each participant's position during the
interval between the last margin collection and
[[Page 26]]
the closeout of positions following a participant default by--
(A) Ensuring that initial margin meets an established single-tailed
confidence level of at least 99 percent with respect to the estimated
distribution of future exposure; and
(B) Using a conservative estimate of the time horizons for the
effective hedging or closeout of the particular types of products
cleared, including in stressed market conditions; and
(vii) Is monitored on an ongoing basis and regularly reviewed,
tested, and verified through--
(A) Daily backtests;
(B) Monthly sensitivity analyses, performed more frequently during
stressed market conditions or significant fluctuations in participant
positions, with this analysis taking into account a wide range of
parameters and assumptions that reflect possible market conditions that
captures a variety of historical and hypothetical conditions, including
the most volatile periods that have been experienced by the markets the
designated financial market utility serves; and
(C) Annual model validations of the designated financial market
utility's margin models and related parameters and assumptions, as part
of its risk-management model validation under paragraph (a)(4)(v) of
this section.
(7) Liquidity risk. The designated financial market utility
effectively measures, monitors, and manages the liquidity risk that
arises in or is borne by the designated financial market utility. In
this regard, the designated financial market utility--
(i) Has effective operational and analytical tools to identify,
measure, and monitor its settlement and funding flows on an ongoing and
timely basis, including its use of intraday liquidity;
(ii) Maintains sufficient liquid resources in all relevant
currencies to effect same-day and, where applicable, intraday and
multiday settlement of payment obligations with a high degree of
confidence under a wide range of significantly different potential
stress scenarios that includes the default of the participant and its
affiliates that would generate the largest aggregate liquidity
obligation for the designated financial market utility in extreme but
plausible market conditions;
(iii) Holds, for purposes of meeting the minimum liquid resource
requirement under paragraph (a)(7)(ii) of this section,--
(A) cash in each relevant currency at the central bank of issue or
creditworthy commercial banks;
(B) assets that are readily available and convertible into cash,
through committed arrangements without material adverse change
conditions, such as collateralized lines of credit, foreign exchange
swaps, and repurchase agreements; or
(C) subject to the determination of the Board, highly marketable
collateral and investments that are readily available and convertible
into cash with prearranged and highly reliable funding arrangements,
even in extreme but plausible market conditions;
(iv) Evaluates and confirms, at least annually, whether each
provider of the arrangements as described in paragraphs (a)(7)(iii)(B)
and (C) of this section has sufficient information to understand and
manage that provider's associated liquidity risks, and whether the
provider has the capacity to perform;
(v) Maintains and tests its procedures and operational capacity for
accessing each type of liquid resource required under this paragraph at
least annually;
(vi) Determines the amount and regularly tests the sufficiency of
the liquid resources necessary to meet the minimum liquid resource
requirement under this paragraph by--
(A) On a daily basis, conducting a stress test of its liquid
resources using standard and predetermined stress scenarios, parameters,
and assumptions;
(B) On at least a monthly basis, and more frequently when products
cleared or markets served experience high volatility or become less
liquid, or when the size or concentration of positions held by the
designated financial market utility's participants increases
significantly, conducting a comprehensive and thorough analysis of the
existing stress scenarios, models, and underlying parameters and
assumptions such that the designated financial market utility meets its
identified liquidity
[[Page 27]]
needs and resources in light of current and evolving market conditions;
and
(C) Having clear procedures to report the results of its stress
tests to decisionmakers at the designated financial market utility and
using these results to evaluate the adequacy of and make adjustments to
its liquidity risk-management framework;
(vii) At least annually, provides for a validation of its liquidity
risk-management model by a qualified person who does not perform
functions associated with the model (except as part of the annual model
validation), does not report to such a person, and does not have a
financial interest in whether the model is determined to be valid; and
(viii) Establishes rules and procedures that explicitly--
(A) Address potential liquidity shortfalls that would not be covered
by the designated financial market utility's liquid resources and avoid
unwinding, revoking, or delaying the same-day settlement of payment
obligations; and
(B) Describe the designated financial market utility's process to
replenish any liquid resources that it may employ during a stress event,
including a participant default.
(8) Settlement finality. The designated financial market utility
provides clear and certain final settlement intraday or in real time as
appropriate, and at a minimum, by the end of the value date. The
designated financial market utility clearly defines the point at which
settlement is final and the point after which unsettled payments,
transfer instructions, or other settlement instructions may not be
revoked by a participant.
(9) Money settlements. The designated financial market utility
conducts its money settlements in central bank money where practical and
available. If central bank money is not used, the designated financial
market utility minimizes and strictly controls the credit and liquidity
risks arising from conducting its money settlements in commercial bank
money, including settlement on its own books. If it conducts its money
settlements at a commercial bank, the designated financial market
utility--
(i) Establishes and monitors adherence to criteria based on high
standards for its settlement banks that take account of, among other
things, their applicable regulatory and supervisory frameworks,
creditworthiness, capitalization, access to liquidity, and operational
reliability;
(ii) Monitors and manages the concentration of credit and liquidity
exposures to its commercial settlement banks; and
(iii) Ensures that its legal agreements with its settlement banks
state clearly--
(A) When transfers on the books of individual settlement banks are
expected to occur;
(B) That transfers are final when funds are credited to the
recipient's account; and
(C) That the funds credited to the recipient are available
immediately for retransfer or withdrawal.
(10) Physical deliveries. A designated financial market utility that
operates as a central counterparty, securities settlement system, or
central securities depository clearly states its obligations with
respect to the delivery of physical instruments or commodities and
identifies, monitors, and manages the risks associated with such
physical deliveries.
(11) Central securities depositories. A designated financial market
utility that operates as a central securities depository has appropriate
rules and procedures to help ensure the integrity of securities issues
and minimizes and manages the risks associated with the safekeeping and
transfer of securities. In this regard, the designated financial market
utility maintains securities in an immobilized or dematerialized form
for their transfer by book entry.
(12) Exchange-of-value settlement systems. If it settles
transactions that involve the settlement of two linked obligations, such
as a transfer of securities against payment or the exchange of one
currency for another, the designated financial market utility eliminates
principal risk by conditioning the final settlement of one obligation
upon the final settlement of the other.
(13) Participant-default rules and procedures. The designated
financial market utility has effective and clearly defined
[[Page 28]]
rules and procedures to manage a participant default that are designed
to ensure that the designated financial market utility can take timely
action to contain losses and liquidity pressures so that it can continue
to meet its obligations. In this regard, the designated financial market
utility tests and reviews its default procedures, including any closeout
procedures, at least annually or following material changes to these
rules and procedures.
(14) Segregation and portability. A designated financial market
utility that operates as a central counterparty has rules and procedures
that enable the segregation and portability of positions of a
participant's customers and the collateral provided to the designated
financial market utility with respect to those positions.
(15) General business risk. The designated financial market utility
identifies, monitors, and manages its general business risk, which is
the risk of losses that may arise from its administration and operation
as a business enterprise (including losses from execution of business
strategy, negative cash flows, or unexpected and excessively large
operating expenses) that are neither related to participant default nor
separately covered by financial resources maintained for credit or
liquidity risk. In this regard, in addition to holding financial
resources required to manage credit risk (paragraph (a)(4) of this
section) and liquidity risk (paragraph (a)(7) of this section), the
designated financial market utility--
(i) Maintains liquid net assets funded by equity that are at all
times sufficient to ensure a recovery or orderly wind-down of critical
operations and services such that it--
(A) Holds unencumbered liquid financial assets, such as cash or
highly liquid securities, that are sufficient to cover the greater of--
(1) The cost to implement the plans to address general business
losses as required under paragraph (a)(3)(iii) of this section and
(2) Six months of current operating expenses or as otherwise
determined by the Board; and
(B) Holds equity, such as common stock, disclosed reserves, and
other retained earnings, that is at all times greater than or equal to
the amount of unencumbered liquid financial assets that are required to
be held under paragraph (a)(15)(i)(A) of this section; and
(ii) Maintains a viable plan, approved by the board of directors,
for raising additional equity should the designated financial market
utility's equity fall below the amount required under paragraph
(a)(15)(i) of this section, and updates the plan the earlier of every
two years or following changes to the designated financial market
utility or the environment in which it operates that would significantly
affect the viability or execution of the plan.
(16) Custody and investment risks. The designated financial market
utility--
(i) Safeguards its own and its participants' assets and minimizes
the risk of loss on and delay in access to these assets by--
(A) Holding its own and its participants' assets at supervised and
regulated entities that have accounting practices, safekeeping
procedures, and internal controls that fully protect these assets; and
(B) Evaluating its exposures to its custodian banks, taking into
account the full scope of its relationships with each; and
(ii) Invests its own and its participants' assets--
(A) In instruments with minimal credit, market, and liquidity risks,
such as investments that are secured by, or are claims on, high-quality
obligors and investments that allow for timely liquidation with little,
if any, adverse price effect; and
(B) Using an investment strategy that is consistent with its overall
risk-management strategy and fully disclosed to its participants.
(17) Operational risk. The designated financial market utility
manages its operational risks by establishing a robust operational risk-
management framework that is approved by the board of directors. In this
regard, the designated financial market utility--
(i) Identifies the plausible sources of operational risk, both
internal and external, and mitigates their impact through the use of
appropriate systems, policies, procedures, and controls that are
reviewed, audited, and tested periodically and after major changes;
[[Page 29]]
(ii) Identifies, monitors, and manages the risks its operations
might pose to other financial market utilities and trade repositories,
if any;
(iii) Has policies and systems that are designed to achieve clearly
defined objectives to ensure a high degree of security and operational
reliability;
(iv) Has systems that have adequate, scalable capacity to handle
increasing stress volumes and achieve the designated financial market
utility's service-level objectives;
(v) Has comprehensive physical, information, and cyber security
policies, procedures, and controls that address potential and evolving
vulnerabilities and threats;
(vi) Has business continuity management that provides for rapid
recovery and timely resumption of critical operations and fulfillment of
its obligations, including in the event of a wide-scale disruption or a
major disruption; and
(vii) Has a business continuity plan that--
(A) Incorporates the use of a secondary site that is located at a
sufficient geographical distance from the primary site to have a
distinct risk profile;
(B) Is designed to enable critical systems, including information
technology systems, to recover and resume operations no later than two
hours following disruptive events;
(C) Is designed to enable it to complete settlement by the end of
the day of the disruption, even in case of extreme circumstances; and
(D) Is tested at least annually.
(18) Access and participation requirements. The designated financial
market utility has objective, risk-based, and publicly disclosed
criteria for participation, which permit fair and open access. The
designated financial market utility--
(i) Monitors compliance with its participation requirements on an
ongoing basis and has the authority to impose more-stringent
restrictions or other risk controls on a participant in situations where
the designated financial market utility determines the participant poses
heightened risk to the designated financial market utility; and
(ii) Has clearly defined and publicly disclosed procedures for
facilitating the suspension and orderly exit of a participant that fails
to meet the participation requirements.
(19) Tiered participation arrangements. The designated financial
market utility identifies, monitors, and manages the material risks
arising from arrangements in which firms that are not direct
participants in the designated financial market utility rely on the
services provided by direct participants to access the designated
financial market utility's payment, clearing, or settlement facilities,
whether the risks are borne by the designated financial market utility
or by its participants as a result of their participation. The
designated financial market utility--
(i) Conducts an analysis to determine whether material risks arise
from tiered participation arrangements;
(ii) Where material risks are identified, mitigates or manages such
risks; and
(iii) Reviews and updates the analysis conducted under paragraph
(a)(19)(i) of this section the earlier of every two years or following
material changes to the system design or operations or the environment
in which the designated financial market utility operates if those
changes could affect the analysis conducted under paragraph (a)(19)(i)
of this section.
(20) Links. If it operates as a central counterparty, securities
settlement system, or central securities depository and establishes a
link with one or more of these types of financial market utilities or
trade repositories, the designated financial market utility identifies,
monitors, and manages risks related to this link. In this regard, each
central counterparty in a link arrangement with another central
counterparty covers, at least on a daily basis, its current and
potential future exposures to the linked central counterparty and its
participants, if any, fully with a high degree of confidence without
reducing the central counterparty's ability to fulfill its obligations
to its own participants.
(21) Efficiency and effectiveness. The designated financial market
utility--
(i) Is efficient and effective in meeting the requirements of its
participants
[[Page 30]]
and the markets it serves, in particular, with regard to its--
(A) Clearing and settlement arrangement;
(B) Risk-management policies, procedures, and systems;
(C) Scope of products cleared and settled; and
(D) Use of technology and communication procedures;
(ii) Has clearly defined goals and objectives that are measurable
and achievable, such as minimum service levels, risk-management
expectations, and business priorities; and
(iii) Has policies and procedures for the regular review of its
efficiency and effectiveness.
(22) Communication procedures and standards. The designated
financial market utility uses, or at a minimum accommodates, relevant
internationally accepted communication procedures and standards in order
to facilitate efficient payment, clearing, and settlement.
(23) Disclosure of rules, key procedures, and market data. The
designated financial market utility--
(i) Has clear and comprehensive rules and procedures;
(ii) Publicly discloses all rules and key procedures, including key
aspects of its default rules and procedures;
(iii) Provides sufficient information to enable participants to have
an accurate understanding of the risks, fees, and other material costs
they incur by participating in the designated financial market utility;
(iv) Provides a comprehensive public disclosure of its legal,
governance, risk management, and operating framework, that includes--
(A) Executive summary. An executive summary of the key points from
paragraphs (a)(23)(iv)(B) through (D) of this section;
(B) Summary of major changes since the last update of the
disclosure. A summary of the major changes since the last update of
paragraph (a)(23)(iv)(C), (D), or (E) of this section;
(C) General background on the designated financial market utility. A
description of--
(1) The designated financial market utility's function and the
markets it serves,
(2) Basic data and performance statistics on its services and
operations, such as basic volume and value statistics by product type,
average aggregate intraday exposures to its participants, and statistics
on the designated financial market utility's operational reliability,
and
(3) The designated financial market utility's general organization,
legal and regulatory framework, and system design and operations;
(D) Standard-by-standard summary narrative. A comprehensive
narrative disclosure for each applicable standard set forth in this
paragraph (a) with sufficient detail and context to enable a reader to
understand the designated financial market utility's approach to
controlling the risks and addressing the requirements in each standard;
and
(E) List of publicly available resources. A list of publicly
available resources, including those referenced in the disclosure, that
may help a reader understand how the designated financial market utility
controls its risks and addresses the requirements set forth in this
paragraph (a); and
(v) Updates the public disclosure under paragraph (a)(23)(iv) of
this section the earlier of every two years or following changes to its
system or the environment in which it operates that would significantly
change the accuracy of the statements provided under paragraph
(a)(23)(iv) of this section.
(b) The Board, by order, may apply heightened risk-management
standards to a particular designated financial market utility in
accordance with the risks presented by that designated financial market
utility. The Board, by order, may waive the application of a standard or
standards to a particular designated financial market utility where the
risks presented by or the design of that designated financial market
utility would make the application of the standard or standards
inappropriate.
[77 FR 45919, Aug. 2, 2012, as amended at 79 FR 65558, Nov. 5, 2014]
Sec. 234.4 Changes to rules, procedures, or operations.
(a) Advance notice. (1) A designated financial market utility shall
provide at least 60-days advance notice to the
[[Page 31]]
Board of any proposed change to its rules, procedures, or operations
that could materially affect the nature or level of risks presented by
the designated financial market utility.
(2) The notice of the proposed change shall describe--
(i) The nature of the change and expected effects on risks to the
designated financial market utility, its participants, or the market;
and
(ii) How the designated financial market utility plans to manage any
identified risks.
(3) The Board may require the designated financial market utility to
provide additional information necessary to assess the effect the
proposed change would have on the nature or level of risks associated
with the utility's payment, clearing, or settlement activities and the
sufficiency of any proposed risk-management techniques.
(4) A designated financial market utility shall not implement a
change to which the Board has an objection.
(5) The Board will notify the designated financial market utility of
any objection before the end of 60 days after the later of--
(i) The date the Board receives the notice of proposed change; or
(ii) The date the Board receives any further information it requests
for consideration of the notice.
(6) A designated financial market utility may implement a change if
it has not received an objection to the proposed change before the end
of 60 days after the later of--
(i) The date the Board receives the notice of proposed change; or
(ii) The date the Board receives any further information it requests
for consideration of the notice.
(7) With respect to proposed changes that raise novel or complex
issues, the Board may, by written notice during the 60-day review
period, extend the review period for an additional 60 days. Any
extension under this paragraph will extend the time periods under
paragraphs (a)(5) and (a)(6) of this section to 120 days.
(8) A designated financial market utility may implement a proposed
change before the expiration of the applicable review period if the
Board notifies the designated financial market utility in writing that
the Board does not object to the proposed change and authorizes the
designated financial market utility to implement the change on an
earlier date, subject to any conditions imposed by the Board.
(b) Emergency changes. (1) A designated financial market utility may
implement a change that would otherwise require advance notice under
this section if it determines that--
(i) An emergency exists; and
(ii) Immediate implementation of the change is necessary for the
designated financial market utility to continue to provide its services
in a safe and sound manner.
(2) The designated financial market utility shall provide notice of
any such emergency change to the Board as soon as practicable and no
later than 24 hours after implementation of the change.
(3) In addition to the information required for changes requiring
advance notice in paragraph (a)(2) of this section, the notice of an
emergency change shall describe--
(i) The nature of the emergency; and
(ii) The reason the change was necessary for the designated
financial market utility to continue to provide its services in a safe
and sound manner.
(4) The Board may require modification or rescission of the change
if it finds that the change is not consistent with the purposes of the
Dodd-Frank Act or any applicable rules, order, or standards prescribed
under section 805(a) of the Dodd-Frank Act.
(c) Materiality. (1) The term ``materially affect the nature or
level of risks presented'' in paragraph (a)(1) of this section means
matters as to which there is a reasonable possibility that the change
would materially affect the overall nature or level of risk presented by
the designated financial market utility, including risk arising in the
performance of payment, clearing, or settlement functions.
(2) A change to rules, procedures, or operations that would
materially affect the nature or level of risks presented includes, but
is not limited to, changes that materially affect any one or more of the
following:
(i) Participant eligibility or access criteria;
[[Page 32]]
(ii) Product eligibility;
(iii) Risk management;
(iv) Settlement failure or default procedures;
(v) Financial resources;
(vi) Business continuity and disaster recovery plans;
(vii) Daily or intraday settlement procedures;
(viii) The scope of services, including the addition of a new
service or discontinuation of an existing service;
(ix) Technical design or operating platform, which results in non-
routine changes to the underlying technological framework for payment,
clearing, or settlement functions; or
(x) Governance.
(3) A change to rules, procedures, or operations that does not meet
the conditions of paragraph (c)(2) of this section and would not
materially affect the nature or level of risks presented includes, but
is not limited to the following:
(i) A routine technology systems upgrade;
(ii) A change in a fee, price, or other charge for services provided
by the designated financial market utility;
(iii) A change related solely to the administration of the
designated financial market utility or related to the routine, daily
administration, direction, and control of employees; or
(iv) A clerical change and other non-substantive revisions to rules,
procedures, or other documentation.
[77 FR 45919, Aug. 2, 2012. Redesignated at 79 FR 65562, Nov. 5, 2014]
Sec. 234.5 Access to Federal Reserve Bank accounts and services.
(a) This section applies to any designated financial market utility
for which the Board may authorize a Federal Reserve Bank to open an
account or provide services in accordance with section 806(a) of the
Dodd-Frank Act. Upon receipt of Board authorization and subject to any
limitations, restrictions, or other requirements established by the
Board, a Federal Reserve Bank may enter into agreements governing the
details of its accounts and services with a designated financial market
utility, consistent with this section and any other applicable Board
direction. The agreements may include, among other things, provisions
regarding documentation to establish the account and receive services,
conditions imposed on the account and services, service charges,
reporting, accounting for activity in the account, liability and duty of
care, and termination.
(b) A Federal Reserve Bank should ensure that its establishment and
maintenance of an account for or provision of services to a designated
financial market utility does not create undue credit, settlement, or
other risk to the Reserve Bank. In order to establish and maintain an
account with a Federal Reserve Bank or receive financial services from a
Federal Reserve Bank, the designated financial market utility must be in
compliance with the Supervisory Agency's regulatory and supervisory
requirements regarding financial resources, liquidity, participant
default management, and other aspects of risk management, as determined
by the Supervisory Agency. In addition, at a minimum, the designated
financial market utility must, in the Federal Reserve Bank's judgment--
(1) Be in generally sound financial condition, including maintenance
of sufficient working capital and cash flow to permit the designated
financial market utility to continue as a going concern and to meet its
current and projected operating expenses under a range of scenarios;
(2) Be in compliance with Board orders and policies, Federal Reserve
Bank account agreements and, as applicable, operating circulars, and
other applicable Federal Reserve requirements regarding the
establishment and maintenance of an account at a Federal Reserve Bank
and the receipt of financial services from a Federal Reserve Bank; and
(3) Have an ongoing ability, including during periods of market
stress or a participant default, to meet all of its obligations under
its agreement for a Federal Reserve Bank account and services, including
by maintaining--
(i) Sufficient liquid resources to meet its obligations under the
account agreement;
(ii) The operational capacity to ensure that such liquid resources
are
[[Page 33]]
available to satisfy the account obligations on a timely basis in
accordance with the account agreement; and
(iii) Sound money settlement processes designed to adequately
monitor its Federal Reserve Bank account on an intraday basis, process
money transfers through its account in an orderly manner, and complete
final money settlement no later than the value date.
(c) The Board will consult with the Supervisory Agency of a
designated financial market utility prior to authorizing a Federal
Reserve Bank to open an account, and periodically thereafter, to
ascertain the views of the Supervisory Agency regarding the designated
financial market utility's compliance with the requirements in paragraph
(b) of this section.
(d) In addition to any right that a Reserve Bank has to limit or
terminate an account or the use of a service pursuant to its account
agreement, the Board may direct the Federal Reserve Bank to impose
limits, restrictions, or other conditions on the availability or use of
a Federal Reserve Bank account or service by a designated financial
market utility, including directing the Reserve Bank to terminate the
use of a particular service or to close the account. If the Reserve Bank
determines that a designated financial market utility no longer complies
with one or more of the minimum conditions in subsection (b), the
Reserve Bank will consult with the Board regarding continued maintenance
of the account and provision of services.
[78 FR 76979, Dec. 20, 2013. Redesignated and amended at 79 FR 65562,
Nov. 5, 2014]
Sec. 234.6 Interest on balances.
(a) A Federal Reserve Bank may pay interest on balances maintained
by a designated financial market utility at the Federal Reserve Bank in
accordance with this section and under such other terms and conditions
as the Board may prescribe.
(b) Interest on balances paid under this section shall be at the
rate paid on balances maintained by depository institutions or another
rate determined by the Board from time to time, not to exceed the
general level of short-term interest rates.
(c) For purposes of this section, ``short-term interest rates''
shall have the same meaning as the meaning provided for that term in
Sec. 204.10(b)(3) of this chapter.
[78 FR 76979, Dec. 20, 2013. Redesignated at 79 FR 65562, Nov. 5, 2014]
PART 235_DEBIT CARD INTERCHANGE FEES AND ROUTING--Table of Contents
Sec.
235.1 Authority and purpose.
235.2 Definitions.
235.3 Reasonable and proportional interchange fees.
235.4 Fraud-prevention adjustment.
235.5 Exemptions.
235.6 Prohibition on circumvention, evasion, or net compensation.
235.7 Limitation on payment card restrictions.
235.8 Reporting requirements and record retention.
235.9 Administrative enforcement.
235.10 Effective and compliance dates.
Appendix A to Part 235--Official Board Commentary on Regulation II
Authority: 15 U.S.C. 1693o-2.
Source: 76 FR 43466, July 20, 2011, unless otherwise noted.
Sec. 235.1 Authority and purpose.
(a) Authority. This part is issued by the Board of Governors of the
Federal Reserve System (Board) under section 920 of the Electronic Fund
Transfer Act (EFTA) (15 U.S.C. 1693o-2, as added by section 1075 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law
111-203, 124 Stat. 1376 (2010)).
(b) Purpose. This part implements the provisions of section 920 of
the EFTA, including standards for reasonable and proportional
interchange transaction fees for electronic debit transactions,
standards for receiving a fraud-prevention adjustment to interchange
transaction fees, exemptions from the interchange transaction fee
limitations, prohibitions on evasion and circumvention, prohibitions on
payment card network exclusivity arrangements and routing restrictions
for debit card transactions, and reporting requirements for debit card
issuers and payment card networks.
[[Page 34]]
Sec. 235.2 Definitions.
For purposes of this part:
(a) Account (1) Means a transaction, savings, or other asset account
(other than an occasional or incidental credit balance in a credit plan)
established for any purpose and that is located in the United States;
and
(2) Does not include an account held under a bona fide trust
agreement that is excluded by section 903(2) of the Electronic Fund
Transfer Act and rules prescribed thereunder.
(b) Acquirer means a person that contracts directly or indirectly
with a merchant to provide settlement for the merchant's electronic
debit transactions over a payment card network. An acquirer does not
include a person that acts only as a processor for the services it
provides to the merchant.
(c) Affiliate means any company that controls, is controlled by, or
is under common control with another company.
(d) Cardholder means the person to whom a debit card is issued.
(e) Control of a company means--
(1) Ownership, control, or power to vote 25 percent or more of the
outstanding shares of any class of voting security of the company,
directly or indirectly, or acting through one or more other persons;
(2) Control in any manner over the election of a majority of the
directors, trustees, or general partners (or individuals exercising
similar functions) of the company; or
(3) The power to exercise, directly or indirectly, a controlling
influence over the management or policies of the company, as the Board
determines.
(f) Debit card (1) Means any card, or other payment code or device,
issued or approved for use through a payment card network to debit an
account, regardless of whether authorization is based on signature,
personal identification number (PIN), or other means, and regardless of
whether the issuer holds the account, and
(2) Includes any general-use prepaid card; and
(3) Does not include--
(i) Any card, or other payment code or device, that is redeemable
upon presentation at only a single merchant or an affiliated group of
merchants for goods or services; or
(ii) A check, draft, or similar paper instrument, or an electronic
representation thereof.
(g) Designated automated teller machine (ATM) network means either--
(1) All ATMs identified in the name of the issuer; or
(2) Any network of ATMs identified by the issuer that provides
reasonable and convenient access to the issuer's customers.
(h) Electronic debit transaction (1) Means the use of a debit card
by a person as a form of payment in the United States to initiate a
debit to an account, and
(2) Does not include transactions initiated at an ATM, including
cash withdrawals and balance transfers initiated at an ATM.
(i) General-use prepaid card means a card, or other payment code or
device, that is--
(1) Issued on a prepaid basis in a specified amount, whether or not
that amount may be increased or reloaded, in exchange for payment; and
(2) Redeemable upon presentation at multiple, unaffiliated merchants
for goods or services.
(j) Interchange transaction fee means any fee established, charged,
or received by a payment card network and paid by a merchant or an
acquirer for the purpose of compensating an issuer for its involvement
in an electronic debit transaction.
(k) Issuer means any person that authorizes the use of a debit card
to perform an electronic debit transaction.
(l) Merchant means any person that accepts debit cards as payment.
(m) Payment card network means an entity that--
(1) Directly or indirectly provides the proprietary services,
infrastructure, and software that route information and data to an
issuer from an acquirer to conduct the authorization, clearance, and
settlement of electronic debit transactions; and
(2) A merchant uses in order to accept as a form of payment a brand
of debit card or other device that may be used to carry out electronic
debit transactions.
[[Page 35]]
(n) Person means a natural person or an organization, including a
corporation, government agency, estate, trust, partnership,
proprietorship, cooperative, or association.
(o) Processor means a person that processes or routes electronic
debit transactions for issuers, acquirers, or merchants.
(p) Route means to direct and send information and data to an
unaffiliated entity or to an affiliated entity acting on behalf of an
unaffiliated entity.
(q) United States means the States, territories, and possessions of
the United States, the District of Columbia, the Commonwealth of Puerto
Rico, or any political subdivision of any of the foregoing.
Sec. 235.3 Reasonable and proportional interchange transaction fees.
(a) In general. The amount of any interchange transaction fee that
an issuer may receive or charge with respect to an electronic debit
transaction shall be reasonable and proportional to the cost incurred by
the issuer with respect to the electronic debit transaction.
(b) Determination of reasonable and proportional fees. An issuer
complies with the requirements of paragraph (a) of this section only if
each interchange transaction fee received or charged by the issuer for
an electronic debit transaction is no more than the sum of--
(1) 21 cents and;
(2) 5 basis points multiplied by the value of the transaction.
Sec. 235.4 Fraud-prevention adjustment.
(a) In general. Subject to paragraph (b) of this section, an issuer
may receive or charge an amount of no more than 1 cent per transaction
in addition to any interchange transaction fee it receives or charges in
accordance with Sec. 235.3.
(b) Issuer standards. (1) To be eligible to receive or charge the
fraud-prevention adjustment in paragraph (a) of this section, an issuer
must develop and implement policies and procedures reasonably designed
to take effective steps to reduce the occurrence of, and costs to all
parties from, fraudulent electronic debit transactions, including
through the development and implementation of cost-effective fraud-
prevention technology.
(2) An issuer's policies and procedures must address--
(i) Methods to identify and prevent fraudulent electronic debit
transactions;
(ii) Monitoring of the volume and value of its fraudulent electronic
debit transactions;
(iii) Appropriate responses to suspicious electronic debit
transactions in a manner designed to limit the costs to all parties from
and prevent the occurrence of future fraudulent electronic debit
transactions;
(iv) Methods to secure debit card and cardholder data; and
(v) Such other factors as the issuer considers appropriate.
(3) An issuer must review, at least annually, its fraud-prevention
policies and procedures, and their implementation and update them as
necessary in light of--
(i) Their effectiveness in reducing the occurrence of, and cost to
all parties from, fraudulent electronic debit transactions involving the
issuer;
(ii) Their cost-effectiveness; and
(iii) Changes in the types of fraud, methods used to commit fraud,
and available methods for detecting and preventing fraudulent electronic
debit transactions that the issuer identifies from--
(A) Its own experience or information;
(B) Information provided to the issuer by its payment card networks,
law enforcement agencies, and fraud-monitoring groups in which the
issuer participates; and
(C) Applicable supervisory guidance.
(c) Notification. To be eligible to receive or charge a fraud-
prevention adjustment, an issuer must annually notify its payment card
networks that it complies with the standards in paragraph (b) of this
section.
(d) Change in status. An issuer is not eligible to receive or charge
a fraud-prevention adjustment if the issuer is substantially non-
compliant with the standards set forth in paragraph (b) of this section,
as determined by the issuer or the appropriate agency under Sec. 235.9.
Such an issuer must notify its payment card networks that it is no
[[Page 36]]
longer eligible to receive or charge a fraud-prevention adjustment no
later than 10 days after determining or receiving notification from the
appropriate agency under Sec. 235.9 that the issuer is substantially
non-compliant with the standards set forth in paragraph (b) of this
section. The issuer must stop receiving and charging the fraud-
prevention adjustment no later than 30 days after notifying its payment
card networks.
[77 FR 46280, Aug. 3, 2012]
Sec. 235.5 Exemptions.
(a) Exemption for small issuers. (1) In general. Except as provided
in paragraph (a)(3) of this section, Sec. Sec. 235.3, 235.4, and 235.6
do not apply to an interchange transaction fee received or charged by an
issuer with respect to an electronic debit transaction if--
(i) The issuer holds the account that is debited; and
(ii) The issuer, together with its affiliates, has assets of less
than $10 billion as of the end of the calendar year preceding the date
of the electronic debit transaction.
(2) Determination of issuer asset size. A person may rely on lists
published by the Board to determine whether an issuer, together with its
affiliates, has assets of less than $10 billion as of the end of the
calendar year preceding the date of the electronic debit transaction.
(3) Change in status. If an issuer qualifies for the exemption in
paragraph (a)(1) in a particular calendar year, but, as of the end of
that calendar year no longer qualifies for the exemption because at that
time it, together with its affiliates, has assets of $10 billion or
more, the issuer must begin complying with Sec. Sec. 235.3, 235.4, and
235.6 no later than July 1 of the succeeding calendar year.
(b) Exemption for government-administered programs. Except as
provided in paragraph (d) of this section, Sec. Sec. 235.3, 235.4, and
235.6 do not apply to an interchange transaction fee received or charged
by an issuer with respect to an electronic debit transaction if--
(1) The electronic debit transaction is made using a debit card that
has been provided to a person pursuant to a Federal, State, or local
government-administered payment program; and
(2) The cardholder may use the debit card only to transfer or debit
funds, monetary value, or other assets that have been provided pursuant
to such program.
(c) Exemption for certain reloadable prepaid cards--(1) In general.
Except as provided in paragraph (d) of this section, Sec. Sec. 235.3,
235.4, and 235.6 do not apply to an interchange transaction fee received
or charged by an issuer with respect to an electronic debit transaction
using a general-use prepaid card that is--
(i) Not issued or approved for use to access or debit any account
held by or for the benefit of the cardholder (other than a subaccount or
other method of recording or tracking funds purchased or loaded on the
card on a prepaid basis);
(ii) Reloadable and not marketed or labeled as a gift card or gift
certificate; and
(iii) The only means of access to the underlying funds, except when
all remaining funds are provided to the cardholder in a single
transaction.
(2) Temporary cards. For purposes of this paragraph (c), the term
``reloadable'' includes a temporary non-reloadable card issued solely in
connection with a reloadable general-use prepaid card.
(d) Exception. The exemptions in paragraphs (b) and (c) of this
section do not apply to any interchange transaction fee received or
charged by an issuer on or after July 21, 2012, with respect to an
electronic debit transaction if any of the following fees may be charged
to a cardholder with respect to the card:
(1) A fee or charge for an overdraft, including a shortage of funds
or a transaction processed for an amount exceeding the account balance,
unless the fee or charge is imposed for transferring funds from another
asset account to cover a shortfall in the account accessed by the card;
or
(2) A fee imposed by the issuer for the first withdrawal per
calendar month from an ATM that is part of the issuer's designated ATM
network.
[[Page 37]]
Sec. 235.6 Prohibition on circumvention, evasion, and net compensation.
(a) Prohibition of circumvention or evasion. No person shall
circumvent or evade the interchange transaction fee restrictions in
Sec. Sec. 235.3 and 235.4.
(b) Prohibition of net compensation. An issuer may not receive net
compensation from a payment card network with respect to electronic
debit transactions or debit card-related activities within a calendar
year. Net compensation occurs when the total amount of payments or
incentives received by an issuer from a payment card network with
respect to electronic debit transactions or debit card-related
activities, other than interchange transaction fees passed through to
the issuer by the network, during a calendar year exceeds the total
amount of all fees paid by the issuer to the network with respect to
electronic debit transactions or debit card-related activities during
that calendar year. Payments and incentives paid by a network to an
issuer, and fees paid by an issuer to a network, with respect to
electronic debit transactions or debit card related activities are not
limited to volume-based or transaction-specific payments, incentives, or
fees, but also include other payments, incentives or fees related to an
issuer's provision of debit card services.
Sec. 235.7 Limitations on payment card restrictions.
(a) Prohibition on network exclusivity--(1) In general. An issuer or
payment card network shall not directly or through any agent, processor,
or licensed member of a payment card network, by contract, requirement,
condition, penalty, or otherwise, restrict the number of payment card
networks on which an electronic debit transaction may be processed to
less than two unaffiliated networks.
(2) Permitted arrangements. An issuer satisfies the requirements of
paragraph (a)(1) of this section only if the issuer allows an electronic
debit transaction to be processed on at least two unaffiliated payment
card networks, each of which does not, by rule or policy, restrict the
operation of the network to a limited geographic area, specific
merchant, or particular type of merchant or transaction, and each of
which has taken steps reasonably designed to enable the network to
process the electronic debit transactions that the network would
reasonably expect will be routed to it, based on expected transaction
volume.
(3) Prohibited exclusivity arrangements by networks. For purposes of
paragraph (a)(1) of this section, a payment card network may not
restrict or otherwise limit an issuer's ability to contract with any
other payment card network that may process an electronic debit
transaction involving the issuer's debit cards.
(4) Subsequent affiliation. If unaffiliated payment card networks
become affiliated as a result of a merger or acquisition such that an
issuer is no longer in compliance with paragraph (a) of this section,
the issuer must add an unaffiliated payment card network through which
electronic debit transactions on the relevant debit card may be
processed no later than six months after the date on which the
previously unaffiliated payment card networks consummate the
affiliation.
(b) Prohibition on routing restrictions. An issuer or payment card
network shall not, directly or through any agent, processor, or licensed
member of the network, by contract, requirement, condition, penalty, or
otherwise, inhibit the ability of any person that accepts or honors
debit cards for payments to direct the routing of electronic debit
transactions for processing over any payment card network that may
process such transactions.
(c) Compliance dates--(1) General. Except as otherwise provided in
paragraphs (c)(2), (c)(3), and (c)(4) of this section, the compliance
date of paragraph (a) of this section is April 1, 2012.
(2) Restrictions by payment card networks. The compliance date of
paragraphs (a)(1) and (a)(3) of this section for payment card networks
is October 1, 2011.
(3) Debit cards that use transaction qualification or substantiation
systems. Issuers shall comply with the requirements of paragraph (a) of
this section by April 1, 2013, for electronic debit transactions using
debit cards that use point-of-sale transaction qualification or
substantiation systems for verifying
[[Page 38]]
the eligibility of purchased goods or services.
(4) General-use prepaid cards. Issuers shall comply with the
requirements of paragraph (a) of this section with respect to general-
use prepaid cards as set out below.
(i) With respect to non-reloadable general-use prepaid cards, the
compliance date is April 1, 2013. Non-reloadable general-use prepaid
cards sold prior to April 1, 2013 are not subject to paragraph (a) of
this section.
(ii) With respect to reloadable general-use prepaid cards, the
compliance date is April 1, 2013. Reloadable general-use prepaid cards
sold prior to April 1, 2013 are not subject to paragraph (a) of this
section unless and until they are reloaded, in which case the following
compliance dates apply:
(A) With respect to reloadable general-use prepaid cards sold and
reloaded prior to April 1, 2013, the compliance date is May 1, 2013.
(B) With respect to reloadable general-use prepaid cards sold prior
to April 1, 2013, and reloaded on or after April 1, 2013, the compliance
date is 30 days after the date of reloading.
Sec. 235.8 Reporting requirements and record retention.
(a) Entities required to report. Each issuer that is not otherwise
exempt from the requirements of this part under Sec. 235.5(a) and each
payment card network shall file a report with the Board in accordance
with this section.
(b) Report. Each entity required to file a report with the Board
shall submit data in a form prescribed by the Board for that entity.
Data required to be reported may include, but may not be limited to,
data regarding costs incurred with respect to an electronic debit
transaction, interchange transaction fees, network fees, fraud-
prevention costs, fraud losses, and transaction value, volume, and type.
(c) Record retention. (1) An issuer subject to this part shall
retain evidence of compliance with the requirements imposed by this part
for a period of not less than five years after the end of the calendar
year in which the electronic debit transaction occurred.
(2) Any person subject to this part having actual notice that it is
the subject of an investigation or an enforcement proceeding by its
enforcement agency shall retain the records that pertain to the
investigation, action, or proceeding until final disposition of the
matter unless an earlier time is allowed by court or agency order.
Sec. 235.9 Administrative enforcement.
(a) (1) Compliance with the requirements of this part shall be
enforced under--
(i) Section 8 of the Federal Deposit Insurance Act, by the
appropriate Federal banking agency, as defined in section 3(q) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(q)), with respect to--
(A) National banks, federal savings associations, and federal
branches and federal agencies of foreign banks;
(B) Member banks 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, and organizations operating under section 25 or 25A of the
Federal Reserve Act;
(C) Banks and state savings associations insured by the Federal
Deposit Insurance Corporation (other than members of the Federal Reserve
System), and insured state branches of foreign banks;
(ii) The Federal Credit Union Act (12 U.S.C. 1751 et seq.), by the
Administrator of the National Credit Union Administration (National
Credit Union Administration Board) with respect to any federal credit
union;
(iii) The Federal Aviation Act of 1958 (49 U.S.C. 40101 et seq.), by
the Secretary of Transportation, with respect to any air carrier or
foreign air carrier subject to that Act; and
(iv) The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), by
the Securities and Exchange Commission, with respect to any broker or
dealer subject to that Act.
(2) The terms used in paragraph (a)(1) of this section that are not
defined in this part or otherwise defined in section 3(s) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the meaning given
to them in section
[[Page 39]]
1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
(b) Additional powers. (1) For the purpose of the exercise by any
agency referred to in paragraphs (a)(1)(i) through (a)(1)(iv) of this
section of its power under any statute referred to in those paragraphs,
a violation of this part is deemed to be a violation of a requirement
imposed under that statute.
(2) In addition to its powers under any provision of law
specifically referred to in paragraphs (a)(1)(i) through (a)(1)(iv) of
this section, each of the agencies referred to in those paragraphs may
exercise, for the purpose of enforcing compliance under this part, any
other authority conferred on it by law.
(c) Enforcement authority of Federal Trade Commission. Except to the
extent that enforcement of the requirements imposed under this title is
specifically granted to another government agency under paragraphs
(a)(1)(i) through (a)(1)(iv) of this section, and subject to subtitle B
of the Consumer Financial Protection Act of 2010, the Federal Trade
Commission has the authority to enforce such requirements. For the
purpose of the exercise by the Federal Trade Commission of its functions
and powers under the Federal Trade Commission Act, a violation of this
part shall be deemed a violation of a requirement imposed under the
Federal Trade Commission Act. All of the functions and powers of the
Federal Trade Commission under the Federal Trade Commission Act are
available to the Federal Trade Commission to enforce compliance by any
person subject to the jurisdiction of the Federal Trade Commission with
the requirements of this part, regardless of whether that person is
engaged in commerce or meets any other jurisdictional tests under the
Federal Trade Commission Act.
Sec. 235.10 Effective and compliance dates.
Except as provided in Sec. 235.7, this part becomes effective and
compliance is mandatory on October 1, 2011.
Sec. Appendix A to Part 235--Official Board Commentary on Regulation II
Introduction
The following commentary to Regulation II (12 CFR part 235) provides
background material to explain the Board's intent in adopting a
particular part of the regulation. The commentary also provides examples
to aid in understanding how a particular requirement is to work.
Section 235.2 Definitions
2(a) Account
1. Types of accounts. The term ``account'' includes accounts held by
any person, including consumer accounts (i.e., those established
primarily for personal, family or household purposes) and business
accounts. Therefore, the limitations on interchange transaction fees and
the prohibitions on network exclusivity arrangements and routing
restrictions apply to all electronic debit transactions, regardless of
whether the transaction involves a debit card issued primarily for
personal, family, or household purposes or for business purposes. For
example, an issuer of a business-purpose debit card is subject to the
restrictions on interchange transaction fees and is also prohibited from
restricting the number of payment card networks on which an electronic
debit transaction may be processed under Sec. 235.7.
2. Bona fide trusts. This part does not define the term bona fide
trust agreement; therefore, institutions must look to state or other
applicable law for interpretation. An account held under a custodial
agreement that qualifies as a trust under the Internal Revenue Code,
such as an individual retirement account, is considered to be held under
a trust agreement for purposes of this part.
3. Account located in the United States. This part applies only to
electronic debit transactions that are initiated to debit (or credit,
for example, in the case of returned goods or cancelled services) an
account located in the United States. If a cardholder uses a debit card
to debit an account held outside the United States, then the electronic
debit transaction is not subject to this part.
2(b) Acquirer
1. In general. The term ``acquirer'' includes only the institution
that contracts, directly or indirectly, with a merchant to provide
settlement for the merchant's electronic debit transactions over a
payment card network (referred to as acquiring the merchant's electronic
debit transactions). In some acquiring relationships, an institution
provides processing services to the merchant and is a licensed member of
the payment card network, but does not settle the transactions with the
merchant (by crediting the
[[Page 40]]
merchant's account) or with the issuer. These institutions are not
``acquirers'' because they do not provide credit to the merchant for the
transactions or settle the merchant's transactions with the issuer.
These institutions are considered processors and in some circumstances
may be considered payment card networks for purposes of this part (See
Sec. Sec. 235.2(m), 235.2(o), and commentary thereto).
2(c) Affiliate
1. Types of entities. The term ``affiliate'' includes any bank and
nonbank affiliates located in the United States or a foreign country.
2. Other affiliates. For commentary on whether merchants are
affiliated, see comment 2(f)-7.
2(d) Cardholder
1. Scope. In the case of debit cards that access funds in
transaction, savings, or other similar asset accounts, ``the person to
whom a card is issued'' generally will be the named person or persons
holding the account. If the account is a business account, multiple
employees (or other persons associated with the business) may have debit
cards that can access the account. Each employee that has a debit card
that can access the account is a cardholder. In the case of a prepaid
card, the cardholder generally is either the purchaser of the card or a
person to whom the purchaser gave the card, such as a gift recipient.
2(e) Control [Reserved]
2(f) Debit Card
1. Card, or other payment code or device. The term ``debit card'' as
defined in Sec. 235.2(f) applies to any card, or other payment code or
device, even if it is not issued in a physical form. Debit cards
include, for example, an account number or code that can be used to
access funds in an account to make Internet purchases. Similarly, the
term ``debit card'' includes a device with a chip or other embedded
mechanism, such as a mobile phone or sticker containing a contactless
chip that links the device to funds stored in an account, and enables an
account to be debited. The term ``debit card,'' however, does not
include a one-time password or other code if such password or code is
used for the purposes of authenticating the cardholder and is used in
addition to another card, or other payment code or device, rather than
as the payment code or device.
2. Deferred debit cards. The term ``debit card'' includes a card, or
other payment code or device, that is used in connection with deferred
debit card arrangements in which transactions are not immediately posted
to and funds are not debited from the underlying transaction, savings,
or other asset account upon settlement of the transaction. Instead, the
funds in the account typically are held and made unavailable for other
transactions for a period of time specified in the issuer-cardholder
agreement. After the expiration of the time period, the cardholder's
account is debited for the value of all transactions made using the card
that have been submitted to the issuer for settlement during that time
period. For example, under some deferred debit card arrangements, the
issuer may debit the consumer's account for all debit card transactions
that occurred during a particular month at the end of the month.
Regardless of the time period between the transaction and account
posting, a card, or other payment code or device, that is used in
connection with a deferred debit arrangement is considered a debit card
for purposes of the requirements of this part.
3. Decoupled debit cards. Decoupled debit cards are issued by an
entity other than the financial institution holding the cardholder's
account. In a decoupled debit arrangement, transactions that are
authorized by the card issuer settle against the cardholder's account
held by an entity other than the issuer, generally via a subsequent ACH
debit to that account. The term ``debit card'' includes any card, or
other payment code or device, issued or approved for use through a
payment card network to debit an account, regardless of whether the
issuer holds the account. Therefore, decoupled debit cards are debit
cards for purposes of this part.
4. Hybrid cards.
i. Some cards, or other payment codes or devices, may have both
credit- and debit-like features (``hybrid cards''). For example, these
cards may enable a cardholder to access a line of credit, but select
certain transactions for immediate repayment (i.e., prior to the end of
a billing cycle) via a debit to the cardholder's account, as the term is
defined in Sec. 235.2(a), held either with the issuer or at another
institution. If a card permits a cardholder to initiate transactions
that debit an account or funds underlying a prepaid card, the card is
considered a debit card for purposes of this part. Not all transactions
initiated by such a hybrid card, however, are electronic debit
transactions. Rather, only those transactions that debit an account as
defined in this part or funds underlying a prepaid card are electronic
debit transactions. If the transaction posts to a line of credit, then
the transaction is a credit transaction.
ii. If an issuer conditions the availability of a credit or charge
card that permits pre-authorized repayment of some or all transactions
on the cardholder maintaining an account at the issuer, such a card is
considered a debit card for purposes of this part.
[[Page 41]]
5. Virtual wallets. A virtual wallet is a device (e.g., a mobile
phone) that stores several different payment codes or devices (``virtual
cards'') that access different accounts, funds underlying the card, or
lines of credit. At the point of sale, the cardholder may select from
the virtual wallet the virtual card he or she wishes to use for payment.
The virtual card that the cardholder uses for payment is considered a
debit card under this part if the virtual card that initiates a
transaction meets the definition of debit card, notwithstanding the fact
that other cards in the wallet may not be debit cards.
6. General-use prepaid card. The term ``debit card'' includes
general-use prepaid cards. See Sec. 235.2(i) and related commentary for
information on general-use prepaid cards.
7. Store cards. The term ``debit card'' does not include prepaid
cards that may be used at a single merchant or affiliated merchants. Two
or more merchants are affiliated if they are related by either common
ownership or by common corporate control. For purposes of the ``debit
card'' definition, franchisees are considered to be under common
corporate control if they are subject to a common set of corporate
policies or practices under the terms of their franchise licenses.
8. Checks, drafts, and similar instruments. The term ``debit card''
does not include a check, draft, or similar paper instrument or a
transaction in which the check is used as a source of information to
initiate an electronic payment. For example, if an account holder
provides a check to buy goods or services and the merchant takes the
account number and routing number information from the MICR line at the
bottom of a check to initiate an ACH debit transfer from the
cardholder's account, the check is not a debit card, and such a
transaction is not considered an electronic debit transaction. Likewise,
the term ``debit card'' does not include an electronic representation of
a check, draft, or similar paper instrument.
9. ACH transactions. The term ``debit card'' does not include an
account number when it is used by a person to initiate an ACH
transaction that debits that person's account. For example, if an
account holder buys goods or services over the Internet using an account
number and routing number to initiate an ACH debit, the account number
is not a debit card, and such a transaction is not considered an
electronic debit transaction. However, the use of a card to purchase
goods or services that debits the cardholder's account that is settled
by means of a subsequent ACH debit initiated by the card issuer to the
cardholder's account, as in the case of a decoupled debit card
arrangement, involves the use of a debit card for purposes of this part.
2(g) Designated Automated Teller Machine (ATM) Network
1. Reasonable and convenient access clarified. Under Sec.
235.2(g)(2), a designated ATM network includes any network of ATMs
identified by the issuer that provides reasonable and convenient access
to the issuer's cardholders. Whether a network provides reasonable and
convenient access depends on the facts and circumstances, including the
distance between ATMs in the designated network and each cardholder's
last known home or work address, or if a home or work address is not
known, where the card was first issued.
2(h) Electronic Debit Transaction
1. Debit an account. The term ``electronic debit transaction''
includes the use of a card to debit an account. The account debited
could be, for example, the cardholder's asset account or the account
that holds the funds used to settle prepaid card transactions.
2. Form of payment. The term ``electronic debit transaction''
includes the use of a card as a form of payment that may be made in
exchange for goods or services, as a charitable contribution, to satisfy
an obligation (e.g., tax liability), or for other purposes.
3. Subsequent transactions. The term ``electronic debit
transaction'' includes both the cardholder's use of a debit card for the
initial payment and any subsequent use by the cardholder of the debit
card in connection with the initial payment. For example, the term
``electronic debit transaction'' includes using the debit card to return
merchandise or cancel a service that then results in a debit to the
merchant's account and a credit to the cardholder's account.
4. Cash withdrawal at the point of sale. The term ``electronic debit
transaction'' includes a transaction in which a cardholder uses the
debit card both to make a purchase and to withdraw cash (known as a
``cash-back transaction'').
5. Geographic limitation. This regulation applies only to electronic
debit transactions that are initiated at a merchant located in the
United States. If a cardholder uses a debit card at a merchant located
outside the United States to debit an account held in the United States,
the electronic debit transaction is not subject to this part.
2(i) General-Use Prepaid Card
1. Redeemable upon presentation at multiple, unaffiliated merchants.
A prepaid card is redeemable upon presentation at multiple, unaffiliated
merchants if such merchants agree to honor the card.
2. Selective authorization cards. Selective authorization cards,
(e.g., mall cards) are generally intended to be used or redeemed for
goods or services at participating retailers
[[Page 42]]
within a shopping mall or other limited geographic area. Selective
authorization cards are considered general-use prepaid cards, regardless
of whether they carry the mark, logo, or brand of a payment card
network, if they are redeemable at multiple, unaffiliated merchants.
2(j) Interchange Transaction fee
1. In general. Generally, the payment card network is the entity
that establishes and charges the interchange transaction fee to the
acquirers or merchants. The acquirers then pay to the issuers any
interchange transaction fee established and charged by the network.
Acquirers typically pass the interchange transaction fee through to
merchant-customers.
2. Compensating an issuer. The term ``interchange transaction fee''
is limited to those fees that a payment card network establishes,
charges, or receives to compensate the issuer for its role in the
electronic debit transaction. By contrast, payment card networks
generally charge issuers and acquirers fees for services the network
performs. Such fees are not interchange transaction fees because the
payment card network is charging and receiving the fee as compensation
for services it provides.
3. Established, charged, or received. Interchange transaction fees
are not limited to those fees for which a payment card network sets the
value. A fee that compensates an issuer is an interchange transaction
fee if the fee is set by the issuer but charged to acquirers by virtue
of the network determining each participant's net settlement position.
2(k) Issuer
1. In general. A person issues a debit card by authorizing the use
of debit card by a cardholder to perform electronic debit transactions.
That person may provide the card directly to the cardholder or
indirectly by using a third party (such as a processor, or a telephone
network or manufacturer) to provide the card, or other payment code or
device, to the cardholder. The following examples illustrate the entity
that is the issuer under various card program arrangements. For purposes
of determining whether an issuer is exempted under Sec. 235.5(a),
however, the term issuer is limited to the entity that holds the account
being debited.
2. Traditional debit card arrangements. In a traditional debit card
arrangement, the bank or other entity holds the cardholder's funds and
authorizes the cardholder to use the debit card to access those funds
through electronic debit transactions, and the cardholder receives the
card directly or indirectly (e.g., through an agent) from the bank or
other entity that holds the funds (except for decoupled debit cards,
discussed below). In this system, the bank or entity holding the
cardholder's funds is the issuer.
3. BIN-sponsor arrangements. Payment card networks assign Bank
Identification Numbers (BINs) to member-institutions for purposes of
issuing cards, authorizing, clearing, settling, and other processes. In
exchange for a fee or other financial considerations, some members of
payment card networks permit other entities to issue debit cards using
the member's BIN. The entity permitting the use of its BIN is referred
to as the ``BIN sponsor'' and the entity that uses the BIN to issue
cards is often referred to as the ``affiliate member.'' BIN sponsor
arrangements can follow at least two different models:
i. Sponsored debit card model. In some cases, a community bank or
credit union may provide debit cards to its account holders through a
BIN sponsor arrangement with a member institution. In general, the bank
or credit union will authorize its account holders to use debit cards to
perform electronic debit transactions that access funds in accounts at
the bank or credit union. The bank or credit union's name typically will
appear on the debit card. The bank or credit union may directly or
indirectly provide the cards to cardholders. Under these circumstances,
the bank or credit union is the issuer for purposes of this part. If
that bank or credit union, together with its affiliates, has assets of
less than $10 billion, then that bank or credit union is exempt from the
interchange transaction fee restrictions. Although the bank or credit
union may distribute cards through the BIN sponsors, the BIN sponsor
does not enter into the agreement with the cardholder that authorizes
the cardholder to use the card to perform electronic debit transactions
that access funds in the account at the bank or credit union, and
therefore the BIN sponsor is not the issuer.
ii. Prepaid card model. A member institution may also serve as the
BIN sponsor for a prepaid card program. Under these arrangements, a
program manager distributes prepaid cards to the cardholders and the
BIN-sponsoring institution generally holds the funds for the prepaid
card program in an omnibus or pooled account. Either the BIN sponsor or
the prepaid card program manager may keep track of the underlying funds
for each individual prepaid card through subaccounts. While the
cardholder may receive the card directly from the program manager or at
a retailer, the BIN sponsor authorizes the cardholder to use the card to
perform electronic debit transactions that access the funds in the
pooled account and the cardholder's relationship generally is with the
BIN sponsor. Accordingly, under these circumstances, the BIN sponsor, or
the bank holding the pooled account, is the issuer.
4. Decoupled debit cards. In the case of decoupled debit cards, an
entity other than the bank holding the cardholder's account enters
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into a relationship with the cardholder authorizing the use of the card
to perform electronic debit transactions. The entity authorizing the use
of the card to perform electronic debit transaction typically arranges
for the card to be provided directly or indirectly to the cardholder and
has a direct relationship with the cardholder with respect to the card.
The bank holding the cardholder's account has agreed generally to permit
ACH debits to the account, but has not authorized the use of the debit
card to access the funds through electronic debit transactions. Under
these circumstances, the entity authorizing the use of the debit card,
and not the account-holding institution, is considered the issuer. An
issuer of a decoupled debit card is not exempt under Sec. 235.5(a),
even if, together with its affiliates, it has assets of less than $10
billion, because it is not the entity holding the account to be debited.
2(l) Merchant [Reserved]
2(m) Payment Card Network
1. In general. An entity is a considered a payment card network with
respect to an electronic debit transaction for purposes of this rule if
it routes information and data to the issuer from the acquirer to
conduct authorization, clearance, and settlement of the electronic debit
transaction. By contrast, if an entity receives transaction information
and data from a merchant and authorizes and settles the transaction
without routing the information and data to another entity (i.e., the
issuer or the issuer's processor) for authorization, clearance, or
settlement, that entity is not considered a payment card network with
respect to the electronic debit transaction.
2. Three-party systems. In the case of a three-party system,
electronic debit transactions are processed by an entity that acts as
system operator and issuer, and may also act as the acquirer. The entity
acting as system operator and issuer that receives the transaction
information from the merchant or acquirer also holds the cardholder's
funds. Therefore, rather than directing the transaction information to a
separate issuer, the entity authorizes and settles the transaction based
on the information received from the merchant. As these entities do not
connect (or ``network'') multiple issuers and do not route information
to conduct the transaction, they are not ``payment card networks'' with
respect to these transactions.
3. Processors as payment card networks. A processor is considered a
payment card network if, in addition to acting as processor for an
acquirer and issuer, the processor routes transaction information and
data received from a merchant or the merchant's acquirer to an issuer.
For example, if a merchant uses a processor in order to accept any,
some, or all brands of debit cards and the processor routes transaction
information and data to the issuer or issuer's processor, the merchant's
processor is considered a payment card network with respect to the
electronic debit transaction. If the processor establishes, charges, or
receives a fee for the purpose of compensating an issuer, that fee is
considered an interchange transaction fee for purposes of this part.
4. Automated clearing house (ACH) operators. An ACH operator is not
considered a payment card network for purposes of this part. While an
ACH operator processes transactions that debit an account and provides
for interbank clearing and settlement of such transactions, a person
does not use the ACH system to accept as a form of payment a brand of
debit card.
5. ATM networks. An ATM network is not considered a payment card
network for purposes of this part. While ATM networks process
transactions that debit an account and provide for interbank clearing
and settlement of such transactions, a cash withdrawal from an ATM is
not a payment because there is no exchange of money for goods or
services, or payment made as a charitable contribution, to satisfy an
obligation (e.g., tax liability), or for other purposes.
2(n) Person [Reserved]
2(o) Processor
1. Distinction from acquirers. A processor may perform all
transaction-processing functions for a merchant or acquirer, but if it
does not acquire (that is, settle with the merchant for the
transactions), it is not an acquirer. The entity that acquirers
electronic debit transactions is the entity that is responsible to other
parties to the electronic debit transaction for the amount of the
transaction.
2. Issuers. A processor may perform services related to
authorization, clearance, and settlement of transactions for an issuer
without being considered to be an issuer for purposes of this part.
2(p) Route
1. An entity routes information if it both directs and sends the
information to an unaffiliated entity (or affiliated entity acting on
behalf of the unaffiliated entity). This other entity may be a payment
card network or processor (if the entity directing and sending the
information is a merchant or an acquirer) or an issuer or processor (if
the entity directing and sending the information is a payment card
network).
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2(q) United States [Reserved]
Section 235.3 Reasonable and Proportional Interchange Transaction Fees
3(a) [Reserved]
3(b) Determining Reasonable and Proportional Fees
1. Two components. The standard for the maximum permissible
interchange transaction fee that an issuer may receive consists of two
components: a base component that does not vary with a transaction's
value and an ad valorem component. The amount of any interchange
transaction fee received or charged by an issuer may not exceed the sum
of the maximum permissible amounts of each component and any fraud-
prevention adjustment the issuer is permitted to receive under Sec.
235.4 of this part.
2. Variation in interchange fees. An issuer is permitted to charge
or receive, and a network is permitted to establish, interchange
transaction fees that vary in their base component and ad valorem
component based on, for example, the type of transaction or merchant,
provided the amount of any interchange transaction fee for any
transaction does not exceed the sum of the maximum permissible base
component of 21 cents and 5 basis points of the value of the
transaction.
3. Example. For a $39 transaction, the maximum permissible
interchange transaction fee is 22.95 cents (21 cents plus 5 basis points
of $39). A payment card network may, for example, establish an
interchange transaction fee of 22 cents without any ad valorem
component.
Section 235.4 Fraud-Prevention Adjustment
4(b) Issuer Standards
Section 235.4 Fraud-prevention adjustment
4(a) [Reserved]
4(b)(1) Issuer standards
1. An issuer's policies and procedures should address fraud related
to debit card use by unauthorized persons. Examples of use by
unauthorized persons include, but are not limited to, the following:
i. A thief steals a cardholder's wallet and uses the debit card to
purchase goods, without the authority of the cardholder.
ii. A cardholder makes a purchase at a merchant. Subsequently, the
merchant's employee uses information from the debit card to initiate a
subsequent transaction, without the authority of the cardholder.
iii. A hacker steals cardholder account information from the issuer
or a merchant processor and uses the stolen information to make
unauthorized card-not-present purchases or to create a counterfeit card
to make unauthorized card-present purchases.
2. An issuer's policies and procedures must be designed to reduce
fraud, where cost effective, across all types of electronic debit
transactions in which its cardholders engage. Therefore, an issuer
should consider whether its policies and procedures are effective for
each method used to authenticate the card (e.g., a chip or a code
embedded in the magnetic stripe) and the cardholder (e.g., a signature
or a PIN), and for different sales channels (e.g., card-present and
card-not-present).
3. An issuer's policies and procedures must be designed to take
effective steps to reduce both the occurrence of and costs to all
parties from fraudulent electronic debit transactions. An issuer should
take steps reasonably designed to reduce the number and value of its
fraudulent electronic debit transactions relative to its non-fraudulent
electronic debit transactions. These steps should reduce the costs from
fraudulent transactions to all parties, not merely the issuer. For
example, an issuer should take steps to reduce the number and value of
its fraudulent electronic debit transactions relative to its non-
fraudulent transactions whether or not it bears the fraud losses as a
result of regulations or network rules.
4. For any given issuer, the number and value of fraudulent
electronic debit transactions relative to non-fraudulent transactions
may vary materially from year to year. Therefore, in certain
circumstances, an issuer's policies and procedures may be effective
notwithstanding a relative increase in the transactions that are
fraudulent in a particular year. However, continuing increases in the
share of fraudulent transactions would warrant further scrutiny.
5. In determining which fraud-prevention technologies to implement
or retain, an issuer must consider the cost-effectiveness of the
technology, that is, the expected cost of the technology relative to its
expected effectiveness in controlling fraud. In evaluating the cost of a
particular technology, an issuer should consider whether and to what
extent other parties will incur costs to implement the technology, even
though an issuer may not have complete information about the costs that
may be incurred by other parties, such as the cost of new merchant
terminals. In evaluating the costs, an issuer should consider both
initial implementation costs and ongoing costs of using the fraud-
prevention method.
6. An issuer need not develop fraud-prevention technologies itself
to satisfy the standards in Sec. 235.4(b). An issuer may implement
fraud-prevention technologies that have been developed by a third party
that the issuer has determined are appropriate under its own policies
and procedures.
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Paragraph 4(b)(2) Elements of fraud-prevention policies and procedures.
1. In general. An issuer may tailor its policies and procedures to
address its particular debit card program, including the size of the
program, the types of transactions in which its cardholders commonly
engage, fraud types and methods experienced by the issuer, and the cost
of implementing new fraud-prevention methods in light of the expected
fraud reduction.
Paragraph 4(b)(2)(i). Methods to identify and prevent fraudulent debit
card transactions.
1. In general. Examples of policies and procedures reasonably
designed to identify and prevent fraudulent electronic debit
transactions include the following:
i. Practices to help determine whether a card is authentic and
whether the user is authorized to use the card at the time of a
transaction. For example, an issuer may specify the use of particular
authentication technologies or methods, such as dynamic data, to better
authenticate a card and cardholder at the time of the transaction, to
the extent doing so does not inhibit the ability of a merchant to direct
the routing of electronic debit transactions for processing over any
payment card network that may process such transactions. (See Sec.
235.7 and commentary thereto.)
ii. An automated mechanism to assess the risk that a particular
electronic debit transaction is fraudulent during the authorization
process (i.e., before the issuer approves or declines an authorization
request). For example, an issuer may use neural networks to identify
transactions that present increased risk of fraud. As a result of this
analysis, the issuer may decide to decline to authorize these
transactions. An issuer may not be able to determine whether a given
transaction in isolation is fraudulent at the time of authorization, and
therefore may have implemented policies and procedures that monitor sets
of transactions initiated with a cardholder's debit card. For example,
an issuer could compare a set of transactions initiated with the card to
a customer's typical transactions in order to determine whether a
transaction is likely to be fraudulent. Similarly, an issuer could
compare a set of transactions initiated with a debit card and common
fraud patterns in order to determine whether a transaction or future
transaction is likely to be fraudulent.
iii. Practices to support reporting of lost and stolen cards or
suspected incidences of fraud by cardholders or other parties to a
transaction. As an example, an issuer may promote customer awareness by
providing text alerts of transactions in order to detect fraudulent
transactions in a timely manner. An issuer may also report debit cards
suspected of being fraudulent to their networks for inclusion in a
database of potentially compromised cards.
Paragraph 4(b)(2)(ii). Monitoring of the issuer's volume and value of
fraudulent electronic debit transactions.
1. Tracking its fraudulent electronic debit transactions over time
enables an issuer to assess whether its policies and procedures are
effective. Accordingly, an issuer must include policies and procedures
designed to monitor trends in the number and value of its fraudulent
electronic debit transactions. An effective monitoring program would
include tracking issuer losses from fraudulent electronic debit
transactions, fraud-related chargebacks to acquirers, losses passed on
to cardholders, and any other reimbursements from other parties. Other
reimbursements could include payments made to issuers as a result of
fines assessed to merchants for noncompliance with Payment Card Industry
(PCI) Data Security Standards or other industry standards. An issuer
should also establish procedures to track fraud-related information
necessary to perform its reviews under Sec. 235.4(b)(3) and to retain
and report information as required under Sec. 235.8.
Paragraph 4(b)(2)(iii). Appropriate responses to suspicious electronic
debit transactions.
1. An issuer may identify transactions that it suspects to be
fraudulent after it has authorized or settled the transaction. For
example, a cardholder may inform the issuer that the cardholder did not
initiate a transaction or transactions, or the issuer may learn of a
fraudulent transaction or possibly compromised debit cards from the
network, the acquirer, or other parties. An issuer must implement
policies and procedures designed to provide an appropriate response once
an issuer has identified suspicious transactions to reduce the
occurrence of future fraudulent electronic debit transactions and the
costs associated with such transactions. The appropriate response may
differ depending on the facts and circumstances, including the issuer's
assessment of the risk of future fraudulent electronic debit
transactions. For example, in some circumstances, it may be sufficient
for an issuer to monitor more closely the account with the suspicious
transactions. In other circumstances, it may be necessary to contact the
cardholder to verify a transaction, reissue a card, or close an account.
An appropriate response may also require coordination with industry
organizations, law enforcement agencies, and other parties, such as
payment card networks, merchants, and issuer or merchant processors.
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Paragraph 4(b)(2)(iv). Methods to secure debit card and cardholder data.
1. An issuer must implement policies and procedures designed to
secure debit card and cardholder data. These policies and procedures
should apply to data that are transmitted by the issuer (or its service
provider) during transaction processing, that are stored by the issuer
(or its service provider), and that are carried on media (e.g., laptops,
transportable data storage devices) by employees or agents of the
issuer. This standard may be incorporated into an issuer's information
security program, as required by Section 501(b) of the Gramm-Leach-
Bliley Act.
Paragraph 4(b)(3) Review of and updates to policies and procedures.
1. i. An issuer's assessment of the effectiveness of its policies
and procedures should consider whether they are reasonably designed to
reduce the number and value of fraudulent electronic debit transactions
relative to non-fraudulent electronic debit transactions and are cost
effective. (See comment 4(b)(1)-3 and comment 4(b)(1)-5).
ii. An issuer must also assess its policies and procedures in light
of changes in fraud types (e.g., the use of counterfeit cards, lost or
stolen cards) and methods (e.g., common purchase patterns indicating
possible fraudulent behavior), as well as changes in the available
methods of detecting and preventing fraudulent electronic debit
transactions (e.g., transaction monitoring, authentication methods) as
part of its periodic review of its policies and procedures. An issuer's
review of its policies and procedures must consider information from the
issuer's own experience and that the issuer otherwise identified itself;
information from payment card networks, law enforcement agencies, and
fraud-monitoring groups in which the issuer participates; and
supervisory guidance. For example, an issuer should consider warnings
and alerts it receives from payment card networks regarding compromised
cards and data breaches.
2. An issuer should review its policies and procedures and their
implementation more frequently than annually if the issuer determines
that more frequent review is appropriate based on information obtained
from monitoring its fraudulent electronic debit transactions, changes in
the types or methods of fraud, or available methods of detecting and
preventing fraudulent electronic debit transactions. (See Sec.
235.4(b)(1)(ii) and commentary thereto.)
3. In light of an issuer's review of its policies and procedures,
and their implementation, the issuer may determine that updates to its
policies and procedures, and their implementation, are necessary. Merely
determining that updates are necessary does not render an issuer
ineligible to receive or charge the fraud-prevention adjustment. To
remain eligible to receive or charge a fraud-prevention adjustment,
however, an issuer should develop and implement such updates as soon as
reasonably practicable, in light of the facts and circumstances.
4(c) Notification.
1. Payment card networks that plan to allow issuers to receive or
charge a fraud-prevention adjustment can develop processes for
identifying issuers eligible for this adjustment. Each issuer that wants
to be eligible to receive or charge a fraud-prevention adjustment must
notify annually the payment card networks in which it participates of
its compliance through the networks' processes.
Section 235.5 Exemptions for Certain Electronic Debit Transactions
1. Eligibility for multiple exemptions. An electronic debit
transaction may qualify for one or more exemptions. For example, a debit
card that has been provided to a person pursuant to a Federal, State, or
local government-administered payment program may be issued by an entity
that, together with its affiliates, has assets of less than $10 billion
as of the end of the preceding calendar year. In this case, an
electronic debit transaction made using that card may qualify for the
exemption under Sec. 235.5(a) for small issuers or for the exemption
under Sec. 235.5(b) for government-administered payment programs. A
payment card network establishing interchange fees for transactions that
qualify for more than one exemption need only satisfy itself that the
issuer's transactions qualify for at least one of the exemptions in
order to exempt the electronic debit transaction from the interchange
fee restrictions.
2. Certification process. Payment card networks that plan to allow
issuers to receive higher interchange fees than permitted under
Sec. Sec. 235.3 and 235.4 pursuant to one of the exemptions in Sec.
235.5 could develop their own processes for identifying issuers and
products eligible for such exemptions. Section 235.5(a)(2) permits
payment card networks to rely on lists published by the Board to help
determine eligibility for the small issuer exemption set forth in Sec.
235.5(a)(1).
5(a) Exemption for Small Issuers
1. Asset size determination. An issuer would qualify for the small-
issuer exemption if its total worldwide banking and nonbanking assets,
including assets of affiliates, other than trust assets under
management, are less than $10 billion, as of December 31 of the
preceding calendar year.
2. Change in status. If an exempt issuer becomes covered based on
its and its affiliates assets at the end of a calendar year, that
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issuer must begin complying with the interchange fee standards (Sec.
235.3), the fraud-prevention adjustment standards (to the extent the
issuer wishes to receive a fraud-prevention adjustment) (Sec. 235.4),
and the provisions prohibiting circumvention, evasion, and net
compensation (Sec. 235.6) no later than July 1.
5(b) Exemption for Government-Administered Payment Programs
1. Government-administered payment program. A program is considered
government-administered regardless of whether a Federal, State, or local
government agency operates the program or outsources some or all
functions to third parties so long as the program is operated on behalf
of the government agency. In addition, a program may be government-
administered even if a Federal, State, or local government agency is not
the source of funds for the program it administers. For example, child
support programs are government-administered programs even though a
Federal, State, or local government agency is not the source of funds. A
tribal government is considered a local government for purposes of this
exemption.
5(c) Exemption for Certain Reloadable Prepaid Cards
1. Subaccount clarified. A subaccount is an account within an
account, opened in the name of an agent, nominee, or custodian for the
benefit of two or more cardholders, where the transactions and balances
of individual cardholders are tracked in such subaccounts. An account
that is opened solely in the name of a single cardholder is not a
subaccount.
2. Reloadable. A general-use prepaid card is ``reloadable'' if the
terms and conditions of the agreement permit funds to be added to the
general-use prepaid card at any time after the initial purchase or
issuance. A general-use prepaid card is not ``reloadable'' merely
because the issuer or processor is technically able to add functionality
that would otherwise enable the general-use prepaid card to be reloaded.
3. Marketed or labeled as a gift card or gift certificate. i.
Electronic debit transactions made using a reloadable general-use
prepaid card are not exempt from the interchange fee restrictions if the
card is marketed or labeled as a gift card or gift certificate. The term
``marketed or labeled as a gift card or gift certificate'' means
directly or indirectly offering, advertising or otherwise suggesting the
potential use of a general-use prepaid card as a gift for another
person. Whether the exclusion applies generally does not depend on the
type of entity that makes the promotional message. For example, a card
may be marketed or labeled as a gift card or gift certificate if anyone
(other than the purchaser of the card), including the issuer, the
retailer, the program manager that may distribute the card, or the
payment network on which a card is used, promotes the use of the card as
a gift card or gift certificate. A general-use prepaid card is marketed
or labeled as a gift card or gift certificate even if it is only
occasionally marketed as a gift card or gift certificate. For example, a
network-branded general purpose reloadable card would be marketed or
labeled as a gift card or gift certificate if the issuer principally
advertises the card as a less costly alternative to a bank account but
promotes the card in a television, radio, newspaper, or Internet
advertisement, or on signage as ``the perfect gift'' during the holiday
season.
ii. The mere mention of the availability of gift cards or gift
certificates in an advertisement or on a sign that also indicates the
availability of exempted general-use prepaid cards does not by itself
cause the general-use prepaid card to be marketed as a gift card or a
gift certificate. For example, the posting of a sign in a store that
refers to the availability of gift cards does not by itself constitute
the marketing of otherwise exempted general-use prepaid cards that may
also be sold in the store along with gift cards or gift certificates,
provided that a person acting reasonably under the circumstances would
not be led to believe that the sign applies to all cards sold in the
store. (See, however, comment 5(c)-4.ii.)
4. Examples of marketed or labeled as a gift card or gift
certificate.
i. The following are examples of marketed or labeled as a gift card
or gift certificate:
A. Using the word ``gift'' or ``present'' on a card or accompanying
material, including documentation, packaging and promotional displays;
B. Representing or suggesting that a card can be given to another
person, for example, as a ``token of appreciation'' or a ``stocking
stuffer,'' or displaying a congratulatory message on the card or
accompanying material;
C. Incorporating gift-giving or celebratory imagery or motifs, such
as a bow, ribbon, wrapped present, candle, or a holiday or
congratulatory message, on a card, accompanying documentation, or
promotional material;
ii. The term does not include the following:
A. Representing that a card can be used as a substitute for a
checking, savings, or deposit account;
B. Representing that a card can be used to pay for a consumer's
health-related expenses--for example, a card tied to a health savings
account;
C. Representing that a card can be used as a substitute for
travelers checks or cash;
D. Representing that a card can be used as a budgetary tool, for
example, by teenagers, or to cover emergency expenses.
5. Reasonable policies and procedures to avoid marketing as a gift
card. The exemption for a
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general-use prepaid card that is reloadable and not marketed or labeled
as a gift card or gift certificate in Sec. 235.5(c) applies if a
reloadable general-use prepaid card is not marketed or labeled as a gift
card or gift certificate and if persons involved in the distribution or
sale of the card, including issuers, program managers, and retailers,
maintain policies and procedures reasonably designed to avoid such
marketing. Such policies and procedures may include contractual
provisions prohibiting a reloadable general-use prepaid card from being
marketed or labeled as a gift card or gift certificate, merchandising
guidelines or plans regarding how the product must be displayed in a
retail outlet, and controls to regularly monitor or otherwise verify
that the general-use prepaid card is not being marketed as a gift card.
Whether a general-use prepaid card has been marketed as a gift card or
gift certificate will depend on the facts and circumstances, including
whether a reasonable person would be led to believe that the general-use
prepaid card is a gift card or gift certificate. The following examples
illustrate the application of Sec. 235.5(c):
i. An issuer or program manager of prepaid cards agrees to sell
general-purpose reloadable cards through a retailer. The contract
between the issuer or program manager and the retailer establishes the
terms and conditions under which the cards may be sold and marketed at
the retailer. The terms and conditions prohibit the general-purpose
reloadable cards from being marketed as a gift card or gift certificate,
and require policies and procedures to regularly monitor or otherwise
verify that the cards are not being marketed as such. The issuer or
program manager sets up one promotional display at the retailer for gift
cards and another physically separated display for exempted products
under Sec. 235.5(c), including general-purpose reloadable cards, such
that a reasonable person would not believe that the exempted cards are
gift cards. The exemption in Sec. 235.5(c) applies because policies and
procedures reasonably designed to avoid the marketing of the general-
purpose reloadable cards as gift cards or gift certificates are
maintained, even if a retail clerk inadvertently stocks or a consumer
inadvertently places a general-purpose reloadable card on the gift card
display.
ii. Same facts as in comment 5(c)-5.i, except that the issuer or
program manager sets up a single promotional display at the retailer on
which a variety of prepaid cards are sold, including store gift cards
and general-purpose reloadable cards. A sign stating ``Gift Cards''
appears prominently at the top of the display. The exemption in Sec.
235.5(c) does not apply with respect to the general-purpose reloadable
cards because policies and procedures reasonably designed to avoid the
marketing of exempted cards as gift cards or gift certificates are not
maintained.
iii. Same facts as in comment 5(c)-5.i, except that the issuer or
program manager sets up a single promotional multi-sided display at the
retailer on which a variety of prepaid card products, including store
gift cards and general-purpose reloadable cards are sold. Gift cards are
segregated from exempted cards, with gift cards on one side of the
display and exempted cards on a different side of a display. Signs of
equal prominence at the top of each side of the display clearly
differentiate between gift cards and the other types of prepaid cards
that are available for sale. The retailer does not use any more
conspicuous signage suggesting the general availability of gift cards,
such as a large sign stating ``Gift Cards'' at the top of the display or
located near the display. The exemption in Sec. 235.5(c) applies
because policies and procedures reasonably designed to avoid the
marketing of the general-purpose reloadable cards as gift cards or gift
certificates are maintained, even if a retail clerk inadvertently stocks
or a consumer inadvertently places a general-purpose reloadable card on
the gift card display.
iv. Same facts as in comment 5(c)-5.i, except that the retailer
sells a variety of prepaid card products, including store gift cards and
general-purpose reloadable cards, arranged side-by-side in the same
checkout lane. The retailer does not affirmatively indicate or represent
that gift cards are available, such as by displaying any signage or
other indicia at the checkout lane suggesting the general availability
of gift cards. The exemption in Sec. 235.5(c) applies because policies
and procedures reasonably designed to avoid marketing the general-
purpose reloadable cards as gift cards or gift certificates are
maintained.
6. On-line sales of prepaid cards. Some web sites may prominently
advertise or promote the availability of gift cards or gift certificates
in a manner that suggests to a consumer that the web site exclusively
sells gift cards or gift certificates. For example, a web site may
display a banner advertisement or a graphic on the home page that
prominently states ``Gift Cards,'' ``Gift Giving,'' or similar language
without mention of other available products, or use a web address that
includes only a reference to gift cards or gift certificates in the
address. In such a case, a consumer acting reasonably under the
circumstances could be led to believe that all prepaid products sold on
the web site are gift cards or gift certificates. Under these facts, the
web site has marketed all such products as gift cards or gift
certificates, and the exemption in Sec. 235.5(c) does not apply to any
products sold on the web site.
7. Temporary non-reloadable cards issued in connection with a
general-use reloadable card. Certain general-purpose prepaid cards that
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are typically marketed as an account substitute initially may be sold or
issued in the form of a temporary non-reloadable card. After the card is
purchased, the cardholder is typically required to call the issuer to
register the card and to provide identifying information in order to
obtain a reloadable replacement card. In most cases, the temporary non-
reloadable card can be used for purchases until the replacement
reloadable card arrives and is activated by the cardholder. Because the
temporary non-reloadable card may only be obtained in connection with
the reloadable card, the exemption in Sec. 235.5(c) applies so long as
the card is not marketed as a gift card or gift certificate.
5(d) Exception
1. Additional ATM access. Some debit cards may be used to withdraw
cash from ATMs that are not part of the issuer's designated ATM network.
An electronic debit card transaction may still qualify for the exemption
under Sec. Sec. 235.5(b) or (c) with a respect to a card for which a
fee may be imposed for a withdrawal from an ATM that is outside of the
issuer's designated ATM network as long as the card complies with the
condition set forth in Sec. 235.5(d)(2) for withdrawals within the
issuer's designated ATM network. The condition with respect to ATM fees
does not apply to cards that do not provide ATM access.
Section 235.6 Prohibition on Circumvention, Evasion, and Net
Compensation
1. No applicability to exempt issuers or electronic debit
transactions. The prohibition against circumventing or evading the
interchange transaction fee restrictions or against net compensation
does not apply to issuers or electronic debit transactions that qualify
for an exemption under Sec. 235.5 from the interchange transaction fee
restrictions.
6(a) Prohibition of Circumvention or Evasion
1. Finding of circumvention or evasion. A finding of evasion or
circumvention will depend on all relevant facts and circumstances.
Although net compensation may be one form of circumvention or evasion
prohibited under Sec. 235.6(a), it is not the only form.
2. Examples of circumstances that may constitute circumvention or
evasion.
The following examples do not constitute per se circumvention or
evasion, but may warrant additional supervisory scrutiny to determine
whether the totality of the facts and circumstances constitute
circumvention or evasion:
i. A payment card network decreases network processing fees paid by
issuers for electronic debit transactions by 50 percent and increases
the network processing fees charged to merchants or acquirers with
respect to electronic debit transactions by a similar amount. Because
the requirements of this subpart do not restrict or otherwise establish
the amount of fees that a network may charge for its services, the
increase in network fees charged to merchants or acquirers and decrease
in fees charged to issuers is not a per se circumvention or evasion of
the interchange transaction fee standards, but may warrant additional
supervisory scrutiny to determine whether the facts and circumstances
constitute circumvention or evasion.
ii. An issuer replaces its debit cards with prepaid cards that are
exempt from the interchange limits of Sec. Sec. 235.3 and 235.4. The
exempt prepaid cards are linked to its customers' transaction accounts
and funds are swept from the transaction accounts to the prepaid
accounts as needed to cover transactions made. Again, this arrangement
is not per se circumvention or evasion, but may warrant additional
supervisory scrutiny to determine whether the facts and circumstances
constitute circumvention or evasion.
6(b) Prohibition of Net Compensation
1. Net compensation. Net compensation to an issuer through the use
of network fees is prohibited.
2. Consideration of payments or incentives provided by the network
in net compensation determination.
i. For purposes of the net compensation determination, payments or
incentives paid by a payment card network to an issuer with respect to
electronic debit transactions or debit card related activities could
include, but are not limited to, marketing incentives; payments or
rebates for meeting or exceeding a specific transaction volume,
percentage share, or dollar amount of transactions processed; or other
payments for debit card related activities. For example, signing bonuses
paid by a network to an issuer for the issuer's debit card portfolio
would also be included in the total amount of payments or incentives
received by an issuer from a payment card network with respect to
electronic debit transactions. A signing bonus for an entire card
portfolio, including credit cards, may be allocated to the issuer's
debit card business based on the proportion of the cards or transactions
that are debit cards or electronic debit transactions, as appropriate to
the situation, for purposes of the net compensation determination.
ii. Incentives paid by the network with respect to multiple-year
contracts may be allocated over the life of the contract.
iii. For purposes of the net compensation determination, payments or
incentives paid by a payment card network with respect to electronic
debit transactions or debit card-related activities do not include
interchange transaction fees that are passed through to
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the issuer by the network, or discounts or rebates provided by the
network or an affiliate of the network for issuer-processor services. In
addition, funds received by an issuer from a payment card network as a
result of chargebacks, fines paid by merchants or acquirers for
violations of network rules, or settlements or recoveries from merchants
or acquirers to offset the costs of fraudulent transactions or a data
security breach do not constitute incentives or payments made by a
payment card network.
3. Consideration of fees paid by an issuer in net compensation
determination.
i. For purposes of the net compensation determination, fees paid by
an issuer to a payment card network with respect to electronic debit
transactions or debit card related activities include, but are not
limited to, membership or licensing fees, network administration fees,
and fees for optional network services, such as risk management
services.
ii. For purposes of the net compensation determination, fees paid by
an issuer to a payment card network with respect to electronic debit
transactions or debit card-related activities do not include network
processing fees (such as switch fees and network connectivity fees) or
fees paid to an issuer processor affiliated with the network for
authorizing, clearing, or settling an electronic debit transaction.
4. Example of circumstances not involving net compensation to the
issuer. The following example illustrates circumstances that would not
indicate net compensation by the payment card network to the issuer:
i. Because of an increase in debit card transactions that are
processed through a payment card network during a calendar year, an
issuer receives an additional volume-based incentive payment from the
network for that period. Over the same period, however, the total
network fees (other than processing fees) the issuer pays the payment
card network with respect to debit card transactions also increase so
that the total amount of fees paid by the issuer to the network continue
to exceed incentive payments by the network to the issuer. Under these
circumstances, the issuer does not receive net compensation from the
network for electronic debit transactions or debit card related
activities.
Section 235.7 Limitations on Payment Card Restrictions
1. Application of small issuer, government-administered payment
program, and reloadable card exemptions to payment card network
restrictions. The exemptions under Sec. 235.5 for small issuers, cards
issued pursuant to government-administered payment programs, and certain
reloadable prepaid cards do not apply to the limitations on payment card
network restrictions. For example, debit cards for government-
administered payment programs, although exempt from the restrictions on
interchange transaction fees, are subject to the requirement that
electronic debit transactions made using such cards must be capable of
being processed on at least two unaffiliated payment card networks and
to the prohibition on inhibiting a merchant's ability to determine the
routing for electronic debit transactions.
7(a) Prohibition on Network Exclusivity
1. Scope of restriction. Section 235.7(a) requires a debit card
subject to the regulation to be enabled on at least two unaffiliated
payment card networks. This paragraph does not, however, require an
issuer to have two or more unaffiliated networks available for each
method of cardholder authentication. For example, it is sufficient for
an issuer to issue a debit card that operates on one signature-based
card network and on one PIN-based card network, as long as the two card
networks are not affiliated. Alternatively, an issuer may issue a debit
card that is accepted on two unaffiliated signature-based card networks
or on two unaffiliated PIN-based card networks. See also, comment 7(a)-
7.
2. Permitted networks. i. A smaller payment card network could be
used to help satisfy the requirement that an issuer enable two
unaffiliated networks if the network was willing to expand its coverage
in response to increased merchant demand for access to its network and
it meets the other requirements for a permitted arrangement, including
taking steps reasonably designed to enable it to process the electronic
debit transactions that it would reasonably expect to be routed to it.
If, however, the network's policy or practice is to limit such
expansion, it would not qualify as one of the two unaffiliated networks.
ii. A payment card network that is accepted only at a limited
category of merchants (such as a particular grocery store chain,
merchants located in a particular shopping mall, or a single class of
merchants, such as grocery stores or gas stations) would not satisfy the
rule.
iii. One of the steps a network can take to form a reasonable
expectation of transaction volume is to consider factors such as the
number of cards expected to be issued that are enabled on the network
and expected card usage patterns.
3. Examples of prohibited network restrictions on an issuer's
ability to contract. The following are examples of prohibited network
restrictions on an issuer's ability to contract with other payment card
networks:
i. Network rules or contract provisions limiting or otherwise
restricting the other payment card networks that may be enabled on a
particular debit card, or network rules or contract provisions that
specify the other
[[Page 51]]
networks that may be enabled on a particular debit card.
ii. Network rules or guidelines that allow only that network's (or
its affiliated network's) brand, mark, or logo to be displayed on a
particular debit card, or that otherwise limit the ability of brands,
marks, or logos of other payment card networks to appear on the debit
card.
4. Network logos or symbols on card not required. Section 235.7(a)
does not require that a debit card display the brand, mark, or logo of
each payment card network over which an electronic debit transaction may
be processed. For example, this rule does not require a debit card that
is enabled for two or more unaffiliated payment card networks to bear
the brand, mark, or logo for each card network.
5. Voluntary exclusivity arrangements prohibited. Section 235.7(a)
requires the issuance of debit cards that are enabled on at least two
unaffiliated payment card networks, even if the issuer is not subject to
any rule of, or contract or other agreement with, a payment card network
requiring that all or a specified minimum percentage of electronic debit
transactions be processed on the network or its affiliated networks.
6. Affiliated payment card networks. Section 235.7(a) does not
prohibit an issuer from including an affiliated payment card network
among the networks that may process an electronic debit transaction with
respect to a particular debit card, as long as at least two of the
networks that are enabled on the card are unaffiliated. For example, an
issuer may offer debit cards that are accepted on a payment card network
for signature debit transactions and on an affiliated payment card
network for PIN debit transactions as long as those debit cards may also
be accepted on another unaffiliated payment card network.
7. Application of rule regardless of form factor. The network
exclusivity provisions in Sec. 235.7(a) require that all debit cards be
enabled on at least two unaffiliated payment card networks for
electronic debit transactions, regardless of whether the debit card is
issued in card form. This applies to any supplemental device, such as a
fob or token, or chip or application in a mobile phone, that is issued
in connection with a plastic card, even if that plastic card fully
complies with the rule.
7(b) Prohibition on Routing Restrictions
1. Relationship to the network exclusivity restrictions. An issuer
or payment card network is prohibited from inhibiting a merchant's
ability to route or direct an electronic debit transaction over any of
the payment card networks that the issuer has enabled to process an
electronic debit transaction for that particular debit card. This rule
does not permit a merchant to route the transaction over a network that
the issuer did not enable to process transactions using that debit card.
2. Examples of prohibited merchant restrictions. The following are
examples of issuer or network practices that would inhibit a merchant's
ability to direct the routing of an electronic debit transaction that
are prohibited under Sec. 235.7(b):
i. Prohibiting a merchant from encouraging or discouraging a
cardholder's use of a particular method of debit card authorization,
such as rules prohibiting merchants from favoring a cardholder's use of
PIN debit over signature debit, or from discouraging the cardholder's
use of signature debit.
ii. Establishing network rules or designating issuer priorities
directing the processing of an electronic debit transaction on a
specified payment card network or its affiliated networks, or directing
the processing of the transaction away from a specified network or its
affiliates, except as a default rule in the event the merchant, or its
acquirer or processor, does not designate a routing preference, or if
required by state law.
iii. Requiring a specific payment card network based on the type of
access device provided to the cardholder by the issuer.
3. Merchant payments not prohibited. A payment card network does not
restrict a merchant's ability to route transactions over available
payment card networks in violation of Sec. 235.7(b) by offering
payments or other incentives to encourage the merchant to route
electronic debit card transactions to the network for processing.
4. Real-time routing decision not required. A merchant need not make
network routing decisions on a transaction-by-transaction basis. A
merchant and its acquirer or processor may agree to a pre-determined set
of routing choices that apply to all electronic debit transactions that
are processed by the acquirer or processor on behalf of the merchant.
5. No effect on network rules governing the routing of subsequent
transactions. Section 235.7 does not supersede a network rule that
requires a chargeback or return of an electronic debit transaction to be
processed on the same network that processed the original transaction.
7(c) Effective Date
1. Health care and employee benefit cards. Section 235.7(c)(1)
delays the effective date of the network exclusivity provisions for
certain debit cards issued in connection with a health care or employee
benefit account to the extent such cards use (even if not required)
transaction substantiation or qualification authorization systems at
point of sale to verify that the card is only used for eligible goods
and services for purposes of qualifying for favorable tax treatment
under Internal Revenue Code requirements. Debit
[[Page 52]]
cards that may qualify for the delayed effective date include, but may
not be limited to, cards issued in connection with flexible spending
accounts established under section 125 of the Internal Revenue Code for
health care related expenses and health reimbursement accounts
established under section 105 of the Internal Revenue Code.
Section 235.8 Reporting Requirements and Record Retention
[Reserved]
Section 235.9 Administrative Enforcement
[Reserved]
Section 235.10 Effective and Compliance Dates
[Reserved]
[76 FR 43466, July 20, 2011, as amended at 76 FR 43467, July 20, 2011;
77 FR 46280, Aug. 3, 2012]
PART 237_SWAPS MARGIN AND SWAPS PUSH-OUT--Table of Contents
Subpart A_Margin and Capital Requirements for Covered Swap Entities
(Regulation KK)
Sec.
237.1 Authority, purpose, scope, exemptions and compliance dates.
237.2 Definitions.
237.3 Initial margin.
237.4 Variation margin.
237.5 Netting arrangements, minimum transfer amount and satisfaction of
collecting and posting requirements.
237.6 Eligible collateral.
237.7 Segregation of collateral.
237.8 Initial margin models and standardized amounts.
237.9 Cross-border application of margin requirements.
237.10 Documentation of margin matters.
237.11 Special rules for affiliates.
237.12 Capital.
Appendix A to 237--Standardized Minimum Initial Margin Requirements for
Non-Cleared Swaps and Non-Cleared Security-Based Swaps
Appendix B to 237--Margin Values for Eligible Noncash Margin Collateral
Subpart B_Prohibition Against Federal Assistance to Swaps Entities
237.20 Definitions.
237.21 Definition of insured depository institution for purposes of
section 716 of the Dodd-Frank Act.
237.22 Transition period for insured depository institutions.
Authority: 15 U.S.C. 8305, 12 U.S.C. 343-350, 12 U.S.C. 1818, 12
U.S.C. 3101 et seq.
Effective Date Note: At 80 FR 74911, Nov. 30, 2015, the authority
citation for part 237 was revised, effective Apr. 1, 2016. For the
convenience of the user, the revised text is set forth as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 15 U.S.C. 8305, 12
U.S.C. 221 et seq., 12 U.S.C. 343-350, 12 U.S.C. 1818, 12 U.S.C. 1841 et
seq., 12 U.S.C. 3101 et seq., and 12 U.S.C. 1461 et seq.
Source: 78 FR 34549, June 10, 2013, unless otherwise noted.
Subpart A_Margin and Capital Requirements for Covered Swap Entities
(Regulation KK)
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 221 et
seq., 12 U.S.C. 1818, 12 U.S.C. 1841 et seq., 12 U.S.C. 3101 et seq. and
12 U.S.C. 1461 et seq.
Source: 80 FR 74898, 74911, Nov. 30, 2015, unless otherwise noted.
Editorial Note: Nomenclature changes to subpart A to part 237 appear
at 80 FR 74911, Nov. 30, 2015.
Effective Date Note: At 80 FR 74898, 74911, Nov. 30, 2015, subpart A
to part 237 was added, effective Apr. 1, 2016. At 80 FR 74911 and 74912,
the subpart was amended by: adding an authority citation, revising the
subpart heading, making nomenclature changes, editing several sections
and adding Sec. 237.12, effective Apr. 1, 2016. At 80 FR 74923, Nov.
30, 2015, Sec. 237.1 was further amended by adding paragraph (d),
effective Apr. 1, 2016. For the convenience of the user, the added and
fully amended text is set forth as follows:
Sec. 237.1 Authority, purpose, scope, exemptions and compliance dates.
(a) Authority. This subpart (Regulation KK) is issued by the Board
of Governors of the Federal Reserve System (Board) under section 4s(e)
of the Commodity Exchange Act of 1936, as amended (7 U.S.C. 6s(e)), and
section 15F(e) of the Securities Exchange Act of 1934, as amended (15
U.S.C. 78o-10(e)), as well as under the Federal Reserve Act, as amended
(12 U.S.C. 221 et seq.); section 8 of the Federal Deposit Insurance Act,
as amended (12 U.S.C. 1818); the Bank Holding Company Act of 1956, as
amended (12 U.S.C. 1841 et seq.); the International Banking Act of 1978,
as amended (12 U.S.C. 3101 et seq.), and the
[[Page 53]]
Home Owners' Loan Act, as amended (1461 et seq.).
(b) Purpose. Section 4s of the Commodity Exchange Act of 1936 (7
U.S.C. 6s) and section 15F of the Securities Exchange Act of 1934 (15
U.S.C. 78o-10) require the Board to establish capital and margin
requirements for any state member bank (as defined in 12 CFR 208.2(g)),
bank holding company (as defined in 12 U.S.C. 1841), savings and loan
holding company (as defined in 12 U.S.C. 1467a (on or after the transfer
established under Section 311 of the Dodd-Frank Act) (12 U.S.C. 5411)),
foreign banking organization (as defined in 12 CFR 211.21(o)), foreign
bank that does not operate an insured branch, state branch or state
agency of a foreign bank (as defined in 12 U.S.C. 3101(b)(11) and (12)),
or Edge or agreement corporation (as defined in 12 CFR 211.1(c)(2) and
(3)) that is registered as a swap dealer, major swap participant,
security-based swap dealer, or major security-based swap participant
with respect to all non-cleared swaps and non-cleared security-based
swaps. This subpart implements section 4s of the Commodity Exchange Act
of 1936 and section 15F of the Securities Exchange Act of 1934 by
defining terms used in the statute and related terms, establishing
capital and margin requirements, and explaining the statutes'
requirements.
(c) Scope. This subpart establishes minimum capital and margin
requirements for each covered swap entity subject to this subpart with
respect to all non-cleared swaps and non-cleared security-based swaps.
This subpart applies to any non-cleared swap or non-cleared security-
based swap entered into by a covered swap entity on or after the
relevant compliance date set forth in paragraph (e) of this section.
Nothing in this subpart is intended to prevent a covered swap entity
from collecting margin in amounts greater than are required under this
subpart.
(d) Exemptions--(1) Swaps. The requirements of this subpart (except
for Sec. 237.12) shall not apply to a non-cleared swap if the
counterparty:
(i) Qualifies for an exception from clearing under section
2(h)(7)(A) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(7)(A))
and implementing regulations;
(ii) Qualifies for an exemption from clearing under a rule,
regulation, or order that the Commodity Futures Trading Commission
issued pursuant to its authority under section 4(c)(1) of the Commodity
Exchange Act of 1936 (7 U.S.C. 6(c)(1)) concerning cooperative entities
that would otherwise be subject to the requirements of section
2(h)(1)(A) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(1)(A));
or
(iii) Satisfies the criteria in section 2(h)(7)(D) of the Commodity
Exchange Act of 1936 (7 U.S.C. 2(h)(7)(D)) and implementing regulations.
(2) Security-based swaps. The requirements of this subpart (except
for Sec. 237.12) shall not apply to a non-cleared security-based swap
if the counterparty:
(i) Qualifies for an exception from clearing under section 3C(g)(1)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(1)) and
implementing regulations; or
(ii) Satisfies the criteria in section 3C(g)(4) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c-3(g)(4)) and implementing
regulations.
(e) Compliance dates. Covered swap entities shall comply with the
minimum margin requirements of this subpart on or before the following
dates for non-cleared swaps and non-cleared security-based swaps entered
into on or after the following dates:
(1) September 1, 2016 with respect to the requirements in Sec.
237.3 for initial margin and Sec. 237.4 for variation margin for any
non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign
exchange swaps for March, April and May 2016 that exceeds $3 trillion,
where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(1)(i) and (ii) of
this section, an entity shall count the average daily aggregate notional
amount of a
[[Page 54]]
non-cleared swap, a non-cleared security-based swap, a foreign exchange
forward or a foreign exchange swap between the entity and an affiliate
only one time, and shall not count a swap or security-based swap that is
exempt pursuant to paragraph (d) of this section.
(2) March 1, 2017 with respect to the requirements in Sec. 237.4
for variation margin for any other covered swap entity with respect to
non-cleared swaps and non-cleared security-based swaps entered into with
any other counterparty.
(3) September 1, 2017 with respect to the requirements in Sec.
237.3 for initial margin for any non-cleared swaps and non-cleared
security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign
exchange swaps for March, April and May 2017 that exceeds $2.25
trillion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(3)(i) and (ii) of
this section, an entity shall count the average daily aggregate notional
amount of a non-cleared swap, a non-cleared security-based swap, a
foreign exchange forward or a foreign exchange swap between the entity
and an affiliate only one time, and shall not count a swap or security-
based swap that is exempt pursuant to paragraph (d) of this section.
(4) September 1, 2018 with respect to the requirements in Sec.
237.3 for initial margin for any non-cleared swaps and non-cleared
security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign
exchange swaps for March, April and May 2018 that exceeds $1.5 trillion,
where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(4)(i) and (ii) of
this section, an entity shall count the average daily aggregate notional
amount of a non-cleared swap, a non-cleared security-based swap, a
foreign exchange forward or a foreign exchange swap between the entity
and an affiliate only one time, and shall not count a swap or security-
based swap that is exempt pursuant to paragraph (d) of this section.
(5) September 1, 2019 with respect to the requirements in Sec.
237.3 for initial margin for any non-cleared swaps and non-cleared
security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign
exchange swaps for March, April and May 2019 that exceeds $0.75
trillion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(5)(i) and (ii) of
this section, an entity shall count the average daily aggregate notional
amount of a non-cleared swap, a non-cleared security-based swap, a
foreign exchange forward or a foreign exchange swap between the entity
and an affiliate only one time, and shall not count a swap or security-
based swap that is exempt pursuant to paragraph (d) of this section.
(6) September 1, 2020 with respect to the requirements in Sec.
237.3 for initial margin for any other covered swap entity with respect
to non-cleared swaps and non-cleared security-based swaps entered into
with any other counterparty.
(f) Once a covered swap entity must comply with the margin
requirements for non-cleared swaps and non-cleared security-based swaps
with respect to a particular counterparty based on the compliance dates
in paragraph (e) of this section, the covered swap entity shall remain
subject to the requirements of this subpart with respect to that
counterparty.
(g)(1) If a covered swap entity's counterparty changes its status
such
[[Page 55]]
that a non-cleared swap or non-cleared security-based swap with that
counterparty becomes subject to stricter margin requirements under this
subpart (such as if the counterparty's status changes from a financial
end user without material swaps exposure to a financial end user with
material swaps exposure), then the covered swap entity shall comply with
the stricter margin requirements for any non-cleared swap or non-cleared
security-based swap entered into with that counterparty after the
counterparty changes its status.
(2) If a covered swap entity's counterparty changes its status such
that a non-cleared swap or non-cleared security-based swap with that
counterparty becomes subject to less strict margin requirements under
this subpart (such as if the counterparty's status changes from a
financial end user with material swaps exposure to a financial end user
without material swaps exposure), then the covered swap entity may
comply with the less strict margin requirements for any non-cleared swap
or non-cleared security-based swap entered into with that counterparty
after the counterparty changes its status as well as for any outstanding
non-cleared swap or non-cleared security-based swap entered into after
the applicable compliance date in paragraph (e) of this section and
before the counterparty changed its status.
[80 FR 74898, 74911, Nov. 30, 2015, as amended at 80 FR 74923, Nov. 30,
2015]
Sec. 237.2 Definitions.
Affiliate. A company is an affiliate of another company if:
(1) Either company consolidates the other on financial statements
prepared in accordance with U.S. Generally Accepted Accounting
Principles, the International Financial Reporting Standards, or other
similar standards;
(2) Both companies are consolidated with a third company on a
financial statement prepared in accordance with such principles or
standards;
(3) For a company that is not subject to such principles or
standards, if consolidation as described in paragraph (1) or (2) of this
definition would have occurred if such principles or standards had
applied; or
(4) The Board has determined that a company is an affiliate of
another company, based on Board's conclusion that either company
provides significant support to, or is materially subject to the risks
or losses of, the other company.
Bank holding company has the meaning specified in section 2 of the
Bank Holding Company Act of 1956 (12 U.S.C. 1841).
Broker has the meaning specified in section 3(a)(4) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)).
Business day means any day other than a Saturday, Sunday, or legal
holiday.
Clearing agency has the meaning specified in section 3(a)(23) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(23)).
Company means a corporation, partnership, limited liability company,
business trust, special purpose entity, association, or similar
organization.
Counterparty means, with respect to any non-cleared swap or non-
cleared security-based swap to which a person is a party, each other
party to such non-cleared swap or non-cleared security-based swap.
Covered swap entity means any swap entity that is a:
(1) State member bank (as defined in 12 CFR 208.2(g));
(2) Bank holding company (as defined in 12 U.S.C. 1841);
(3) Savings and loan holding company (as defined in 12 U.S.C.
1467a);
(4) Foreign banking organization (as defined in 12 CFR 211.21(o));
(5) Foreign bank that does not operate an insured branch;
(6) State branch or state agency of a foreign bank (as defined in 12
U.S.C. 3101(b)(11) and (12));
(7) Edge or agreement corporation (as defined in 12 CFR 211.1(c)(2)
and (3)); or
(8) Covered swap entity as determined by the Board. Covered swap
entity would not include an affiliate of an entity listed in paragraphs
(1) through (7) of this definition for which the Office of the
Comptroller of the Currency or the Federal Deposit Insurance Corporation
is the prudential regulator or that is required to be registered with
[[Page 56]]
the U.S. Commodity Futures Trading Commission as a swap dealer or major
swap participant or with the U.S. Securities and Exchange Commission as
a security-based swap dealer or major security-based swap participant.
Cross-currency swap means a swap in which one party exchanges with
another party principal and interest rate payments in one currency for
principal and interest rate payments in another currency, and the
exchange of principal occurs on the date the swap is entered into, with
a reversal of the exchange of principal at a later date that is agreed
upon when the swap is entered into.
Currency of settlement means a currency in which a party has agreed
to discharge payment obligations related to a non-cleared swap, a non-
cleared security-based swap, a group of non-cleared swaps, or a group of
non-cleared security-based swaps subject to a master agreement at the
regularly occurring dates on which such payments are due in the ordinary
course.
Day of execution means the calendar day at the time the parties
enter into a non-cleared swap or non-cleared security-based swap,
provided:
(1) If each party is in a different calendar day at the time the
parties enter into the non-cleared swap or non-cleared security-based
swap, the day of execution is deemed the latter of the two dates; and
(2) If a non-cleared swap or non-cleared security-based swap is:
(i) Entered into after 4:00 p.m. in the location of a party; or
(ii) Entered into on a day that is not a business day in the
location of a party, then the non-cleared swap or non-cleared security-
based swap is deemed to have been entered into on the immediately
succeeding day that is a business day for both parties, and both parties
shall determine the day of execution with reference to that business
day.
Dealer has the meaning specified in section 3(a)(5) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)).
Depository institution has the meaning specified in section 3(c) of
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
Derivatives clearing organization has the meaning specified in
section 1a(15) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(15)).
Eligible collateral means collateral described in Sec. 237.6.
Eligible master netting agreement means a written, legally
enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default following any stay permitted by paragraph (2) of this
definition, including upon an event of receivership, conservatorship,
insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the covered swap entity 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 default, including upon an event of receivership,
conservatorship, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case, any exercise of rights
under the agreement will not be stayed or avoided under applicable law
in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5381 et seq.), the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit
Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign
jurisdictions that are substantially similar to the U.S. laws referenced
in this paragraph (2)(i) in order to facilitate the orderly resolution
of the defaulting counterparty; or
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of
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the defaulter is a net creditor under the agreement); and
(4) A covered swap entity that relies on the agreement for purposes
of calculating the margin required by this part must:
(i) Conduct sufficient legal review to conclude with a well-founded
basis (and maintain sufficient written documentation of that legal
review) that:
(A) The agreement meets the requirements of paragraph (2) of this
definition; and
(B) In the event of a legal challenge (including one resulting from
default or from receivership, conservatorship, insolvency, liquidation,
or similar proceeding), the relevant court and administrative
authorities would find the agreement to be legal, valid, binding, and
enforceable under the law of the relevant jurisdictions; and
(ii) Establish and maintain written procedures to monitor possible
changes in relevant law and to ensure that the agreement continues to
satisfy the requirements of this definition.
Financial end user means:
(1) Any counterparty that is not a swap entity and that is:
(i) A bank holding company or an affiliate thereof; a savings and
loan holding company; a U.S. intermediate holding company established or
designated for purposes of compliance with 12 CFR 252.153; or a nonbank
financial institution supervised by the Board of Governors of the
Federal Reserve System under Title I of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (12 U.S.C. 5323);
(ii) A depository institution; a foreign bank; a Federal credit
union or State credit union as defined in section 2 of the Federal
Credit Union Act (12 U.S.C. 1752(1) & (6)); an institution that
functions solely in a trust or fiduciary capacity as described in
section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C.
1841(c)(2)(D)); an industrial loan company, an industrial bank, or other
similar institution described in section 2(c)(2)(H) of the Bank Holding
Company Act (12 U.S.C. 1841(c)(2)(H));
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money
lender; installment lender; consumer lender or lending company; mortgage
lender, broker, or bank; motor vehicle title pledge lender; payday or
deferred deposit lender; premium finance company; commercial finance or
lending company; or commercial mortgage company; except entities
registered or licensed solely on account of financing the entity's
direct sales of goods or services to customers;
(B) A money services business, including a check casher; money
transmitter; currency dealer or exchange; or money order or traveler's
check issuer;
(iv) A regulated entity as defined in section 1303(20) of the
Federal Housing Enterprises Financial Safety and Soundness Act of 1992,
as amended (12 U.S.C. 4502(20)) or any entity for which the Federal
Housing Finance Agency or its successor is the primary federal
regulator;
(v) Any institution chartered in accordance with the Farm Credit Act
of 1971, as amended, 12 U.S.C. 2001 et seq., that is regulated by the
Farm Credit Administration;
(vi) A securities holding company; a broker or dealer; an investment
adviser as defined in section 202(a) of the Investment Advisers Act of
1940 (15 U.S.C. 80b-2(a)); an investment company registered with the
U.S. Securities and Exchange Commission under the Investment Company Act
of 1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be
regulated as a business development company pursuant to section 54(a) of
the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
(vii) A private fund as defined in section 202(a) of the Investment
Advisers Act of 1940 (15 U.S.C. 80-b-2(a)); an entity that would be an
investment company under section 3 of the Investment Company Act of 1940
(15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is
deemed not to be an investment company under section 3 of the Investment
Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 (17 CFR
270.3a-7) of the U.S. Securities and Exchange Commission;
(viii) A commodity pool, a commodity pool operator, or a commodity
trading advisor as defined, respectively, in section 1a(10), 1a(11), and
1a(12) of the Commodity Exchange Act
[[Page 58]]
of 1936 (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor
trader, or introducing broker as defined, respectively, in 1a(22),
1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C.
1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined
in 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
(ix) An employee benefit plan as defined in paragraphs (3) and (32)
of section 3 of the Employee Retirement Income and Security Act of 1974
(29 U.S.C. 1002);
(x) An entity that is organized as an insurance company, primarily
engaged in writing insurance or reinsuring risks underwritten by
insurance companies, or is subject to supervision as such by a State
insurance regulator or foreign insurance regulator;
(xi) An entity, person or arrangement that is, or holds itself out
as being, an entity, person, or arrangement that raises money from
investors, accepts money from clients, or uses its own money primarily
for the purpose of investing or trading or facilitating the investing or
trading in loans, securities, swaps, funds or other assets for resale or
other disposition or otherwise trading in loans, securities, swaps,
funds or other assets; or
(xii) An entity that would be a financial end user described in
paragraph (1) of this definition or a swap entity, if it were organized
under the laws of the United States or any State thereof.
(2) The term ``financial end user'' does not include any
counterparty that is:
(i) A sovereign entity;
(ii) A multilateral development bank;
(iii) The Bank for International Settlements;
(iv) An entity that is exempt from the definition of financial
entity pursuant to section 2(h)(7)(C)(iii) of the Commodity Exchange Act
of 1936 (7 U.S.C. 2(h)(7)(C)(iii)) and implementing regulations; or
(v) An affiliate that qualifies for the exemption from clearing
pursuant to section 2(h)(7)(D) of the Commodity Exchange Act of 1936 (7
U.S.C. 2(h)(7)(D)) or section 3C(g)(4) of the Securities Exchange Act of
1934 (15 U.S.C. 78c-3(g)(4)) and implementing regulations.
Foreign bank means an organization that is organized under the laws
of a foreign country and that engages directly in the business of
banking outside the United States.
Foreign exchange forward has the meaning specified in section 1a(24)
of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(24)).
Foreign exchange swap has the meaning specified in section 1a(25) of
the Commodity Exchange Act of 1936 (7 U.S.C. 1a(25)).
Initial margin means the collateral as calculated in accordance with
Sec. 237.8 that is posted or collected in connection with a non-cleared
swap or non-cleared security-based swap.
Initial margin collection amount means:
(1) In the case of a covered swap entity that does not use an
initial margin model, the amount of initial margin with respect to a
non-cleared swap or non-cleared security-based swap that is required
under appendix A of this subpart; and
(2) In the case of a covered swap entity that uses an initial margin
model pursuant to Sec. 237.8, the amount of initial margin with respect
to a non-cleared swap or non-cleared security-based swap that is
required under the initial margin model.
Initial margin model means an internal risk management model that:
(1) Has been developed and designed to identify an appropriate,
risk-based amount of initial margin that the covered swap entity must
collect with respect to one or more non-cleared swaps or non-cleared
security-based swaps to which the covered swap entity is a party; and
(2) Has been approved by the Board pursuant to Sec. 237.8.
Initial margin threshold amount means an aggregate credit exposure
of $50 million resulting from all non-cleared swaps and non-cleared
security-based swaps between a covered swap entity and its affiliates,
and a counterparty and its affiliates. For purposes of this calculation,
an entity shall not count a swap or security-based swap that is exempt
pursuant to Sec. 237.1(d).
Major currency means:
(1) United States Dollar (USD);
(2) Canadian Dollar (CAD);
[[Page 59]]
(3) Euro (EUR);
(4) United Kingdom Pound (GBP);
(5) Japanese Yen (JPY);
(6) Swiss Franc (CHF);
(7) New Zealand Dollar (NZD);
(8) Australian Dollar (AUD);
(9) Swedish Kronor (SEK);
(10) Danish Kroner (DKK);
(11) Norwegian Krone (NOK); or
(12) Any other currency as determined by the Board.
Margin means initial margin and variation margin.
Market intermediary means a securities holding company; a broker or
dealer; a futures commission merchant as defined in 1a(28) of the
Commodity Exchange Act of 1936 (7 U.S.C. 1a(28)); a swap dealer as
defined in section 1a(49) of the Commodity Exchange Act of 1936 (7
U.S.C. 1a(49)); or a security-based swap dealer as defined in section
3(a)(71) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(71)).
Material swaps exposure for an entity means that an entity and its
affiliates have an average daily aggregate notional amount of non-
cleared swaps, non-cleared security-based swaps, foreign exchange
forwards, and foreign exchange swaps with all counterparties for June,
July, and August of the previous calendar year that exceeds $8 billion,
where such amount is calculated only for business days. An entity shall
count the average daily aggregate notional amount of a non-cleared swap,
a non-cleared security-based swap, a foreign exchange forward or a
foreign exchange swap between the entity and an affiliate only one time.
For purposes of this calculation, an entity shall not count a swap or
security-based swap that is exempt pursuant to Sec. 237.1(d).
Multilateral development bank means the International Bank for
Reconstruction and Development, the Multilateral Investment Guarantee
Agency, the International Finance Corporation, the Inter-American
Development Bank, the Asian Development Bank, the African Development
Bank, the European Bank for Reconstruction and Development, the European
Investment Bank, the European Investment Fund, the Nordic Investment
Bank, the Caribbean Development Bank, the Islamic Development Bank, the
Council of Europe Development Bank, and any other entity that provides
financing for national or regional development in which the U.S.
government is a shareholder or contributing member or which the Board
determines poses comparable credit risk.
Non-cleared security-based swap means a security-based swap that is
not, directly or indirectly, submitted to and cleared by a clearing
agency registered with the U.S. Securities and Exchange Commission
pursuant to section 17A of the Securities Exchange Act of 1934 (15
U.S.C. 78q-1) or by a clearing agency that the U.S. Securities and
Exchange Commission has exempted from registration by rule or order
pursuant to section 17A of the Securities Exchange Act of 1934 (15
U.S.C. 78q-1).
Non-cleared swap means a swap that is not cleared by a derivatives
clearing organization registered with the Commodity Futures Trading
Commission pursuant to section 5b(a) of the Commodity Exchange Act of
1936 (7 U.S.C. 7a-1(a)) or by a clearing organization that the Commodity
Futures Trading Commission has exempted from registration by rule or
order pursuant to section 5b(h) of the Commodity Exchange Act of 1936 (7
U.S.C. 7a-1(h)).
Prudential regulator has the meaning specified in section 1a(39) of
the Commodity Exchange Act of 1936 (7 U.S.C. 1a(39)).
Savings and loan holding company has the meaning specified in
section 10(n) of the Home Owners' Loan Act (12 U.S.C. 1467a(n)).
Securities holding company has the meaning specified in section 618
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12
U.S.C. 1850a).
Security-based swap has the meaning specified in section 3(a)(68) of
the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)).
Sovereign entity means a central government (including the U.S.
government) or an agency, department, ministry, or central bank of a
central government.
State means any State, commonwealth, territory, or possession of the
United States, the District of Columbia, the Commonwealth of Puerto
Rico, the Commonwealth of the Northern Mariana Islands, American Samoa,
[[Page 60]]
Guam, or the United States Virgin Islands.
Subsidiary. A company is a subsidiary of another company if:
(1) The company is consolidated by the other company on financial
statements prepared in accordance with U.S. Generally Accepted
Accounting Principles, the International Financial Reporting Standards,
or other similar standards;
(2) For a company that is not subject to such principles or
standards, if consolidation as described in paragraph (1) of this
definition would have occurred if such principles or standards had
applied; or
(3) The Board has determined that the company is a subsidiary of
another company, based on Board's conclusion that either company
provides significant support to, or is materially subject to the risks
of loss of, the other company.
Swap has the meaning specified in section 1a(47) of the Commodity
Exchange Act of 1936 (7 U.S.C. 1a(47)).
Swap entity means a person that is registered with the Commodity
Futures Trading Commission as a swap dealer or major swap participant
pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or
a person that is registered with the U.S. Securities and Exchange
Commission as a security-based swap dealer or a major security-based
swap participant pursuant to the Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.).
U.S. Government-sponsored enterprise means an entity established or
chartered by the U.S. government to serve public purposes specified by
federal statute but whose debt obligations are not explicitly guaranteed
by the full faith and credit of the U.S. government.
Variation margin means collateral provided by one party to its
counterparty to meet the performance of its obligations under one or
more non-cleared swaps or non-cleared security-based swaps between the
parties as a result of a change in value of such obligations since the
last time such collateral was provided.
Variation margin amount means the cumulative mark-to-market change
in value to a covered swap entity of a non-cleared swap or non-cleared
security-based swap, as measured from the date it is entered into (or,
in the case of a non-cleared swap or non-cleared security-based swap
that has a positive or negative value to a covered swap entity on the
date it is entered into, such positive or negative value plus any
cumulative mark-to-market change in value to the covered swap entity of
a non-cleared swap or non-cleared security-based swap after such date),
less the value of all variation margin previously collected, plus the
value of all variation margin previously posted with respect to such
non-cleared swap or non-cleared security-based swap.
[80 FR 74898, 74911, Nov. 30, 2015, as amended at 80 FR 74923, Nov. 30,
2015]
Sec. 237.3 Initial margin.
(a) Collection of margin. A covered swap entity shall collect
initial margin with respect to any non-cleared swap or non-cleared
security-based swap from a counterparty that is a financial end user
with material swaps exposure or that is a swap entity in an amount that
is no less than the greater of:
(1) Zero; or
(2) The initial margin collection amount for such non-cleared swap
or non-cleared security-based swap less the initial margin threshold
amount (not including any portion of the initial margin threshold amount
already applied by the covered swap entity or its affiliates to other
non-cleared swaps or non-cleared security-based swaps with the
counterparty or its affiliates), as applicable.
(b) Posting of margin. A covered swap entity shall post initial
margin with respect to any non-cleared swap or non-cleared security-
based swap to a counterparty that is a financial end user with material
swaps exposure. Such initial margin shall be in an amount at least as
large as the covered swap entity would be required to collect under
paragraph (a) of this section if it were in the place of the
counterparty.
(c) Timing. A covered swap entity shall comply with the initial
margin requirements described in paragraphs (a) and (b) of this section
on each business day, for a period beginning on or before the business
day following the
[[Page 61]]
day of execution and ending on the date the non-cleared swap or non-
cleared security-based swap terminates or expires.
(d) Other counterparties. A covered swap entity is not required to
collect or post initial margin with respect to any non-cleared swap or
non-cleared security-based swap described in Sec. 237.1(d). For any
other non-cleared swap or non-cleared security-based swap between a
covered swap entity and a counterparty that is neither a financial end
user with a material swaps exposure nor a swap entity, the covered swap
entity shall collect initial margin at such times and in such forms and
such amounts (if any), that the covered swap entity determines
appropriately addresses the credit risk posed by the counterparty and
the risks of such non-cleared swap or non-cleared security-based swap.
Sec. 237.4 Variation margin.
(a) General. After the date on which a covered swap entity enters
into a non-cleared swap or non-cleared security-based swap with a swap
entity or financial end user, the covered swap entity shall collect
variation margin equal to the variation margin amount from the
counterparty to such non-cleared swap or non-cleared security-based swap
when the amount is positive and post variation margin equal to the
variation margin amount to the counterparty to such non-cleared swap or
non-cleared security-based swap when the amount is negative.
(b) Timing. A covered swap entity shall comply with the variation
margin requirements described in paragraph (a) of this section on each
business day, for a period beginning on or before the business day
following the day of execution and ending on the date the non-cleared
swap or non-cleared security based swap terminates or expires.
(c) Other counterparties. A covered swap entity is not required to
collect or post variation margin with respect to any non-cleared swap or
non-cleared security-based swap described in Sec. 237.1(d). For any
other non-cleared swap or non-cleared security-based swap between a
covered swap entity and a counterparty that is neither a financial end
user nor a swap entity, the covered swap entity shall collect variation
margin at such times and in such forms and such amounts (if any), that
the covered swap entity determines appropriately addresses the credit
risk posed by the counterparty and the risks of such non-cleared swap or
non-cleared security-based swap.
Sec. 237.5 Netting arrangements, minimum transfer amount and
satisfaction of collecting and posting requirements.
(a) Netting arrangements. (1) For purposes of calculating and
complying with the initial margin requirements of Sec. 237.3 using an
initial margin model as described in Sec. 237.8, or with the variation
margin requirements of Sec. 237.4, a covered swap entity may net non-
cleared swaps or non-cleared security-based swaps in accordance with
this subsection.
(2) To the extent that one or more non-cleared swaps or non-cleared
security-based swaps are executed pursuant to an eligible master netting
agreement between a covered swap entity and its counterparty that is a
swap entity or financial end user, a covered swap entity may calculate
and comply with the applicable requirements of this subpart on an
aggregate net basis with respect to all non-cleared swaps and non-
cleared security-based swaps governed by such agreement, subject to
paragraph (a)(3) of this section.
(3)(i) Except as permitted in paragraph (a)(3)(ii) of this section,
if an eligible master netting agreement covers non-cleared swaps and
non-cleared security-based swaps entered into on or after the applicable
compliance date set forth in Sec. 237.1(e) or (g), all the non-cleared
swaps and non-cleared security-based swaps covered by that agreement are
subject to the requirements of this subpart and included in the
aggregate netting portfolio for the purposes of calculating and
complying with the margin requirements of this subpart.
(ii) An eligible master netting agreement may identify one or more
separate netting portfolios that independently meet the requirements in
paragraph (1) of the definition of ``Eligible master netting agreement''
in Sec. 237.2 and to which collection and posting of
[[Page 62]]
margin applies on an aggregate net basis separate from and exclusive of
any other non-cleared swaps or non-cleared security-based swaps covered
by the eligible master netting agreement. Any such netting portfolio
that contains any non-cleared swap or non-cleared security-based swap
entered into on or after the applicable compliance date set forth in
Sec. 237.1(e) or (g) is subject to the requirements of this subpart.
Any such netting portfolio that contains only non-cleared swaps or non-
cleared security-based swaps entered into before the applicable
compliance date is not subject to the requirements of this subpart.
(4) If a covered swap entity cannot conclude after sufficient legal
review with a well-founded basis that the netting agreement described in
this section meets the definition of eligible master netting agreement
set forth in Sec. 237.2, the covered swap entity must treat the non-
cleared swaps and non-cleared security based swaps covered by the
agreement on a gross basis for the purposes of calculating and complying
with the requirements of this subpart to collect margin, but the covered
swap entity may net those non-cleared swaps and non-cleared security-
based swaps in accordance with paragraphs (a)(1) through (3) of this
section for the purposes of calculating and complying with the
requirements of this subpart to post margin.
(b) Minimum transfer amount. Notwithstanding Sec. 237.3 or Sec.
237.4, a covered swap entity is not required to collect or post margin
pursuant to this subpart with respect to a particular counterparty
unless and until the combined amount of initial margin and variation
margin that is required pursuant to this subpart to be collected or
posted and that has not yet been collected or posted with respect to the
counterparty is greater than $500,000.
(c) Satisfaction of collecting and posting requirements. A covered
swap entity shall not be deemed to have violated its obligation to
collect or post margin from or to a counterparty under Sec. 237.3,
Sec. 237.4, or Sec. 237.6(e) if:
(1) The counterparty has refused or otherwise failed to provide or
accept the required margin to or from the covered swap entity; and
(2) The covered swap entity has:
(i) Made the necessary efforts to collect or post the required
margin, including the timely initiation and continued pursuit of formal
dispute resolution mechanisms, or has otherwise demonstrated upon
request to the satisfaction of the Board that it has made appropriate
efforts to collect or post the required margin; or
(ii) Commenced termination of the non-cleared swap or non-cleared
security-based swap with the counterparty promptly following the
applicable cure period and notification requirements.
Sec. 237.6 Eligible collateral.
(a) Non-cleared swaps and non-cleared security-based swaps with a
swap entity. For a non-cleared swap or non-cleared security-based swap
with a swap entity, a covered swap entity shall collect initial margin
and variation margin required pursuant to this subpart solely in the
form of the following types of collateral:
(1) Immediately available cash funds that are denominated in:
(i) U.S. dollars or another major currency; or
(ii) The currency of settlement for the non-cleared swap or non-
cleared security-based swap;
(2) With respect to initial margin only:
(i) A security that is issued by, or unconditionally guaranteed as
to the timely payment of principal and interest by, the U.S. Department
of the Treasury;
(ii) A security that is issued by, or unconditionally guaranteed as
to the timely payment of principal and interest by, a U.S. government
agency (other than the U.S. Department of Treasury) whose obligations
are fully guaranteed by the full faith and credit of the United States
government;
(iii) A security that is issued by, or fully guaranteed as to the
payment of principal and interest by, the European Central Bank or a
sovereign entity that is assigned no higher than a 20 percent risk
weight under the capital rules applicable to the covered swap entity as
set forth in Sec. 237.12;
(iv) A publicly traded debt security issued by, or an asset-backed
security fully guaranteed as to the payment of
[[Page 63]]
principal and interest by, a U.S. Government-sponsored enterprise that
is operating with capital support or another form of direct financial
assistance received from the U.S. government that enables the repayments
of the U.S. Government-sponsored enterprise's eligible securities;
(v) A publicly traded debt security that meets the terms of 12 CFR
1.2(d) and is issued by a U.S. Government-sponsored enterprise not
operating with capital support or another form of direct financial
assistance from the U.S. government, and is not an asset-backed
security;
(vi) A security that is issued by, or fully guaranteed as to the
payment of principal and interest by, the Bank for International
Settlements, the International Monetary Fund, or a multilateral
development bank;
(vii) A security solely in the form of:
(A) Publicly traded debt not otherwise described in paragraph (a)(2)
of this section that meets the terms of 12 CFR 1.2(d) and is not an
asset-backed security;
(B) Publicly traded common equity that is included in:
(1) The Standard & Poor's Composite 1500 Index or any other similar
index of liquid and readily marketable equity securities as determined
by the Board; or
(2) An index that a covered swap entity's supervisor in a foreign
jurisdiction recognizes for purposes of including publicly traded common
equity as initial margin under applicable regulatory policy, if held in
that foreign jurisdiction;
(viii) Securities in the form of redeemable securities in a pooled
investment fund representing the security-holder's proportional interest
in the fund's net assets and that are issued and redeemed only on the
basis of the market value of the fund's net assets prepared each
business day after the security-holder makes its investment commitment
or redemption request to the fund, if:
(A) The fund's investments are limited to the following:
(1) Securities that are issued by, or unconditionally guaranteed as
to the timely payment of principal and interest by, the U.S. Department
of the Treasury, and immediately-available cash funds denominated in
U.S. dollars; or
(2) Securities denominated in a common currency and issued by, or
fully guaranteed as to the payment of principal and interest by, the
European Central Bank or a sovereign entity that is assigned no higher
than a 20 percent risk weight under the capital rules applicable to the
covered swap entity as set forth in Sec. 237.12, and immediately-
available cash funds denominated in the same currency; and
(B) Assets of the fund may not be transferred through securities
lending, securities borrowing, repurchase agreements, reverse repurchase
agreements, or other means that involve the fund having rights to
acquire the same or similar assets from the transferee; or
(ix) Gold.
(b) Non-cleared swaps and non-cleared security-based swaps with a
financial end user. For a non-cleared swap or non-cleared security-based
swap with a financial end user, a covered swap entity shall collect and
post initial margin and variation margin required pursuant to this
subpart solely in the form of the following types of collateral:
(1) Immediately available cash funds that are denominated in:
(i) U.S. dollars or another major currency; or
(ii) The currency of settlement for the non-cleared swap or non-
cleared security-based swap;
(2) A security that is issued by, or unconditionally guaranteed as
to the timely payment of principal and interest by, the U.S. Department
of the Treasury;
(3) A security that is issued by, or unconditionally guaranteed as
to the timely payment of principal and interest by, a U.S. government
agency (other than the U.S. Department of Treasury) whose obligations
are fully guaranteed by the full faith and credit of the United States
government;
(4) A security that is issued by, or fully guaranteed as to the
payment of principal and interest by, the European Central Bank or a
sovereign entity that is assigned no higher than a 20 percent risk
weight under the capital rules applicable to the covered swap entity as
set forth in Sec. 237.12;
[[Page 64]]
(5) A publicly traded debt security issued by, or an asset-backed
security fully guaranteed as to the payment of principal and interest
by, a U.S. Government-sponsored enterprise that is operating with
capital support or another form of direct financial assistance received
from the U.S. government that enables the repayments of the U.S.
Government-sponsored enterprise's eligible securities;
(6) A publicly traded debt security that meets the terms of 12 CFR
1.2(d) and is issued by a U.S. Government-sponsored enterprise not
operating with capital support or another form of direct financial
assistance from the U.S. government, and is not an asset-backed
security;
(7) A security that is issued by, or fully guaranteed as to the
payment of principal and interest by, the Bank for International
Settlements, the International Monetary Fund, or a multilateral
development bank;
(8) A security solely in the form of:
(i) Publicly traded debt not otherwise described in this paragraph
(b) that meets the terms of 12 CFR 1.2(d) and is not an asset-backed
security;
(ii) Publicly traded common equity that is included in:
(A) The Standard & Poor's Composite 1500 Index or any other similar
index of liquid and readily marketable equity securities as determined
by the Board; or
(B) An index that a covered swap entity's supervisor in a foreign
jurisdiction recognizes for purposes of including publicly traded common
equity as initial margin under applicable regulatory policy, if held in
that foreign jurisdiction;
(9) Securities in the form of redeemable securities in a pooled
investment fund representing the security-holder's proportional interest
in the fund's net assets and that are issued and redeemed only on the
basis of the market value of the fund's net assets prepared each
business day after the security-holder makes its investment commitment
or redemption request to the fund, if:
(i) The fund's investments are limited to the following:
(A) Securities that are issued by, or unconditionally guaranteed as
to the timely payment of principal and interest by, the U.S. Department
of the Treasury, and immediately-available cash funds denominated in
U.S. dollars; or
(B) Securities denominated in a common currency and issued by, or
fully guaranteed as to the payment of principal and interest by, the
European Central Bank or a sovereign entity that is assigned no higher
than a 20 percent risk weight under the capital rules applicable to the
covered swap entity as set forth in Sec. 237.12, and immediately-
available cash funds denominated in the same currency; and
(ii) Assets of the fund may not be transferred through securities
lending, securities borrowing, repurchase agreements, reverse repurchase
agreements, or other means that involve the fund having rights to
acquire the same or similar assets from the transferee; or
(10) Gold.
(c)(1) The value of any eligible collateral collected or posted to
satisfy margin requirements pursuant to this subpart is subject to the
sum of the following discounts, as applicable:
(i) An 8 percent discount for variation margin collateral
denominated in a currency that is not the currency of settlement for the
non-cleared swap or non-cleared security-based swap, except for
immediately available cash funds denominated in U.S. dollars or another
major currency;
(ii) An 8 percent discount for initial margin collateral denominated
in a currency that is not the currency of settlement for the non-cleared
swap or non-cleared security-based swap, except for eligible types of
collateral denominated in a single termination currency designated as
payable to the non-posting counterparty as part of the eligible master
netting agreement; and
(iii) For variation and initial margin non-cash collateral, the
discounts described in appendix B of this subpart.
(2) The value of variation margin or initial margin collateral is
computed as the product of the cash or market value of the eligible
collateral asset times one minus the applicable discounts pursuant to
paragraph (c)(1) of this section expressed in percentage terms. The
total value of all variation margin or initial margin collateral is
[[Page 65]]
calculated as the sum of those values for each eligible collateral
asset.
(d) Notwithstanding paragraphs (a) and (b) of this section, eligible
collateral for initial margin and variation margin required by this
subpart does not include a security issued by:
(1) The party or an affiliate of the party pledging such collateral;
(2) A bank holding company, a savings and loan holding company, a
U.S. intermediate holding company established or designated for purposes
of compliance with 12 CFR 252.153, a foreign bank, a depository
institution, a market intermediary, a company that would be any of the
foregoing if it were organized under the laws of the United States or
any State, or an affiliate of any of the foregoing institutions; or
(3) A nonbank financial institution supervised by the Board of
Governors of the Federal Reserve System under Title I of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (12 U.S.C. 5323).
(e) A covered swap entity shall monitor the market value and
eligibility of all collateral collected and posted to satisfy the
minimum initial margin and minimum variation margin requirements of this
subpart. To the extent that the market value of such collateral has
declined, the covered swap entity shall promptly collect or post such
additional eligible collateral as is necessary to maintain compliance
with the margin requirements of this subpart. To the extent that the
collateral is no longer eligible, the covered swap entity shall promptly
collect or post sufficient eligible replacement collateral to comply
with the margin requirements of this subpart.
(f) A covered swap entity may collect or post initial margin and
variation margin that is required by Sec. 237.3(d) or Sec. 237.4(c) or
that is not required pursuant to this subpart in any form of collateral.
[80 FR 74898, 74912, Nov. 30, 2015, as amended at 80 FR 74912, Nov. 30,
2015]
Sec. 237.7 Segregation of collateral.
(a) A covered swap entity that posts any collateral other than for
variation margin with respect to a non-cleared swap or a non-cleared
security-based swap shall require that all funds or other property other
than variation margin provided by the covered swap entity be held by one
or more custodians that are not the covered swap entity or counterparty
and not affiliates of the covered swap entity or the counterparty.
(b) A covered swap entity that collects initial margin required by
Sec. 237.3(a) with respect to a non-cleared swap or a non-cleared
security-based swap shall require that such initial margin be held by
one or more custodians that are not the covered swap entity or
counterparty and not affiliates of the covered swap entity or the
counterparty.
(c) For purposes of paragraphs (a) and (b) of this section, the
custodian must act pursuant to a custody agreement that:
(1) Prohibits the custodian from rehypothecating, repledging,
reusing, or otherwise transferring (through securities lending,
securities borrowing, repurchase agreement, reverse repurchase agreement
or other means) the collateral held by the custodian, except that cash
collateral may be held in a general deposit account with the custodian
if the funds in the account are used to purchase an asset described in
Sec. 237.6(a)(2) or (b), such asset is held in compliance with this
Sec. 237.7, and such purchase takes place within a time period
reasonably necessary to consummate such purchase after the cash
collateral is posted as initial margin; and
(2) Is a legal, valid, binding, and enforceable agreement under the
laws of all relevant jurisdictions, including in the event of
bankruptcy, insolvency, or a similar proceeding.
(d) Notwithstanding paragraph (c)(1) of this section, a custody
agreement may permit the posting party to substitute or direct any
reinvestment of posted collateral held by the custodian, provided that,
with respect to collateral collected by a covered swap entity pursuant
to Sec. 237.3(a) or posted by a covered swap entity pursuant to Sec.
237.3(b), the agreement requires the posting party to:
(1) Substitute only funds or other property that would qualify as
eligible collateral under Sec. 237.6, and for which the amount net of
applicable discounts described in appendix B of this subpart
[[Page 66]]
would be sufficient to meet the requirements of Sec. 237.3; and
(2) Direct reinvestment of funds only in assets that would qualify
as eligible collateral under Sec. 237.6, and for which the amount net
of applicable discounts described in appendix B of this subpart would be
sufficient to meet the requirements of Sec. 237.3.
Sec. 237.8 Initial margin models and standardized amounts.
(a) Standardized amounts. Unless a covered swap entity's initial
margin model conforms to the requirements of this section, the covered
swap entity shall calculate the amount of initial margin required to be
collected or posted for one or more non-cleared swaps or non-cleared
security-based swaps with a given counterparty pursuant to Sec. 237.3
on a daily basis pursuant to appendix A of this subpart.
(b) Use of initial margin models. A covered swap entity may
calculate the amount of initial margin required to be collected or
posted for one or more non-cleared swaps or non-cleared security-based
swaps with a given counterparty pursuant to Sec. 237.3 on a daily basis
using an initial margin model only if the initial margin model meets the
requirements of this section.
(c) Requirements for initial margin model. (1) A covered swap entity
must obtain the prior written approval of the Board before using any
initial margin model to calculate the initial margin required in this
subpart.
(2) A covered swap entity must demonstrate that the initial margin
model satisfies all of the requirements of this section on an ongoing
basis.
(3) A covered swap entity must notify the Board in writing 60 days
prior to:
(i) Extending the use of an initial margin model that the Board has
approved under this section to an additional product type;
(ii) Making any change to any initial margin model approved by the
Board under this section that would result in a material change in the
covered swap entity's assessment of initial margin requirements; or
(iii) Making any material change to modeling assumptions used by the
initial margin model.
(4) The Board may rescind its approval of the use of any initial
margin model, in whole or in part, or may impose additional conditions
or requirements if the Board determines, in its sole discretion, that
the initial margin model no longer complies with this section.
(d) Quantitative requirements. (1) The covered swap entity's initial
margin model must calculate an amount of initial margin that is equal to
the potential future exposure of the non-cleared swap, non-cleared
security-based swap or netting portfolio of non-cleared swaps or non-
cleared security-based swaps covered by an eligible master netting
agreement. Potential future exposure is an estimate of the one-tailed 99
percent confidence interval for an increase in the value of the non-
cleared swap, non-cleared security-based swap or netting portfolio of
non-cleared swaps or non-cleared security-based swaps due to an
instantaneous price shock that is equivalent to a movement in all
material underlying risk factors, including prices, rates, and spreads,
over a holding period equal to the shorter of ten business days or the
maturity of the non-cleared swap, non-cleared security-based swap or
netting portfolio.
(2) All data used to calibrate the initial margin model must be
based on an equally weighted historical observation period of at least
one year and not more than five years and must incorporate a period of
significant financial stress for each broad asset class that is
appropriate to the non-cleared swaps and non-cleared security-based
swaps to which the initial margin model is applied.
(3) The covered swap entity's initial margin model must use risk
factors sufficient to measure all material price risks inherent in the
transactions for which initial margin is being calculated. The risk
categories must include, but should not be limited to, foreign exchange
or interest rate risk, credit risk, equity risk, and commodity risk, as
appropriate. For material exposures in significant currencies and
markets, modeling techniques must capture spread and basis risk and must
[[Page 67]]
incorporate a sufficient number of segments of the yield curve to
capture differences in volatility and imperfect correlation of rates
along the yield curve.
(4) In the case of a non-cleared cross-currency swap, the covered
swap entity's initial margin model need not recognize any risks or risk
factors associated with the fixed, physically-settled foreign exchange
transaction associated with the exchange of principal embedded in the
non-cleared cross-currency swap. The initial margin model must recognize
all material risks and risk factors associated with all other payments
and cash flows that occur during the life of the non-cleared cross-
currency swap.
(5) The initial margin model may calculate initial margin for a non-
cleared swap or non-cleared security-based swap or a netting portfolio
of non-cleared swaps or non-cleared security-based swaps covered by an
eligible master netting agreement. It may reflect offsetting exposures,
diversification, and other hedging benefits for non-cleared swaps and
non-cleared security-based swaps that are governed by the same eligible
master netting agreement by incorporating empirical correlations within
the following broad risk categories, provided the covered swap entity
validates and demonstrates the reasonableness of its process for
modeling and measuring hedging benefits: Commodity, credit, equity, and
foreign exchange or interest rate. Empirical correlations under an
eligible master netting agreement may be recognized by the initial
margin model within each broad risk category, but not across broad risk
categories.
(6) If the initial margin model does not explicitly reflect
offsetting exposures, diversification, and hedging benefits between
subsets of non-cleared swaps or non-cleared security-based swaps within
a broad risk category, the covered swap entity must calculate an amount
of initial margin separately for each subset within which such
relationships are explicitly recognized by the initial margin model. The
sum of the initial margin amounts calculated for each subset of non-
cleared swaps and non-cleared security-based swaps within a broad risk
category will be used to determine the aggregate initial margin due from
the counterparty for the portfolio of non-cleared swaps and non-cleared
security-based swaps within the broad risk category.
(7) The sum of the initial margin amounts calculated for each broad
risk category will be used to determine the aggregate initial margin due
from the counterparty.
(8) The initial margin model may not permit the calculation of any
initial margin collection amount to be offset by, or otherwise take into
account, any initial margin that may be owed or otherwise payable by the
covered swap entity to the counterparty.
(9) The initial margin model must include all material risks arising
from the nonlinear price characteristics of option positions or
positions with embedded optionality and the sensitivity of the market
value of the positions to changes in the volatility of the underlying
rates, prices, or other material risk factors.
(10) The covered swap entity may not omit any risk factor from the
calculation of its initial margin that the covered swap entity uses in
its initial margin model unless it has first demonstrated to the
satisfaction of the Board that such omission is appropriate.
(11) The covered swap entity may not incorporate any proxy or
approximation used to capture the risks of the covered swap entity's
non-cleared swaps or non-cleared security-based swaps unless it has
first demonstrated to the satisfaction of the Board that such proxy or
approximation is appropriate.
(12) The covered swap entity must have a rigorous and well-defined
process for re-estimating, re-evaluating, and updating its internal
margin model to ensure continued applicability and relevance.
(13) The covered swap entity must review and, as necessary, revise
the data used to calibrate the initial margin model at least annually,
and more frequently as market conditions warrant, to ensure that the
data incorporate a period of significant financial stress appropriate to
the non-cleared swaps and non-cleared security-based swaps
[[Page 68]]
to which the initial margin model is applied.
(14) The level of sophistication of the initial margin model must be
commensurate with the complexity of the non-cleared swaps and non-
cleared security-based swaps to which it is applied. In calculating an
initial margin collection amount, the initial margin model may make use
of any of the generally accepted approaches for modeling the risk of a
single instrument or portfolio of instruments.
(15) The Board may in its sole discretion require a covered swap
entity using an initial margin model to collect a greater amount of
initial margin than that determined by the covered swap entity's initial
margin model if the Board determines that the additional collateral is
appropriate due to the nature, structure, or characteristics of the
covered swap entity's transaction(s), or is commensurate with the risks
associated with the transaction(s).
(e) Periodic review. A covered swap entity must periodically, but no
less frequently than annually, review its initial margin model in light
of developments in financial markets and modeling technologies, and
enhance the initial margin model as appropriate to ensure that the
initial margin model continues to meet the requirements for approval in
this section.
(f) Control, oversight, and validation mechanisms. (1) The covered
swap entity must maintain a risk control unit that reports directly to
senior management and is independent from the business trading units.
(2) The covered swap entity's risk control unit must validate its
initial margin model prior to implementation and on an ongoing basis.
The covered swap entity's validation process must be independent of the
development, implementation, and operation of the initial margin model,
or the validation process must be subject to an independent review of
its adequacy and effectiveness. The validation process must include:
(i) An evaluation of the conceptual soundness of (including
developmental evidence supporting) the initial margin model;
(ii) An ongoing monitoring process that includes verification of
processes and benchmarking by comparing the covered swap entity's
initial margin model outputs (estimation of initial margin) with
relevant alternative internal and external data sources or estimation
techniques. The benchmark(s) must address the chosen model's
limitations. When applicable, the covered swap entity should consider
benchmarks that allow for non-normal distributions such as historical
and Monte Carlo simulations. When applicable, validation shall include
benchmarking against observable margin standards to ensure that the
initial margin required is not less than what a derivatives clearing
organization or a clearing agency would require for similar cleared
transactions; and
(iii) An outcomes analysis process that includes backtesting the
initial margin model. This analysis must recognize and compensate for
the challenges inherent in back-testing over periods that do not contain
significant financial stress.
(3) If the validation process reveals any material problems with the
initial margin model, the covered swap entity must promptly notify the
Board of the problems, describe to the Board any remedial actions being
taken, and adjust the initial margin model to ensure an appropriately
conservative amount of required initial margin is being calculated.
(4) The covered swap entity must have an internal audit function
independent of business-line management and the risk control unit that
at least annually assesses the effectiveness of the controls supporting
the covered swap entity's initial margin model measurement systems,
including the activities of the business trading units and risk control
unit, compliance with policies and procedures, and calculation of the
covered swap entity's initial margin requirements under this subpart. At
least annually, the internal audit function must report its findings to
the covered swap entity's board of directors or a committee thereof.
(g) Documentation. The covered swap entity must adequately document
all material aspects of its initial margin model, including the
management and
[[Page 69]]
valuation of the non-cleared swaps and non-cleared security-based swaps
to which it applies, the control, oversight, and validation of the
initial margin model, any review processes and the results of such
processes.
(h) Escalation procedures. The covered swap entity must adequately
document internal authorization procedures, including escalation
procedures, that require review and approval of any change to the
initial margin calculation under the initial margin model, demonstrable
analysis that any basis for any such change is consistent with the
requirements of this section, and independent review of such
demonstrable analysis and approval.
Sec. 237.9 Cross-border application of margin requirements.
(a) Transactions to which this rule does not apply. The requirements
of Sec. Sec. 237.3 through 237.8 and Sec. Sec. 237.10 through 237.12
shall not apply to any foreign non-cleared swap or foreign non-cleared
security-based swap of a foreign covered swap entity.
(b) For purposes of this section, a foreign non-cleared swap or
foreign non-cleared security-based swap is any non-cleared swap or non-
cleared security-based swap with respect to which neither the
counterparty to the foreign covered swap entity nor any party that
provides a guarantee of either party's obligations under the non-cleared
swap or non-cleared security-based swap is:
(1) An entity organized under the laws of the United States or any
State (including a U.S. branch, agency, or subsidiary of a foreign bank)
or a natural person who is a resident of the United States;
(2) A branch or office of an entity organized under the laws of the
United States or any State; or
(3) A swap entity that is a subsidiary of an entity that is
organized under the laws of the United States or any State.
(c) For purposes of this section, a foreign covered swap entity is
any covered swap entity that is not:
(1) An entity organized under the laws of the United States or any
State, including a U.S. branch, agency, or subsidiary of a foreign bank;
(2) A branch or office of an entity organized under the laws of the
United States or any State; or
(3) An entity that is a subsidiary of an entity that is organized
under the laws of the United States or any State.
(d) Transactions for which substituted compliance determination may
apply--(1) Determinations and reliance. For non-cleared swaps and non-
cleared security-based swaps entered into by covered swap entities
described in paragraph (d)(3) of this section, a covered swap entity may
satisfy the provisions of this subpart by complying with the foreign
regulatory framework for non-cleared swaps and non-cleared security-
based swaps that the prudential regulators jointly, conditionally or
unconditionally, determine by public order satisfy the corresponding
requirements of Sec. Sec. 237.3 through 237.8 and Sec. Sec. 237.10
through 237.12.
(2) Standard. In determining whether to make a determination under
paragraph (d)(1) of this section, the prudential regulators will
consider whether the requirements of such foreign regulatory framework
for non-cleared swaps and non-cleared security-based swaps applicable to
such covered swap entities are comparable to the otherwise applicable
requirements of this subpart and appropriate for the safe and sound
operation of the covered swap entity, taking into account the risks
associated with non-cleared swaps and non-cleared security-based swaps.
(3) Covered swap entities eligible for substituted compliance. A
covered swap entity may rely on a determination under paragraph (d)(1)
of this section only if:
(i) The covered swap entity's obligations under the non-cleared swap
or non-cleared security-based swap do not have a guarantee from:
(A) An entity organized under the laws of the United States or any
State (other than a U.S. branch or agency of a foreign bank) or a
natural person who is a resident of the United States; or
(B) A branch or office of an entity organized under the laws of the
United States or any State; and
(ii) The covered swap entity is:
(A) A foreign covered swap entity;
[[Page 70]]
(B) A U.S. branch or agency of a foreign bank; or
(C) An entity that is not organized under the laws of the United
States or any State and is a subsidiary of a depository institution,
Edge corporation, or agreement corporation.
(4) Compliance with foreign margin collection requirement. A covered
swap entity satisfies its requirement to post initial margin under Sec.
237.3(b) by posting to its counterparty initial margin in the form and
amount, and at such times, that its counterparty is required to collect
pursuant to a foreign regulatory framework, provided that the
counterparty is subject to the foreign regulatory framework and the
prudential regulators have made a determination under paragraph (d)(1)
of this section, unless otherwise stated in that determination, and the
counterparty's obligations under the non-cleared swap or non-cleared
security-based swap do not have a guarantee from:
(i) An entity organized under the laws of the United States or any
State (including a U.S. branch, agency, or subsidiary of a foreign bank)
or a natural person who is a resident of the United States; or
(ii) A branch or office of an entity organized under the laws of the
United States or any State.
(e) Requests for determinations. (1) A covered swap entity described
in paragraph (d)(3) of this section may request that the prudential
regulators make a determination pursuant to this section. A request for
a determination must include a description of:
(i) The scope and objectives of the foreign regulatory framework for
non-cleared swaps and non-cleared security-based swaps;
(ii) The specific provisions of the foreign regulatory framework for
non-cleared swaps and non-cleared security-based swaps that govern:
(A) The scope of transactions covered;
(B) The determination of the amount of initial margin and variation
margin required and how that amount is calculated;
(C) The timing of margin requirements;
(D) Any documentation requirements;
(E) The forms of eligible collateral;
(F) Any segregation and rehypothecation requirements; and
(G) The approval process and standards for models used in
calculating initial margin and variation margin;
(iii) The supervisory compliance program and enforcement authority
exercised by a foreign financial regulatory authority or authorities in
such system to support its oversight of the application of the non-
cleared swap or non-cleared security-based swap regulatory framework and
how that framework applies to the non-cleared swaps or non-cleared
security-based swaps of the covered swap entity; and
(iv) Any other descriptions and documentation that the prudential
regulators determine are appropriate.
(2) A covered swap entity described in paragraph (d)(3) of this
section may make a request under this section only if the non-cleared
swap or non-cleared security-based swap activities of the covered swap
entity are directly supervised by the authorities administering the
foreign regulatory framework for non-cleared swaps and non-cleared
security-based swaps.
(f) Segregation unavailable. Sections 237.3(b) and 237.7 do not
apply to a non-cleared swap or non-cleared security-based swap entered
into by:
(1) A foreign branch of a covered swap entity that is a depository
institution; or
(2) A covered swap entity that is not organized under the laws of
the United States or any State and is a subsidiary of a depository
institution, Edge corporation, or agreement corporation, if:
(i) Inherent limitations in the legal or operational infrastructure
in the foreign jurisdiction make it impracticable for the covered swap
entity and the counterparty to post any form of eligible initial margin
collateral recognized pursuant to Sec. 237.6(b) in compliance with the
segregation requirements of Sec. 237.7;
(ii) The covered swap entity is subject to foreign regulatory
restrictions that require the covered swap entity to transact in the
non-cleared swap or non-cleared security-based swap with the
counterparty through an establishment within the foreign jurisdiction
and do not accommodate the posting of
[[Page 71]]
collateral for the non-cleared swap or non-cleared security-based swap
outside the jurisdiction;
(iii) The counterparty to the non-cleared swap or non-cleared
security-based swap is not, and the counterparty's obligations under the
non-cleared swap or non-cleared security-based swap do not have a
guarantee from:
(A) An entity organized under the laws of the United States or any
State (including a U.S. branch, agency, or subsidiary of a foreign bank)
or a natural person who is a resident of the United States; or
(B) A branch or office of an entity organized under the laws of the
United States or any State;
(iv) The covered swap entity collects initial margin for the non-
cleared swap or non-cleared security-based swap in accordance with Sec.
237.3(a) in the form of cash pursuant to Sec. 237.6(b)(1), and posts
and collects variation margin in accordance with Sec. 237.4(a) in the
form of cash pursuant to Sec. 237.6(b)(1); and
(v) The Board provides the covered swap entity with prior written
approval for the covered swap entity's reliance on this paragraph (f)
for the foreign jurisdiction.
(g) Guarantee means an arrangement pursuant to which one party to a
non-cleared swap or non-cleared security-based swap has rights of
recourse against a third-party guarantor, with respect to its
counterparty's obligations under the non-cleared swap or non-cleared
security-based swap. For these purposes, a party to a non-cleared swap
or non-cleared security-based swap has rights of recourse against a
guarantor if the party has a conditional or unconditional legally
enforceable right to receive or otherwise collect, in whole or in part,
payments from the guarantor with respect to its counterparty's
obligations under the non-cleared swap or non-cleared security-based
swap. In addition, any arrangement pursuant to which the guarantor has a
conditional or unconditional legally enforceable right to receive or
otherwise collect, in whole or in part, payments from any other third
party guarantor with respect to the counterparty's obligations under the
non-cleared swap or non-cleared security-based swap, such arrangement
will be deemed a guarantee of the counterparty's obligations under the
non-cleared swap or non-cleared security-based swap by the other
guarantor.
Sec. 237.10 Documentation of margin matters.
A covered swap entity shall execute trading documentation with each
counterparty that is either a swap entity or financial end user
regarding credit support arrangements that:
(a) Provides the covered swap entity and its counterparty with the
contractual right to collect and post initial margin and variation
margin in such amounts, in such form, and under such circumstances as
are required by this subpart; and
(b) Specifies:
(1) The methods, procedures, rules, and inputs for determining the
value of each non-cleared swap or non-cleared security-based swap for
purposes of calculating variation margin requirements; and
(2) The procedures by which any disputes concerning the valuation of
non-cleared swaps or non-cleared security-based swaps, or the valuation
of assets collected or posted as initial margin or variation margin, may
be resolved; and
(c) Describes the methods, procedures, rules, and inputs used to
calculate initial margin for non-cleared swaps and non-cleared security
based swaps entered into between the covered swap entity and the
counterparty.
Sec. 237.11 Special rules for affiliates.
(a) Affiliates. This subpart applies to a non-cleared swap or non-
cleared security-based swap of a covered swap entity with its affiliate,
unless the swap or security-based swap is excluded from coverage under
Sec. 237.1(d) or as otherwise provided in this section. To the extent
of any inconsistency between this section and any other provision of
this subpart, this section will apply.
(b) Initial margin--(1) Posting of initial margin. The requirement
for a covered swap entity to post initial margin under Sec. 237.3(b)
does not apply with respect to any non-cleared swap or non-cleared
security-based swap with a counterparty that is an affiliate. A covered
swap entity shall calculate the
[[Page 72]]
amount of initial margin that would be required to be posted to an
affiliate that is a financial end user with material swaps exposure
pursuant to Sec. 237.3(b) and provide documentation of such amount to
each affiliate on a daily basis.
(2) Initial margin threshold amount. For purposes of calculating the
amount of initial margin to be collected from an affiliate counterparty
in accordance with Sec. 237.3(a) or calculating the amount of initial
margin that would have been posted to an affiliate counterparty in
accordance with paragraph (b)(1) of this section, the initial margin
threshold amount is an aggregate credit exposure of $20 million
resulting from all non-cleared swaps and non-cleared security-based
swaps between the covered swap entity and that affiliate. For purposes
of this calculation, an entity shall not count a non-cleared swap or
non-cleared security-based swap that is exempt pursuant to Sec.
237.1(d).
(c) Variation margin. A covered swap entity shall collect and post
variation margin with respect to a non-cleared swap or non-cleared
security-based swap with any counterparty that is an affiliate as
provided in Sec. 237.4.
(d) Custodian for non-cash collateral. To the extent that a covered
swap entity collects initial margin required by Sec. 237.3(a) from an
affiliate with respect to any non-cleared swap or non-cleared security-
based swap in the form of collateral other than cash collateral, the
custodian for such collateral may be the covered swap entity or an
affiliate of the covered swap entity.
(e) Model holding period and netting--(1) Model holding period. For
any non-cleared swap or non-cleared security-based swap (or netting
portfolio) between a covered swap entity and an affiliate that would be
subject to the clearing requirements of section 2(h)(1)(A) of the
Commodity Exchange Act of 1936 or section 3C(a)(1) of the Securities
Exchange Act of 1934 but for an exemption under section 2(h)(7)(C)(iii)
or (D) or section 4(c)(1) of the Commodity Exchange Act of 1936 or
regulations of the Commodity Futures Trading Commission or section
3C(g)(4) of the Securities Exchange Act of 1934 or regulations of the
U.S. Securities and Exchange Commission, the covered swap entity's
initial margin model calculation as described in Sec. 237.8(d)(1) may
use a holding period equal to the shorter of five business days or the
maturity of the non-cleared swap or non-cleared security-based swap (or
netting portfolio).
(2) Netting arrangements. Any netting portfolio that contains any
non-cleared swap or non-cleared security-based swap with a model holding
period equal to the shorter of five business days or the maturity of the
non-cleared swap or non-cleared security-based swap pursuant to
paragraph (e)(1) of this section must be identified and separate from
any other netting portfolio for purposes of calculating and complying
with the initial margin requirements of this subpart.
(f) Standardized amounts. If a covered swap entity's initial margin
model does not conform to the requirements of Sec. 237.8, the covered
swap entity shall calculate the amount of initial margin required to be
collected for one or more non-cleared swaps or non-cleared security-
based swaps with a given affiliate counterparty pursuant to section
Sec. 237.3 on a daily basis pursuant to appendix A with the gross
initial margin multiplied by 0.7.
Sec. 237.12 Capital.
A covered swap entity shall comply with:
(a) In the case of a covered swap entity that is a state member bank
(as defined in 12 CFR 208.2(g)), the provisions of the Board's
Regulation Q (12 CFR part 217) applicable to the state member bank;
(b) In the case of a covered swap entity that is a bank holding
company (as defined in 12 U.S.C. 1842) or a savings and loan holding
company (as defined in 12 U.S.C. 1467a), the provisions of the Board's
Regulation Q (12 CFR part 217) applicable to the covered swap entity;
(c) In the case of a covered swap entity that is a foreign banking
organization (as defined in 12 CFR 211.21(o)), a U.S. intermediate
holding company subsidiary of a foreign banking organization (as defined
in 12 CFR 252.3(y)) or any state branch or state agency of a foreign
bank (as defined in 12 U.S.C.
[[Page 73]]
3101(b)(11) and (12)), the capital standards that are applicable to such
covered swap entity under Sec. 225.2(r)(3) of the Board's Regulation Y
(12 CFR 225.2(r)(3)) or the Board's Regulation YY (12 CFR part 252); and
(d) In the case of a covered swap entity that is an Edge or
agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3)), the
capital standards applicable to an Edge corporation under Sec.
211.12(c) of the Board's Regulation K (12 CFR 211.12(c)) and to an
agreement corporation under Sec. Sec. 211.5(g) and 211.12(c) of the
Board's Regulation K (12 CFR 211.5(g) and 211.12(c)).
[80 FR 74912, Nov. 30, 2015]
Effective Date Note: At 80 FR 74912, Nov. 30, 2015, Sec. 237.12 was
added, effective Apr. 1, 2016.
Sec. Appendix A to Subpart A of Part 237--Standardized Minimum Initial
Margin Requirements for Non-Cleared Swaps and Non-Cleared Security-Based
Swaps
Table A--Standardized Minimum Gross Initial Margin Requirements for Non-
Cleared Swaps and Non-Cleared Security-Based Swaps\1\
------------------------------------------------------------------------
Gross initial
margin (% of
Asset Class notional
exposure)
------------------------------------------------------------------------
Credit: 0-2 year duration............................... 2
Credit: 2-5 year duration............................... 5
Credit: 5+ year duration................................ 10
Commodity............................................... 15
Equity.................................................. 15
Foreign Exchange/Currency............................... 6
Cross Currency Swaps: 0-2 year duration................. 1
Cross-Currency Swaps: 2-5 year duration................. 2
Cross-Currency Swaps: 5+ year duration.................. 4
Interest Rate: 0-2 year duration........................ 1
Interest Rate: 2-5 year duration........................ 2
Interest Rate: 5+ year duration......................... 4
Other................................................... 15
------------------------------------------------------------------------
\1\ The initial margin amount applicable to multiple non-cleared swaps
or non-cleared security-based swaps subject to an eligible master
netting agreement that is calculated according to Appendix A will be
computed as follows:
Initial Margin=0.4xGross Initial Margin +0.6x NGRxGross Initial Margin
where;
Gross Initial Margin = the sum of the product of each non-cleared swap's
or non-cleared security-based swap's effective notional amount and the
gross initial margin requirement for all non-cleared swaps and non-
cleared security-based swaps subject to the eligible master netting
agreement;
and
NGR = the net-to-gross ratio (that is, the ratio of the net current
replacement cost to the gross current replacement cost). In
calculating NGR, the gross current replacement cost equals the sum of
the replacement cost for each non-cleared swap and non-cleared
security-based swap subject to the eligible master netting agreement
for which the cost is positive. The net current replacement cost
equals the total replacement cost for all non-cleared swaps and non-
cleared security-based swaps subject to the eligible master netting
agreement. In cases where the gross replacement cost is zero, the NGR
should be set to 1.0.
Sec. Appendix B to Subpart A to Part 237--Margin Values for Eligible
Noncash Margin Collateral
Table B--Margin Values for Eligible Noncash Margin Collateral
------------------------------------------------------------------------
Asset class Discount (%)
------------------------------------------------------------------------
Eligible government and related (e.g., central bank, 0.5
multilateral development bank, GSE securities
identified in Sec. 237.6(a)(2)(iv) or (b)(5) debt:
residual maturity less than one-year...................
Eligible government and related (e.g., central bank, 2.0
multilateral development bank, GSE securities
identified in Sec. 237.6(a)(2)(iv) or (b)(5) debt:
residual maturity between one and five years...........
Eligible government and related (e.g., central bank, 4.0
multilateral development bank, GSE securities
identified in Sec. 237.6(a)(2)(iv) or (b)(5) debt:
residual maturity greater than five years..............
Eligible GSE debt securities not identified in Sec. 1.0
237.6(a)(2)(iv) or (b)(5): residual maturity less than
one-year...............................................
Eligible GSE debt securities not identified in Sec. 4.0
237.6(a)(2)(iv) or (b)(5): residual maturity between
one and five years:....................................
Eligible GSE debt securities not identified in Sec. 8.0
237.6(a)(2)(iv) or (b)(5): residual maturity greater
than five years:.......................................
Other eligible publicly traded debt: residual maturity 1.0
less than one-year.....................................
Other eligible publicly traded debt: residual maturity 4.0
between one and five years.............................
Other eligible publicly traded debt: residual maturity 8.0
greater than five years................................
Equities included in S&P 500 or related index........... 15.0
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Equities included in S&P 1500 Composite or related index 25.0
but not S&P 500 or related index.......................
Gold.................................................... 15.0
------------------------------------------------------------------------
\1\ The discount to be applied to an eligible investment fund is the
weighted average discount on all assets within the eligible investment
fund at the end of the prior month. The weights to be applied in the
weighted average should be calculated as a fraction of the fund's
total market value that is invested in each asset with a given
discount amount. As an example, an eligible investment fund that is
comprised solely of $100 of 91 day Treasury bills and $100 of 3 year
US Treasury bonds would receive a discount of (100/200)*0.5+(100/
200)*2.0=(0.5)*0.5+(0.5)*2.0=1.25 percent.
Subpart B_Prohibition Against Federal Assistance to Swaps Entities
Source: 79 FR 343, Jan. 3, 2014, unless otherwise noted.
Sec. 237.20 Definitions.
Unless otherwise specified, for purposes of this subpart:
(a) Board means the Board of Governors of the Federal Reserve
System.
(b) Dodd-Frank Act means the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
(c) Foreign bank has the same meaning as in Sec. 211.21(n) of the
Board's Regulation K (12 CFR 211.21(n)).
(d) Major security-based swap participant has the same meaning as in
section 3(a)(67) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(67)) and as implemented in rules and orders issued by the
Securities and Exchange Commission.
(e) Major swap participant has the same meaning as in section 1a(33)
of the Commodity Exchange Act (7 U.S.C. 1a(33)) and as implemented in
rules and orders issued by the Commodity Futures Trading Commission.
(f) Security-based swap has the same meaning as in section 3(a)(68)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)) and as
implemented in rules and orders issued by the Securities and Exchange
Commission.
(g) Security-based swap dealer has the same meaning as in section
3(a)(71) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(71))
and as implemented in rules and orders issued by the Securities and
Exchange Commission.
(h) Swap dealer has the same meaning as in section 1a(49) of the
Commodity Exchange Act (7 U.S.C. 1a(49)) and as implemented in rules and
orders issued by the Commodity Futures Trading Commission.
(i) Swaps entity means a person that is registered as a swap dealer,
security-based swap dealer, major swap participant, or major security-
based swap participant under the Commodity Exchange Act or Securities
Exchange Act of 1934, other than an insured depository institution that
is registered as a major swap participant or major security-based swap
participant.
Sec. 237.21 Definition of insured depository institution for
purposes of section 716 of the Dodd-Frank Act.
For purposes of section 716 of the Dodd-Frank Act (15 U.S.C. 8305)
and this rule, the term ``insured depository institution'' includes any
insured depository institution as defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813) and any uninsured U.S. branch or
agency of a foreign bank. The terms branch, agency, and foreign bank are
defined in section 1 of the International Banking Act of 1978 (12 U.S.C.
3101).
Sec. 237.22 Transition period for insured depository institutions.
(a) Approval of transition period. (1) To the extent an insured
depository institution for which the Board is the appropriate Federal
banking agency qualifies as a ``swaps entity'' and would be subject to
the Federal assistance prohibition in section 716(a) of the Dodd-Frank
Act (15 U.S.C. 8305(a)), the insured depository institution may request
a transition period of up to 24 months from the later of July 16, 2013,
or the date on which it becomes a swaps entity, during which to conform
its swaps activities to the requirements of section 716 of the Dodd-
Frank Act (15 U.S.C. 8305) by submitting a request in writing to the
Board.
[[Page 75]]
(2) Any request submitted pursuant to this paragraph (a) of this
section shall, at a minimum, include the following information:
(i) The length of the transition period requested;
(ii) A description of the quantitative and qualitative impacts of
divestiture or cessation of swap or security-based swaps activities on
the insured depository institution, including information that addresses
the factors in paragraph (c) of this section; and
(iii) A detailed explanation of the insured depository institution's
plan for conforming its activities to the requirements of section 716 of
the Dodd-Frank Act (15 U.S.C. 8305) and this part.
(3) The Board may, at any time, request additional information that
it believes is necessary for its decision.
(b) Transition period for insured depository institutions. Following
review of a written request submitted under paragraph (a) of this
section, the Board shall permit an insured depository institution for
which it is the appropriate Federal banking agency up to 24 months after
the later of July 16, 2013, or the date on which the insured depository
institution becomes a swaps entity, to comply with the requirements of
section 716 of the Dodd-Frank Act (15 U.S.C. 8305) and this subpart
based on its consideration of the factors in paragraph (c).
(c) Factors governing Board determinations. In establishing an
appropriate transition period pursuant to any request under this
section, the Board will take into account and make written findings
regarding:
(1) The potential impact of divestiture or cessation of swap or
security-based swaps activities on the insured depository institution's:
(i) Mortgage lending;
(ii) Small business lending;
(iii) Job creation; and
(iv) Capital formation versus the potential negative impact on
insured depositors and the Deposit Insurance Fund of the Federal Deposit
Insurance Corporation; and
(2) Any other factor that the Board believes appropriate.
(d) Timing of Board review. The Board will seek to act on a request
under paragraph (a) of this section expeditiously after the receipt of a
complete request.
(e) Extension of transition period. The Board may extend a
transition period provided under this section for a period of up to one
additional year. To request an extension of the transition period, an
insured depository institution must submit a written request containing
the information set forth in paragraph (a) of this section no later than
60 days before the end of the transition period.
(f) Authority to impose restrictions during any transition period.
The Board may impose such conditions on any transition period granted
under this section as the Board determines are necessary or appropriate.
(g) Consultation. The Board shall consult with the Commodity Futures
Trading Commission or the Securities and Exchange Commission, as
appropriate, prior to the approval of a request by an insured depository
institution for a transition period under this section.
PART 238_SAVINGS AND LOAN HOLDING COMPANIES
(REGULATION LL)--Table of Contents
Subpart A_General Provisions
Sec.
238.1 Authority, purpose and scope.
238.2 Definitions.
238.3 Administration.
238.4 Records, reports, and inspections.
238.5 Audit of savings association holding companies.
238.6 Penalties for violations.
238.7 Tying restriction exception.
238.8 Safe and sound operations.
238.9 Small Bank Holding Company Policy Statement.
Subpart B_Acquisitions of Savings Association Securities or Assets
238.11 Transactions requiring Board approval.
238.12 Transactions not requiring Board approval.
238.13 Prohibited acquisitions.
238.14 Procedural requirements.
238.15 Factors considered in acting on applications.
Subpart C_Control Proceedings
238.21 Control proceedings.
[[Page 76]]
Subpart D_Change in Bank Control
238.31 Transactions requiring prior notice.
238.32 Transactions not requiring prior notice.
238.33 Procedures for filing, processing, publishing, and acting on
notices.
Subpart E_Qualified Stock Issuances
238.41 Qualified stock issuances by undercapitalized savings
associations or holding companies.
Subpart F_Savings and Loan Holding Company Activities and Acquisitions
238.51 Prohibited activities.
238.52 Exempt savings and loan holding companies and grandfathered
activities.
238.53 Prescribed services and activities of savings and loan holding
companies.
238.54 Permissible bank holding company activities of savings and loan
holding companies.
Subpart G_Financial Holding Company Activities
238.61 Scope.
238.62 Definitions.
238.63 Requirements to engage in financial holding company activities.
238.64 Election required.
238.65 Election procedures.
238.66 Ongoing requirements.
Subpart H_Notice of Change of Director or Senior Executive Officer
238.71 Purpose.
238.72 Definitions.
238.73 Prior notice requirement.
238.74 Filing and processing procedures.
238.75 Standards for review.
238.76 Waiting period.
238.77 Waiver of prior notice requirement.
Subpart I_Prohibited Service at Savings and Loan Holding Companies
238.81 Purpose.
238.82 Definitions.
238.83 Prohibited actions.
238.84 Covered convictions or agreements to enter into pre-trial
diversions or similar programs.
238.85 Adjudications and offenses not covered.
238.86 Exemptions.
238.87 Filing procedures.
238.88 Factors for review.
238.89 Board action.
239.90 Hearings.
Subpart J_Management Official Interlocks
238.91 Authority, purpose, and scope.
238.92 Definitions.
238.93 Prohibitions.
238.94 Interlocking relationships permitted by statute.
238.95 Small market share exemption.
238.96 General exemption.
238.97 Change in circumstances.
238.98 Enforcement.
238.99 Interlocking relationships permitted pursuant to Federal Deposit
Insurance Act.
Subpart K_Dividends by Subsidiary Savings Associations
238.101 Authority and purpose.
238.102 Definitions.
238.103 Filing requirement.
238.104 Board action and criteria for review.
Subpart L_Investigative Proceedings and Formal Examination Proceedings
238.111 Scope.
238.112 Definitions.
238.113 Confidentiality of proceedings.
238.114 Transcripts.
238.115 Rights of witnesses.
238.116 Obstruction of the proceedings.
238.117 Subpoenas.
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462, 1462a, 1463, 1464,
1467, 1467a, 1468, 1813, 1817, 1829e, 1831i, 1972; 15 U.S.C. 78 l.
Source: Reg. LL, 76 FR 56532, Sept. 13, 2011, unless otherwise
noted.
Subpart A_General Provisions
Sec. 238.1 Authority, purpose and scope.
(a) Authority. This part is issued by the Board of Governors of the
Federal Reserve System (Board) under section 10(g) of the Home Owners'
Loan Act (HOLA); 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); sections 8(b), 19 and 32 of the Federal
Deposit Insurance Act (12 U.S.C. 1818(b), 1829, and 1831i); and section
914 of the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 (12 U.S.C. 1831i) and the Depository Institution Management
Interlocks Act (12 U.S.C. 3201 et seq.).
(b) Purpose. The principal purposes of this part are to:
(1) Regulate the acquisition of control of savings associations by
companies and individuals;
[[Page 77]]
(2) Define and regulate the activities in which savings and loan
holding companies may engage;
(3) Set forth the procedures for securing approval for these
transactions and activities; and
(4) Set forth the procedures under which directors and executive
officers may be appointed or employed by savings and loan holding
companies in certain circumstances.
Sec. 238.2 Definitions.
As used in this part and in the forms under this part, the following
definitions apply, unless the context otherwise requires:
(a) Affiliate means any person or company which controls, is
controlled by or is under common control with a person, savings
association or company.
(b) Bank means any national bank, state bank, state-chartered
savings bank, cooperative bank, or industrial bank, the deposits of
which are insured by the Deposit Insurance Fund.
(c) Bank holding company has the meaning found in the Board's
Regulation Y (12 CFR 225.2(c)).
(d) Company means any corporation, partnership, trust, association,
joint venture, pool, syndicate, unincorporated organization, joint-stock
company or similar organization, as defined in paragraph (o) of this
section; but a company does not include:
(1) The Federal Deposit Insurance Corporation, the Resolution Trust
Corporation, or any Federal Home Loan Bank, or
(2) Any company the majority of shares of which is owned by:
(i) The United States or any State,
(ii) An officer of the United States or any State in his or her
official capacity, or
(iii) An instrumentality of the United States or any State.
(e) A person shall be deemed to have control of:
(1) A savings association if the person directly or indirectly or
acting in concert with one or more other persons, or through one or more
subsidiaries, owns, controls, or holds with power to vote, or holds
proxies representing, more than 25 percent of the voting shares of such
savings association, or controls in any manner the election of a
majority of the directors of such association;
(2) Any other company if the person directly or indirectly or acting
in concert with one or more other persons, or through one or more
subsidiaries, owns, controls, or holds with power to vote, or holds
proxies representing, more than 25 percent of the voting shares or
rights of such other company, or controls in any manner the election or
appointment of a majority of the directors or trustees of such other
company, or is a general partner in or has contributed more than 25
percent of the capital of such other company;
(3) A trust if the person is a trustee thereof; or
(4) A savings association or any other company if the Board
determines, after reasonable notice and opportunity for hearing, that
such person directly or indirectly exercises a controlling influence
over the management or policies of such association or other company.
(f) Director means any director of a corporation or any individual
who performs similar functions in respect of any company, including a
trustee under a trust.
(g) Management official means any president, chief executive
officer, chief operating officer, vice president, director, partner, or
trustee, or any other person who performs or has a representative or
nominee performing similar policymaking functions, including executive
officers of principal business units or divisions or subsidiaries who
perform policymaking functions, for a savings association or a company,
whether or not incorporated.
(h) Multiple savings and loan holding company means any savings and
loan holding company which directly or indirectly controls two or more
savings associations.
(i) Officer means the chairman of the board, president, vice
president, treasurer, secretary, or comptroller of any company, or any
other person who participates in its major policy decisions.
(j) Person includes an individual, bank, corporation, partnership,
trust, association, joint venture, pool, syndicate, sole proprietorship,
unincorporated organization, or any other form of entity.
[[Page 78]]
(k) Qualified thrift lender means a financial institution that meets
the appropriate qualified thrift lender test set forth in 12 U.S.C.
1467a(m).
(l) Savings Association means a Federal savings and loan association
or a Federal savings bank chartered under section 5 of the Home Owners'
Loan Act, a building and loan, savings and loan or homestead association
or a cooperative bank (other than a cooperative bank described in 12
U.S.C. 1813(a)(2)) the deposits of which are insured by the Federal
Deposit Insurance Corporation, and any corporation (other than a bank)
the deposits of which are insured by the Federal Deposit Insurance
Corporation that the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation jointly determine to be operating
in substantially the same manner as a savings association, and shall
include any savings bank or any cooperative bank which is deemed by the
Office of the Comptroller of the Currency to be a savings association
under 12 U.S.C. 1467a(1).
(m) Savings and loan holding company means any company (including a
savings association) that directly or indirectly controls a savings
association, but does not include:
(1) Any company by virtue of its ownership or control of voting
stock of a savings association acquired in connection with the
underwriting of securities if such stock is held only for such period of
time (not exceeding 120 days unless extended by the Board) as will
permit the sale thereof on a reasonable basis;
(2) Any trust (other than a pension, profit-sharing, stockholders',
voting, or business trust) which controls a savings association if such
trust by its terms must terminate within 25 years or not later than 21
years and 10 months after the death of individuals living on the
effective date of the trust, and:
(i) Was in existence and in control of a savings association on June
26, 1967, or
(ii) Is a testamentary trust;
(3) A bank holding company that is registered under, and subject to,
the Bank Holding Company Act of 1956, or any company directly or
indirectly controlled by such company (other than a savings
association);
(4) A company that controls a savings association that functions
solely in a trust or fiduciary capacity as provided in section
2(c)(2)(D) of the Bank Holding Company Act; or
(5) A company described in section 10(c)(9)(C) of HOLA solely by
virtue of such company's control of an intermediate holding company
established under section 10A of the Home Owners' Loan Act.
(n) Shareholder--(1) Controlling shareholder means a person that
owns or control, directly or indirectly, more than 25 percent of any
class of voting securities of a savings association 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 savings association 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 savings
association or other company.
(o) Stock means common or preferred stock, general or limited
partnership shares or interests, or similar interests.
(p) Subsidiary means any company which is owned or controlled
directly or indirectly by a person, and includes any service corporation
owned in whole or in part by a savings association, or a subsidiary of
such service corporation.
(q) Uninsured institution means any financial institution the
deposits of which are not insured by the Federal Deposit Insurance
Corporation.
(r)(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,
[[Page 79]]
or similar interests are not voting securities if:
(i) Any voting rights associated with the shares or interest are
limited solely to the type customarily provided by statute with regard
to matters that would significantly and adversely affect the rights or
preference of the security or other interest, such as the issuance of
additional amounts or classes of senior securities, the modification of
the terms of the security or interest, the dissolution of the issuing
company, or the payment of dividends by the issuing company when
preferred dividends are in arrears;
(ii) The shares or interest represent an essentially passive
investment or financing device and do not otherwise provide the holder
with control over the issuing company; and
(iii) The shares or interest do not entitle the holder, by statute,
charter, or in any manner, to select or to vote for the selection of
directors, trustees, or partners (or persons exercising similar
functions) of the issuing company.
(3) Class of voting shares. Shares of stock issued by a single
issuer are deemed to be the same class of voting shares, regardless of
differences in dividend rights or liquidation preference, if the shares
are voted together as a single class on all matters for which the shares
have voting rights other than matters described in paragraph (r)(2)(i)
of this section that affect solely the rights or preferences of the
shares.
(s) Well capitalized. (1) A savings and loan holding company is well
capitalized if:
(i) Each of the savings and loan holding company's depository
institutions is well capitalized; and
(ii) The savings and loan 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) In the case of a savings association, ``well capitalized'' takes
the meaning provided in Sec. 225.2(r)(2) of this chapter.
(t) Well managed. The term ``well managed'' takes the meaning
provided in Sec. 225.2(s) of this chapter except that a ``satisfactory
rating for management'' refers to a management rating, if such rating is
given, or otherwise a risk-management rating, if such rating is given.
(u) Depository institution. For purposes of this part, the term
``depository institution'' has the same meaning as in section 3(c) of
Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
Sec. 238.3 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, in the Board's Rules
Regarding Delegation of Authority (12 CFR part 265), the Board's Rules
of Procedure (12 CFR part 262), and in Board orders.
(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 savings and loan holding company (or a company applying to
become a savings and loan 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 savings association on the date it became (or will become) a
savings and loan holding company;
(2) For an individual or company submitting a notice under subpart D
of this part: The Reserve Bank of the Federal Reserve district in which
the banking operations of the savings and loan holding company to be
acquired are principally conducted, as measured by total domestic
deposits on the date the notice is filed.
Sec. 238.4 Records, reports, and inspections.
(a) Records. Each savings and loan holding company shall maintain
such books and records as may be prescribed by the Board. Each savings
and loan holding company and its non-depository affiliates shall
maintain accurate and complete records of all business transactions.
Such records shall support and be readily reconcilable to any regulatory
reports submitted to the
[[Page 80]]
Board and financial reports prepared in accordance with GAAP.
The records shall be maintained in the United States and be readily
accessible for examination and other supervisory purposes within 5
business days upon request by the Board, at a location acceptable to the
Board.
(b) Reports. Each savings and loan holding company and each
subsidiary thereof, other than a savings association, shall file with
the Board such reports as may be required by the Board. Such reports
shall be made under oath or otherwise, and shall be in such form and for
such periods, as the Board may prescribe. Each report shall contain
information concerning the operations of such savings and loan holding
company and its subsidiaries as the Board may require.
(c) Registration statement--(1) Filing of registration statement.
Not later than 90 days after becoming a savings and loan holding
company, each savings and loan holding company shall register with the
Board by furnishing information in the manner and form prescribed by the
Board.
(2) Date of registration. The date of registration of a savings and
loan holding company shall be the date on which its registration
statement is received by the Board.
(3) Extension of time for registration. For timely and good cause
shown, the Board may extend the time within which a savings and loan
holding company shall register.
(d) Release from registration. The Board may at any time, upon its
own motion or upon application, release a registered savings and loan
holding company from any registration theretofore made by such company,
if the Board shall determine that such company no longer has control of
any savings association or no longer qualifies as a savings and loan
holding company.
(e) Examinations. Each savings and loan holding company and each
subsidiary thereof shall be subject to such examinations as the Board
may prescribe. The Board shall, to the extent deemed feasible, use for
the purposes of this section reports filed with or examinations made by
other Federal agencies or the appropriate State supervisory authority.
(f) Appointment of agent. The Board may require any savings and loan
holding company, or persons connected therewith if it is not a
corporation, to execute and file a prescribed form of irrevocable
appointment of agent for service of process.
Sec. 238.5 Audit of savings association holding companies.
(a) General. The Board may require, at any time, an independent
audit of the financial statements of, or the application of procedures
agreed upon by the Board to a savings and loan holding company, or
nondepository affiliate by qualified independent public accountants when
needed for any safety and soundness reason identified by the Board.
(b) Audits required for safety and soundness purposes. The Board
requires an independent audit for safety and soundness purposes if, as
of the beginning of its fiscal year, a savings and loan holding company
controls savings association subsidiary(ies) with aggregate consolidated
assets of $500 million or more.
(c) Procedures. (1) When the Board requires an independent audit
because such an audit is needed for safety and soundness purposes, the
Board shall determine whether the audit was conducted and filed in a
manner satisfactory to the Board.
(2) When the Board requires the application of procedures agreed
upon by the Board for safety and soundness purposes, the Board shall
identify the procedures to be performed. The Board shall also determine
whether the agreed upon procedures were conducted and filed in a manner
satisfactory to the Board.
(d) Qualifications for independent public accountants. The audit
shall be conducted by an independent public accountant who:
(1) Is registered or licensed to practice as a public accountant,
and is in good standing, under the laws of the state or other political
subdivision of the United States in which the savings association's or
holding company's principal office is located;
(2) Agrees in the engagement letter to provide the Board with access
to and copies of any work papers, policies, and
[[Page 81]]
procedures relating to the services performed;
(3)(i) Is in compliance with the American Institute of Certified
Public Accountants' (AICPA) Code of Professional Conduct; and
(ii) Meets the independence requirements and interpretations of the
Securities and Exchange Commission and its staff; and
(4) Has received, or is enrolled in, a peer review program that
meets guidelines acceptable to the Board.
(e) Voluntary audits. When a savings and loan holding company or
nondepository affiliate obtains an independent audit voluntarily, it
must be performed by an independent public accountant who satisfies the
requirements of paragraphs (d)(1), (d)(2), and (d)(3)(i) of this
section.
Sec. 238.6 Penalties for violations.
(a) Criminal and civil penalties. (1) Section 10 of the HOLA
provides criminal penalties for willful violation, and civil penalties
for violation, by any company or individual, of HOLA or any regulation
or order issued under it, or for making a false entry in any book,
report, or statement of a savings and loan holding company.
(2) Civil money penalty assessments for violations of HOLA 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 HOLA, 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. 238.7 Tying restriction exception.
(a) Safe harbor for combined-balance discounts. A savings and loan
holding company or any savings association or any affiliate of either
may 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 company varying the consideration (eligible
products), if:
(1) That company (if it is a savings association) or a savings
association affiliate of that company (if it is not a savings
association) offers deposits, and all such deposits are eligible
products; and
(2) Balances in deposits count at least as much as non-deposit
products toward the minimum balance.
(b) Limitations on exception. This exception shall terminate upon a
finding by the Board that the arrangement is resulting in anti-
competitive practices. The eligibility of a savings and loan holding
company or savings association or affiliate of either to operate under
this exception shall terminate upon a finding by the Board that its
exercise of this authority is resulting in anti-competitive practices.
Sec. 238.8 Safe and sound operations.
(a) Savings and loan holding company policy and operations. (1) A
savings and loan holding company shall serve as a source of financial
and managerial strength to its subsidiary savings associations and shall
not conduct its operations in an unsafe or unsound manner.
(2) Whenever the Board believes an activity of a savings and loan
holding company or control of a nonbank subsidiary (other than a nonbank
subsidiary of a savings association) constitutes a serious risk to the
financial safety, soundness, or stability of a subsidiary savings
association of the savings and loan holding company and is inconsistent
with sound banking principles or the purposes of HOLA or the Financial
Institutions Supervisory Act of 1966, as amended (12 U.S.C. 1818(b) et
seq.), the Board may require the savings and loan holding company to
terminate the activity or to terminate control of the subsidiary, as
provided in section 10(g)(5) of the HOLA.
Sec. 238.9 Small Bank Holding Company Policy Statement.
(a) The Board's Small Bank Holding Company Policy Statement (12 CFR
part 225, appendix C) (Policy Statement) applies to savings and loan
holding companies as if they were bank
[[Page 82]]
holding companies. To qualify or rely on the Policy Statement, savings
and loan holding companies must meet all qualifying requirements in the
Policy Statement as if they were a bank holding company. For purposes of
applying the Policy Statement, the term ``nonbank subsidiary'' as used
in the Policy Statement refers to a subsidiary of a savings and loan
holding company other than a savings association or a subsidiary of a
savings association.
(b) The Board may exclude any savings and loan holding company,
regardless of asset size, from the Policy Statement under paragraph (a)
of this section if the Board determines that such action is warranted
for supervisory purposes.
[80 FR 20158, Apr. 15, 2015]
Subpart B_Acquisitions of Saving Association Securities or Assets
Sec. 238.11 Transactions requiring Board approval.
The following transactions require the Board's prior approval under
section 10 of HOLA except as exempted under Sec. 238.12:
(a) Formation of savings and loan holding company. Any action that
causes a savings association or other company to become a savings and
loan holding company.
(b) Acquisition of subsidiary savings association. Any action that
causes a savings association to become a subsidiary of a savings and
loan holding company.
(c) Acquisition of control of savings association or savings and
loan holding company securities. (1) The acquisition by a savings and
loan holding company of direct or indirect ownership or control of any
voting securities of a savings association or savings and loan holding
company, that is not a subsidiary, 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 savings association or savings and
loan holding company.
(2) An acquisition includes the purchase of additional securities
through the exercise of preemptive rights, but does not include
securities received in a stock dividend or stock split that does not
alter the savings and loan holding company's proportional share of any
class of voting securities.
(3) In the case of a multiple savings and loan holding company,
acquisition of direct or indirect ownership or control of any voting
securities of a savings association or savings and loan holding company,
that is not a subsidiary, 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 savings association or savings and loan holding
company that is engaged in any business activity other than those
specified in Sec. 238.51 of this part.
(d) Acquisition of savings association or savings and loan holding
company assets. The acquisition by a savings and loan holding company or
by a subsidiary thereof (other than a savings association) of all or
substantially all of the assets of a savings association, or savings and
loan holding company.
(e) Merger of savings and loan holding companies. The merger or
consolidation of savings and loan holding companies, and the acquisition
of a savings association through a merger or consolidation.
(f) Acquisition of control by certain individuals. The acquisition,
by a director or officer of a savings and loan holding company, or by
any individual who owns, controls, or holds the power to vote (or holds
proxies representing) more than 25 percent of the voting shares of such
savings and loan holding company, of control of any savings association
that is not a subsidiary of such savings and loan holding company.
Sec. 238.12 Transactions not requiring Board approval.
(a) The requirements of Sec. 238.11(a), (b), (d), (e) and (f) do
not apply to:
(1) Control of a savings association acquired by devise under the
terms of a will creating a trust which is excluded from the definition
of savings and loan holding company;
(2) Control of a savings association acquired in connection with a
reorganization that involves solely the acquisition of control of that
association by
[[Page 83]]
a newly formed company that is controlled by the same acquirors that
controlled the savings association for the immediately preceding three
years, and entails no other transactions, such as an assumption of the
acquirors' debt by the newly formed company: Provided, that the
acquirors have filed the designated form with the appropriate Reserve
Bank and have provided all additional information requested by the Board
or Reserve Bank, and the Board nor the appropriate Reserve Bank object
to the acquisition within 30 days of the filing date;
(3) Control of a savings association acquired by a bank holding
company that is registered under and subject to, the Bank Holding
Company Act of 1956, or any company controlled by such bank holding
company;
(4) Control of a savings association acquired solely as a result of
a pledge or hypothecation of stock to secure a loan contracted for in
good faith or the liquidation of a loan contracted for in good faith, in
either case where such loan was made in the ordinary course of the
business of the lender: Provided, further, That acquisition of control
pursuant to such pledge, hypothecation or liquidation is reported to the
Board within 30 days, and Provided, further, That the acquiror shall not
retain such control for more than one year from the date on which such
control was acquired; however, the Board may, upon application by an
acquiror, extend such one-year period from year to year, for an
additional period of time not exceeding three years, if the Board finds
such extension is warranted and would not be detrimental to the public
interest;
(5) Control of a savings association acquired through a percentage
increase in stock ownership following a pro rata stock dividend or stock
split, if the proportional interests of the recipients remain
substantially the same;
(6) Acquisitions of up to twenty-five percent (25%) of a class of
stock by a tax-qualified employee stock benefit plan; and
(7) Acquisitions of up to 15 percent of the voting stock of any
savings association by a savings and loan holding company (other than a
bank holding company) in connection with a qualified stock issuance if
such acquisition is approved by the Board pursuant to subpart E.
(b) The requirements of Sec. 238.11(c) do not apply to voting
shares of a savings association or of a savings and loan holding
company--
(1) Held as a bona fide fiduciary (whether with or without the sole
discretion to vote such shares);
(2) Held temporarily pursuant to an underwriting commitment in the
normal course of an underwriting business;
(3) Held in an account solely for trading purposes or over which no
control is held other than control of voting rights acquired in the
normal course of a proxy solicitation;
(4) Acquired in securing or collecting a debt previously contracted
in good faith, for two years after the date of acquisition or for such
additional time (not exceeding three years) as the Board may permit if,
in the Board's judgment, such an extension would not be detrimental to
the public interest;
(5) Acquired under section 13(k)(1)(A)(i) of the Federal Deposit
Insurance Act (or section 408(m) of the National Housing Act as in
effect immediately prior to the enactment of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989);
(6) Held by any insurance companies as defined in section 2(a)(17)
of the Investment Company Act of 1940: Provided, That all shares held by
all insurance company affiliates of such savings association or savings
and loan holding company may not, in the aggregate, exceed five percent
of all outstanding shares or of the voting power of the savings
association or savings and loan holding company, and such shares are not
acquired or retained with a view to acquiring, exercising, or
transferring control of the savings association or savings and loan
holding company; and
(7) Acquired pursuant to a qualified stock issuance if such a
purchase is approved pursuant to subpart E of this part.
(c) The aggregate amount of shares held under paragraph (b) of this
section (other than pursuant to paragraphs (b)(1) through (4) and
(b)(6)) may not exceed 15 percent of all outstanding shares or the
voting power of a savings
[[Page 84]]
association or savings and loan holding company.
(d) Acquisitions involving savings association mergers and internal
corporate reorganizations--The requirements of Sec. 238.11 do not apply
to:
(1) Certain transactions subject to the Bank Merger Act. The
acquisition by a savings and loan holding company of shares of a savings
association or company controlling a savings association or the merger
of a company controlling a savings association with the savings and loan
holding company, if the transaction is part of the merger or
consolidation of the savings association with a subsidiary savings
association (other than a nonoperating subsidiary savings association)
of the acquiring savings and loan holding company, or is part of the
purchase of substantially all of the assets of the savings association
by a subsidiary savings association (other than a nonoperating
subsidiary savings association) of the acquiring savings and loan
holding company, and if:
(i) The savings association merger, consolidation, or asset purchase
occurs simultaneously with the acquisition of the shares of the savings
association or savings and loan holding company or the merger of holding
companies, and the savings association is not operated by the acquiring
savings and loan 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
company that would require prior notice or approval under section 10(c)
of the HOLA;
(iv) The transaction does not involve a depository institution
organized in mutual form, a savings and loan holding company organized
in mutual form, a subsidiary holding company of a savings and loan
holding company organized in mutual form, or a bank holding company
organized in mutual form;
(v) The transaction will not have a material adverse impact on the
financial condition of the acquiring savings and loan holding company;
(vi) At least 10 days prior to the transaction, the acquiring
savings and loan 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
(vii) Prior to expiration of the period provided in paragraph
(d)(1)(vi) of this section, neither the Board nor the Reserve Bank has
informed the savings and loan holding company that an application under
Sec. 238.11 is required.
(2) Internal corporate reorganizations. (i) Subject to paragraph
(d)(2)(ii) of this section, any of the following transactions performed
in the United States by a savings and loan holding company:
(A) The merger of holding companies that are subsidiaries of the
savings and loan holding company;
(B) The formation of a subsidiary holding company; \1\
---------------------------------------------------------------------------
\1\ In the case of a transaction that results in the formation or
designation of a new savings and loan holding company, the new savings
and loan holding company must complete the registration requirements
described in section 238.11.
---------------------------------------------------------------------------
(C) The transfer of control or ownership of a subsidiary savings
association or a subsidiary holding company between one subsidiary
holding company and another subsidiary holding company or the savings
and loan holding company.
(ii) A transaction described in paragraph (d)(2)(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 savings and loan 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 savings and loan
holding company;
(C) The transaction does not involve a savings and loan holding
company organized in mutual form, a subsidiary
[[Page 85]]
holding company of a savings and loan holding company organized in
mutual form, or a bank holding company organized in mutual form; and
(D) The transaction will not have a material adverse impact on the
financial condition of the holding company.
Sec. 238.13 Prohibited acquisitions.
(a) No savings and loan holding company may, directly or indirectly,
or through one or more subsidiaries or through one or more transactions,
acquire control of an uninsured institution or retain, for more than one
year after the date any savings association subsidiary becomes
uninsured, control of such association.
(b) Control of mutual savings association. No savings and loan
holding company or any subsidiary thereof, or any director, officer, or
employee of a savings and loan holding company or subsidiary thereof, or
person owning, controlling, or holding with power to vote, or holding
proxies representing, more than 25 percent of the voting shares of such
holding company or subsidiary, may hold, solicit, or exercise any
proxies in respect of any voting rights in a mutual savings association.
Sec. 238.14 Procedural requirements.
(a) Filing application. An application for the Board's prior
approval under Sec. 238.11 shall be governed by the provisions of this
section and shall be filed with the appropriate Reserve Bank on the
designated form.
(b) Request for confidential treatment. An applicant may request
confidential treatment for portions of its application pursuant to 12
CFR 261.15.
(c) Public notice--(1) Newspaper publication--(i) Location of
publication. In the case of each application, 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) in this chapter;
(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 an application is filed with the appropriate
Reserve Bank.
(2) Federal Register Notice--(i) Publication by Board. Upon receipt
of an application, 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. An applicant may request that,
during the 15-day period prior to filing an application, the Board
publish notice of a proposal in the Federal Register. A request for
advance Federal Register Notice publication shall be made in writing to
the appropriate Reserve Bank and shall contain the identifying
information prescribed by the Board for Federal Register Notice
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.
(d) 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 (c) 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
[[Page 86]]
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 applicant. The Board
will grant a joint request by an interested person and the applicant 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.
(e) Hearings. The Board may order a formal or informal hearing or
other proceeding on the application, as provided in Sec. 262.3(i)(2) of
this chapter. Any request for a hearing (other than from the primary
supervisor) shall comply with Sec. 262.3(e) in this chapter.
(f) 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 and to the primary banking
supervisor of the savings association to be acquired and to the Attorney
General, and shall request from the Attorney General a report on the
competitive factors involved. 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.
(g) Action on applications--(1) Action under delegated authority.
Except as provided in paragraph (g)(4) of this section, 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, the Reserve Bank shall approve an application under this
section:
(i) Not earlier than the third business day following the close of
the public comment period; and
(ii) Not later than the later of the fifth business day following
the close of the public comment period or the 30th calendar day after
the acceptance date for the application.
(2) Board action. The Board shall act on an application under this
section 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. The Board may, at any
time, request additional information that it believes is necessary for
its decision.
(3) Approval through failure to act--(i) Ninety-one day rule. An
application shall be deemed approved if the Board fails to act on the
application 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.
(ii) Complete record. For the purpose of computing the commencement
of the 91-day period, the record is complete on the latest of:
(A) The date of receipt by the Board of an application that has been
accepted by the Reserve Bank;
(B) The last day provided in any notice for receipt of comments and
hearing requests on the application or notice;
(C) The date of receipt by the Board of the last relevant material
regarding the application that is needed for the Board's decision, if
the material is received from a source outside of the Federal Reserve
System; or
(D) The date of completion of any hearing or other proceeding.
(4) Expedited reorganization--(i) In general. The Board or the
appropriate Reserve Bank shall act on an application of a reorganization
that meets the requirements of Sec. 238.15(f):
(A) Not earlier than the third business day following the close of
the public comment period; and
[[Page 87]]
(B) Not later than the fifth business day following the close of the
public comment period, except that the Board may extend the period for
action under this paragraph (g)(4) for up to 5 business days.
(ii) Acceptance of notice in event expedited procedure not
available. In the event that the Board or the Reserve Bank determines
that an application filed pursuant to 238.15(f) does not meet one or
more of the requirements of Sec. 238.15(f), paragraph (g)(4) of this
section shall not apply and the Board or Reserve Bank will act on the
application according to the other provisions of paragraph (g) of this
section.
Sec. 238.15 Factors considered in acting on applications.
(a) Generally. 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 savings and loan business in any part of the United States;
(2) The effect of the transaction may be substantially to lessen
competition in any section of the country, tend to create a monopoly, or
in any other manner be in restraint of trade, unless the Board finds
that the transaction's anti-competitive effects are clearly outweighed
by its probable effect in meeting the convenience and needs of the
community;
(3) The applicant has failed to provide the Board with adequate
assurances that it will make available such information on its
operations or activities, and the operations or activities of any
affiliate of the applicant, that the Board deems appropriate to
determine and enforce compliance with HOLA 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)).
(5) In the case of an application by a savings and loan holding
company to acquire an insured depository institution, section
10(e)(2)(E) of HOLA prohibits the Board from approving the transaction.
(b) Other factors. In deciding applications under this subpart, the
Board also considers the following factors with respect to the acquiror,
its subsidiaries, any savings associations or banks related to the
acquiror through common ownership or management, and the savings
association or associations 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 acquiror,
its subsidiaries, and the savings association and savings and loan
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. In the case of an
application required under Sec. 238.11(c), (d), or (e), (or an
application by a savings and loan holding company under Sec.
238.11(b)), 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) Presumptive disqualifiers--(1) Integrity factors. The following
factors shall give rise to a rebuttable presumption that an acquiror may
fail to satisfy the managerial resources and future prospects tests of
paragraph (b) of this section:
[[Page 88]]
(i) During the 10-year period immediately preceding filing of the
application or notice, criminal, civil or administrative judgments,
consents or orders, and any indictments, formal investigations,
examinations, or civil or administrative proceedings (excluding routine
or customary audits, inspections and investigations) that terminated in
any agreements, undertakings, consents or orders, issued against,
entered into by, or involving the acquiror or affiliates of the acquiror
by any federal or state court, any department, agency, or commission of
the U.S. Government, any state or municipality, any Federal Home Loan
Bank, any self-regulatory trade or professional organization, or any
foreign government or governmental entity, which involve:
(A) Fraud, moral turpitude, dishonesty, breach of trust or fiduciary
duties, organized crime or racketeering;
(B) Violation of securities or commodities laws or regulations;
(C) Violation of depository institution laws or regulations;
(D) Violation of housing authority laws or regulations; or
(E) Violation of the rules, regulations, codes of conduct or ethics
of a self-regulatory trade or professional organization;
(ii) Denial, or withdrawal after receipt of formal or informal
notice of an intent to deny, by the acquiror or affiliates of the
acquiror, of
(A) Any application relating to the organization of a financial
institution,
(B) An application to acquire any financial institution or holding
company thereof under HOLA or the Bank Holding Company Act or otherwise,
(C) A notice relating to a change in control of any of the foregoing
under the CIC Act; or
(D) An application or notice under a state holding company or change
in control statute;
(iii) The acquiror or affiliates of the acquiror were placed in
receivership or conservatorship during the preceding 10 years, or any
management official of the acquiror was a management official or
director (other than an official or director serving at the request of
the Board, the Federal Deposit Insurance Corporation, the Resolution
Trust Corporation, the former Federal Savings and Loan Insurance
Corporation, or their predecessors) or principal shareholder of a
company or savings association that was placed into receivership,
conservatorship, or a management consignment program, or was liquidated
during his or her tenure or control or within two years thereafter;
(iv) Felony conviction of the acquiror, an affiliate of the acquiror
or a management official of the acquiror or an affiliate of the
acquiror;
(v) Knowingly making any written or oral statement to the Board or
any predecessor agency (or its delegate) in connection with an
application, notice or other filing under this part that is false or
misleading with respect to a material fact or omits to state a material
fact with respect to information furnished or requested in connection
with such an application, notice or other filing;
(vi) Acquisition and retention at the time of submission of an
application or notice, of stock in the savings association by the
acquiror in violation of this part or its predecessor regulations.
(2) Financial factors. The following shall give rise to a rebuttable
presumption that an acquiror may fail to satisfy the financial-resources
and future-prospects tests of paragraph (c) of this section:
(i) Liability for amounts of debt which, in the opinion of the
Board, create excessive risks of default and pressure on the savings
association to be acquired; or
(ii) Failure to furnish a business plan or furnishing a business
plan projecting activities which are inconsistent with economical home
financing.
(d) Competitive factor. Before approving any such acquisition,
except a transaction under section 13(k) of the Federal Deposit
Insurance Act, the Board shall consider any report rendered by the
Attorney General within 30 days of such request under Sec. 238.14(f) on
the competitive factors involved.
(e) Expedited reorganizations. An application by a savings
association solely for the purpose of obtaining approval for the
creation of a savings and loan holding company by such savings
[[Page 89]]
association shall be eligible for expedited processing under Sec.
238.14(g)(4) if it satisfies the following criteria:
(1) The holding company shall not be capitalized initially in an
amount exceeding the amount the savings association is permitted to pay
in dividends to its holding company as of the date of the reorganization
pursuant to applicable regulations or, in the absence thereof, pursuant
to the then current policy guidelines;
(2) The creation of the savings and loan holding company by the
association is the sole transaction contained in the application, and
there are no other transactions requiring approval incident to the
creation of the holding company (other than the creation of an interim
association that will disappear upon consummation of the reorganization
and the merger of the savings association with such interim association
to effect the reorganization), and the holding company is not also
seeking any regulatory waivers, regulatory forbearances, or resolution
of legal or supervisory issues;
(3) The board of directors and executive officers of the holding
company are composed of persons who, at the time of acquisition, are
executive officers and directors of the association;
(4) The acquisition raises no significant issues of law or policy;
(5) Prior to consummation of the reorganization transaction, the
holding company shall enter into any dividend limitation, regulatory
capital maintenance, or prenuptial agreement required by Board
regulations, or in the absence thereof, required pursuant to policy
guidelines issued by the Board; and
(f) 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 HOLA.
(g) No acquisition shall be approved by the Board pursuant to Sec.
238.11 which would result in the formation by any company, through one
or more subsidiaries or through one or more transactions, of a multiple
savings and loan holding company controlling savings associations in
more than one state where the acquisition causes a savings association
to become an affiliate of another savings association with which it was
not previously affiliated unless:
(1) Such company, or a savings association subsidiary of such
company, is authorized to acquire control of a savings association
subsidiary, or to operate a home or branch office, in the additional
state or states pursuant to section 13(k) of the Federal Deposit
Insurance Act, 12 U.S.C. 1823(k) (or section 408(m) of the National
Housing Act as in effect immediately prior to enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989);
(2) Such company controls a savings association subsidiary which
operated a home or branch office in the additional state or states as of
March 5, 1987; or
(3) The statute laws of the state in which the savings association,
control of which is to be acquired, is located are such that a savings
association chartered by such state could be acquired by a savings
association chartered by the state where the acquiring savings
association or savings and loan holding company is located (or by a
holding company that controls such a state chartered savings
association), and such statute laws specifically authorize such an
acquisition by language to that effect and not merely by implication.
Subpart C_Control Proceedings
Sec. 238.21 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 savings
association or other company.
(2) If the Board makes a preliminary determination of control under
this section, the Board shall send notice to
[[Page 90]]
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 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 savings association 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 savings
association 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 savings association 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 of this part.
(d) Rebuttable presumptions of control. The following rebuttable
presumptions shall be used in any proceeding under this section:
(1) Control of voting securities--(i) Securities convertible into
voting securities. A company that owns, controls, or holds securities
that are immediately convertible, at the option of the holder or owner,
into voting securities of a bank or other company, controls the voting
securities.
(ii) Option or restriction on voting securities. A company that
enters into an agreement or understanding under which the rights of a
holder of voting securities of a savings association 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 savings association 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 savings association or other
company controls the savings association or other company.
(ii) Shares controlled by company and associated individuals. A
company that, together with its management officials or principal
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 savings
association
[[Page 91]]
or other company controls the savings association 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 savings association or other company.
(iii) Common management officials. A company that has one or more
management officials in common with a savings association or other
company controls the savings association 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
savings association 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 savings association or other company.
(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 savings
association or other company does not have control over that savings
association or other company.
(2) In any proceeding under this section, or judicial proceeding
under the Home Owners' Loan 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 savings association or other company, a company may not be held to
have had control over the savings association 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 savings
association or other company, or had already been found to have control
on the basis of the existence of a controlling influence relationship.
Subpart D_Change in Bank Control
Sec. 238.31 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. 238.33 of
this subpart, before acquiring control of a savings and loan holding
company, unless the acquisition is exempt under Sec. 238.32.
(b) Definitions. For purposes of this subpart:
(1) Acquisition includes a purchase, assignment, transfer, or pledge
of voting securities, or an increase in percentage ownership of a
savings and loan 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 savings and loan 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 savings and loan
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 savings and loan 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,
[[Page 92]]
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.\2\
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\2\ 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 savings and loan 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 principal shareholder, partner, trustee, or
management official of the company, if both the company and the person
own voting securities of the savings and loan 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 savings and loan holding company, other than
through a revocable proxy as described in Sec. 238.32(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 savings and loan 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 savings and loan
holding company are not deemed by the Board to constitute control for
purposes of the Bank Control Act.
(g) Rebuttal of presumptions. Prior notice to the Board is not
required for any acquisition of voting securities under the presumption
of control set forth in this section, if the Board finds that the
acquisition will not result in control. The Board shall afford any
person seeking to rebut a presumption in this section an opportunity to
present views in writing or, if appropriate, orally before its
designated representatives at an informal conference.
Sec. 238.32 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 savings and loan 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. 238.31(c)(2), 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 institution
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 savings and loan
holding company by any person (or persons acting in concert) who has
lawfully acquired and maintained control of the institution (for
purposes of Sec. 238.31(c)), 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 10(e) of HOLA (12 U.S.C. 1467a(e) and Sec. 238.11 or
[[Page 93]]
section 18(c) of the Federal Deposit Insurance Act (Bank Merger Act, 12
U.S.C. 1828(c));
(3) Acquisitions subject to approval under HOLA or Bank Merger Act.
Any acquisition of voting securities subject to approval under section
10(e) of HOLA (12 U.S.C. 1467a(e) and Sec. 238.11), or section 18(c) of
the Federal Deposit Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c));
(4) Transactions exempt under HOLA. Any transaction described in
sections 10(a)(3)(A) or 10(e)(1)(B)(ii) of HOLA by a person described in
those provisions;
(5) Proxy solicitation. The acquisition of the power to vote
securities of a savings and loan 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 savings
and loan 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. 238.34.)
(b) Prior notice exemption. (1) The following acquisitions of voting
securities of a savings and loan 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 savings and
loan holding company, which would otherwise require prior notice under
this subpart, are not subject to the prior notice requirements if the
acquiring person does not reasonably have advance knowledge of the
transaction, and provides the written notice required under Sec. 238.33
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 savings and loan 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.
238.33(h).
Sec. 238.33 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. 238.31 of this
[[Page 94]]
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
savings and loan holding company is located and in the community in
which the head office of each of its subsidiary savings associations 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 savings and loan holding company;
(ii) The name of the savings and loan holding company to be
acquired, including the name of each of the savings and loan holding
company's subsidiary savings association; and
(iii) A statement that interested persons may submit comments on the
notice to the Board or the appropriate Reserve Bank for a period of 20
days, or such shorter period as may be provided, pursuant to paragraph
(c)(5) of this section.
(3) Federal Register Announcement. The Board shall, upon filing of a
notice under this subpart, publish announcement in the Federal Register
of receipt of the notice. The Federal Register announcement shall
contain the information required under paragraphs (c)(2)(i) and
(c)(2)(ii) of this section and a statement that interested persons may
submit comments on the proposed acquisition for a period of 15 calendar
days, or such shorter period as may be provided, pursuant to paragraph
(c)(5) of this section. The Board may waive publication in the Federal
Register if the Board determines that such action is appropriate.
(4) Delay of publication. The Board may permit delay in the
publication required under paragraphs (c)(1) and (c)(3) of this section
if the Board determines, for good cause shown, that it is in the public
interest to grant such delay. Requests for delay of publication may be
submitted to the appropriate Reserve Bank.
(5) Shortening or waiving notice. The Board may shorten or waive the
public comment or newspaper publication requirements of this paragraph,
or act on a notice before the expiration of a public comment period, if
it determines in writing that an emergency exists, or that disclosure of
the notice, solicitation of public comment, or delay until expiration of
the public comment period would seriously threaten the safety or
soundness of the savings and loan 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
[[Page 95]]
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. The Reserve Bank shall send
a copy of any notice to the Comptroller of the Currency and the Federal
Deposit Insurance Corporation.
(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 savings and loan
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.
Subpart E_Qualified Stock Issuances
Sec. 238.41 Qualified stock issuances by undercapitalized savings
associations or holding companies.
(a) Acquisitions by savings and loan holding companies. No savings
and loan holding company shall be deemed to
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control a savings association solely by reason of the purchase by such
savings and loan holding company of shares issued by such savings
association, or issued by any savings and loan holding company (other
than a bank holding company) which controls such savings association, in
connection with a qualified stock issuance if prior approval of such
acquisition is granted by the Board under this subpart, unless the
acquiring savings and loan holding company, directly or indirectly, or
acting in concert with 1 or more other persons, or through one or more
subsidiaries, owns, controls, or holds with power to vote, or holds
proxies representing, more than 15 percent of the voting shares of such
savings association or holding company.
(b) Qualification. For purposes of this section, any issuance of
shares of stock shall be treated as a qualified stock issuance if the
following conditions are met:
(1) The shares of stock are issued by--
(i) An undercapitalized savings association, which for purposes of
this paragraph (b)(1)(i) shall mean any savings association--
(A) The assets of which exceed the liabilities of such association;
and
(B) Which does not comply with one or more of the capital standards
in effect under section 5(t) of HOLA; or
(ii) A savings and loan holding company which is not a bank holding
company but which controls an undercapitalized savings association if,
at the time of issuance, the savings and loan holding company is legally
obligated to contribute the net proceeds from the issuance of such stock
to the capital of an undercapitalized savings association subsidiary of
such holding company.
(2) All shares of stock issued consist of previously unissued stock
or treasury shares.
(3) All shares of stock issued are purchased by a savings and loan
holding company that is registered, as of the date of purchase, with the
Board in accordance with the provisions of section 10(b) of the HOLA and
the Board's regulations promulgated thereunder.
(4) Subject to paragraph (c) of this section, the Board approves the
purchase of the shares of stock by the acquiring savings and loan
holding company.
(5) The entire consideration for the stock issued is paid in cash by
the acquiring savings and loan holding company.
(6) At the time of the stock issuance, each savings association
subsidiary of the acquiring savings and loan holding company (other than
an association acquired in a transaction pursuant to section 13(c) or
13(k) of the Federal Deposit Insurance Act, or section 408(m) of the
National Housing Act, as in effect immediately prior to enactment of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989) has
capital (after deducting any subordinated debt, intangible assets, and
deferred, unamortized gains or losses) of not less than 6\1/2\ percent
of the total assets of such savings association.
(7) Immediately after the stock issuance, the acquiring savings and
loan holding company holds not more than 15 percent of the outstanding
voting stock of the issuing undercapitalized savings association or
savings and loan holding company.
(8) Not more than one of the directors of the issuing association or
company is an officer, director, employee, or other representative of
the acquiring company or any of its affiliates.
(9) Transactions between the savings association or savings and loan
holding company that issues the shares pursuant to this section and the
acquiring company and any of its affiliates shall be subject to the
provisions of section 11 of HOLA and the Board's regulations promulgated
thereunder.
(c) Approval of acquisitions--(1) Criteria. The Board, in deciding
whether to approve or deny an application filed on the basis that it is
a qualified stock issuance, shall apply the application criteria set
forth in Sec. 238.15(a), (b), and (c).
(2) Additional capital commitments not required. The Board shall not
disapprove any application for the purchase of stock in connection with
a qualified stock issuance on the grounds that the acquiring savings and
loan holding company has failed to undertake to make subsequent
additional capital contributions to maintain the
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capital of the undercapitalized savings association at or above the
minimum level required by the Board or any other Federal agency having
jurisdiction.
(3) Other conditions. The Board shall impose such conditions on any
approval of an application for the purchase of stock in connection with
a qualified stock issuance as the Board determines to be appropriate,
including--
(i) A requirement that any savings association subsidiary of the
acquiring savings and loan holding company limit dividends paid to such
holding company for such period of time as the Board may require; and
(ii) Such other conditions as the Board deems necessary or
appropriate to prevent evasions of this section.
(4) Application deemed approved if not disapproved within 90 days.
(i) An application for approval of a purchase of stock in connection
with a qualified stock issuance shall be deemed to have been approved by
the Board if such application has not been disapproved by the Board
before the end of the 90-day period beginning on the date of submission
to the Board of the complete record on the application as defined in
Sec. 238.14(g)(3)(ii).
(d) No limitation on class of stock issued. The shares of stock
issued in connection with a qualified stock issuance may be shares of
any class.
(e) Application form. A savings and loan holding company making
application to acquire a qualified stock issuance pursuant to this
subpart shall submit the appropriate form to the appropriate Reserve
Bank.
Subpart F_Savings and Loan Holding Company Activities and Acquisitions
Sec. 238.51 Prohibited activities.
(a) Evasion of law or regulation. No savings and loan holding
company or subsidiary thereof which is not a savings association shall,
for or on behalf of a subsidiary savings association, engage in any
activity or render any services for the purpose or with the effect of
evading any law or regulation applicable to such savings association.
(b) Unrelated business activity. No savings and loan holding company
or subsidiary thereof that is not a savings association shall commence
any business activity at any time, or continue any business activity
after the end of the two-year period beginning on the date on which such
company received approval to become a savings and loan holding company
that is subject to the limitations of this paragraph (b), except (in
either case) the following:
(1) Furnishing or performing management services for a savings
association subsidiary of such company;
(2) Conducting an insurance agency or an escrow business;
(3) Holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings association of such company;
(4) Holding or managing properties used or occupied by a subsidiary
savings association of such company;
(5) Acting as trustee under deed of trust;
(6) Any other activity:
(i) That the Board of Governors of the Federal Reserve System has
permitted for bank holding companies pursuant to regulations promulgated
under section 4(c) of the Bank Holding Company Act; or
(ii) Is set forth in Sec. 238.53, subject to the limitations
therein; or
(7) (i) In the case of a savings and loan holding company,
purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if prior approval for the acquisition of such
stock by such savings and loan holding company is granted by the Board
pursuant to Sec. 238.41.
(ii) Notwithstanding the provisions of this paragraph (b), any
savings and loan holding company that, between March 5, 1987 and August
10, 1987, received approval pursuant to 12 U.S.C. 1730a(e), as then in
effect, to acquire control of a savings association shall not continue
any business activity other than those activities set forth in this
paragraph (b) after August 10, 1987.
(c) Treatment of certain holding companies. If a director or officer
of a savings and loan holding company, or an individual who owns,
controls, or holds with the power to vote (or proxies representing) more
than 25 percent of the
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voting shares of a savings and loan holding company, directly or
indirectly controls more than one savings association, any savings and
loan holding company controlled by such individual shall be subject to
the activities limitations contained in paragraph (b) of this section,
to the same extent such limitations apply to multiple savings and loan
holding companies pursuant to Sec. Sec. 238.51, 238.52, 238.53, and
238.54.
Sec. 238.52 Exempt savings and loan holding companies and
grandfathered activities.
(a) Exempt savings and loan holding companies. (1) The following
savings and loan holding companies are exempt from the limitations of
Sec. 238.51(b):
(i) Any savings and loan holding company (or subsidiary of such
company) that controls only one savings association, if the savings
association subsidiary of such company is a qualified thrift lender as
defined in Sec. 238.2(k).
(ii) Any savings and loan holding company (or subsidiary thereof)
that controls more than one savings association if all, or all but one
of the savings association subsidiaries of such company were acquired
pursuant to an acquisition under section 13(c) or 13(k) of the Federal
Deposit Insurance Act, or section 408(m) of the National Housing Act, as
in effect immediately prior to the date of enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, and all of
the savings association subsidiaries of such company are qualified
thrift lenders as defined in Sec. 238.2(k).
(2) Any savings and loan holding company whose subsidiary savings
association(s) fails to qualify as a qualified thrift lender pursuant to
12 U.S.C. 1467a(m) may not commence, or continue, any service or
activity other than those permitted under Sec. 238.51(b) of this part,
except that, the Board may allow, for good cause shown, such company (or
subsidiary of such company which is not a savings association) up to 3
years to comply with the limitations set forth in Sec. 238.51(b) of
this part: Provided, That effective August 9, 1990, any company that
controls a savings association that should have become or ceases to be a
qualified thrift lender, except a savings association that requalified
as a qualified thrift lender pursuant to section 10(m)(3)(D) of the Home
Owners' Loan Act, shall within one year after the date on which the
savings association fails to qualify as a qualified thrift lender,
register as and be deemed to be a bank holding company, subject to all
of the provisions of the Bank Holding Company Act, section 8 of the
Federal Deposit Insurance Act, and other statutes applicable to bank
holding companies in the same manner and to the same extent as if the
company were a bank holding company and the savings association were a
bank, as those terms are defined in the Bank Holding Company Act.
(b) Grandfathered activities for certain savings and loan holding
companies. Notwithstanding Sec. 238.51(b) and subject to paragraph (c)
of this section, any savings and loan holding company that received
approval prior to March 5, 1987 to acquire control of a savings
association may engage, directly or indirectly or through any subsidiary
(other than a subsidiary savings association of such company) in any
activity in which it was lawfully engaged on March 5, 1987, provided,
that:
(1) The holding company does not, after August 10, 1987, acquire
control of a bank or an additional savings association, other than a
savings association acquired pursuant to section 13(c) or 13(k) of the
Federal Deposit Insurance Act, or section 406(f) or 408(m) of the
National Housing Act, as in effect immediately prior to the date of
enactment of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989;
(2) Any savings association subsidiary of the holding company
continues to qualify as a domestic building and loan association under
section 7701(a)(19) of the Internal Revenue Code of 1986 after August
10, 1987;
(3) The holding company does not engage in any business activity
other than those permitted under Sec. 238.51(b) or in which it was
engaged on March 5, 1987;
(4) Any savings association subsidiary of the holding company does
not increase the number of locations from which such savings association
conducts business after March 5, 1987,
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other than an increase due to a transaction under section 13(c) or 13(k)
of the Federal Deposit Insurance Act, or under section 408(m) of the
National Housing Act, as in effect immediately prior to the date of
enactment of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989; and
(5) Any savings association subsidiary of the holding company does
not permit any overdraft (including an intra-day overdraft) or incur any
such overdraft in its account at a Federal Reserve bank, on behalf of an
affiliate, unless such overdraft results from an inadvertent computer or
accounting error that is beyond the control of both the savings
association subsidiary and the affiliate.
(c) Termination by the Board of grandfathered activities.
Notwithstanding the provisions of paragraph (b) of this section, the
Board may, after opportunity for hearing, terminate any activity engaged
in under paragraph (b) of this section upon determination that such
action is necessary:
(1) To prevent conflicts of interest;
(2) To prevent unsafe or unsound practices; or
(3) To protect the public interest.
(d) Foreign holding company. Any savings and loan holding company
organized under the laws of a foreign country as of June 1, 1984
(including any subsidiary thereof that is not a savings association)
that controlled a single savings association on August 10, 1987, shall
not be subject to the restrictions set forth in Sec. 238.51(b) with
respect to any activities of such holding company that are conducted
exclusively in a foreign country.
Sec. 238.53 Prescribed services and activities of savings
and loan holding companies.
(a) General. For the purpose of Sec. 238.51(b)(6)(ii), the
activities set forth in paragraph (b) of this section are, and were as
of March 5, 1987, permissible services and activities for savings and
loan holding companies or subsidiaries thereof that are neither savings
associations nor service corporation subsidiaries of subsidiary savings
associations. Services and activities of service corporation
subsidiaries of savings and loan holding company subsidiary savings
associations are prescribed by paragraph (d) of this section.
(b) Prescribed services and activities. Subject to the provisions of
paragraph (c) of this section, a savings and loan holding company
subject to restrictions on its activities pursuant to Sec. 238.51(b),
or a subsidiary thereof which is neither a savings association nor a
service corporation of a subsidiary savings association, may furnish or
perform the following services and engage in the following activities to
the extent that it has legal power to do so:
(1) Originating, purchasing, selling and servicing any of the
following:
(i) Loans, and participation interests in loans, on a prudent basis
and secured by real estate, including brokerage and warehousing of such
real estate loans, except that such a company or subsidiary shall not
invest in a loan secured by real estate as to which a subsidiary savings
association of such company has a security interest;
(ii) Manufactured home chattel paper (written evidence of both a
monetary obligation and a security interest of first priority in one or
more manufactured homes, and any equipment installed or to be installed
therein), including brokerage and warehousing of such chattel paper;
(iii) Loans, with or without security, for the altering, repairing,
improving, equipping or furnishing of any residential real estate;
(iv) Educational loans; and
(v) Consumer loans, as defined in Sec. 160.3 of this title,
Provided, That, no subsidiary savings association of such holding
company or service corporation of such savings association shall engage
directly or indirectly, in any transaction with any affiliate involving
the purchase or sale, in whole or in part, of any consumer loan.
(2) Subject to the provisions of 12 U.S.C. 1468, furnishing or
performing clerical accounting and internal audit services primarily for
its affiliates;
(3) Subject to the provisions of 12 U.S.C. 1468, furnishing or
performing the following services primarily for its affiliates, and for
any savings association and service corporation subsidiary thereof, and
for other multiple holding companies and affiliates thereof:
(i) Data processing;
[[Page 100]]
(ii) Credit information, appraisals, construction loan inspections,
and abstracting;
(iii) Development and administration of personnel benefit programs,
including life insurance, health insurance, and pension or retirement
plans;
(iv) Research, studies, and surveys;
(v) Purchase of office supplies, furniture and equipment;
(vi) Development and operation of storage facilities for microfilm
or other duplicate records; and
(vii) Advertising and other services to procure and retain both
savings accounts and loans;
(4) Acquisition of unimproved real estate lots, and acquisition of
other unimproved real estate for the purpose of prompt development and
subdivision, for:
(i) Construction of improvements,
(ii) Resale to others for such construction, or
(iii) Use as mobile home sites;
(5) Development, subdivision and construction of improvements on
real estate acquired pursuant to paragraph (b)(4) of this section, for
sale or rental;
(6) Acquisition of improved real estate and mobile homes to be held
for rental;
(7) Acquisition of improved real estate for remodeling,
rehabilitation, modernization, renovation, or demolition and rebuilding
for sale or for rental;
(8) Maintenance and management of improved real estate;
(9) Underwriting or reinsuring contract of credit life or credit
health and accident insurance in connection with extensions of credit by
the savings and loan holding company or any of its subsidiaries, or
extensions of credit by any savings association or service corporation
subsidiary thereof, or any other savings and loan holding company or
subsidiary thereof;
(10) Preparation of State and Federal tax returns for accountholders
of or borrowers from (including immediate family members of such
accountholders or borrowers but not including an accountholder or
borrower which is a corporation operated for profit) an affiliated
savings association;
(11) Purchase and sale of gold coins minted and issued by the United
States Treasury pursuant to Public Law 99-185, 99 Stat. 1177 (1985), and
activities reasonably incident thereto; and
(12) Any services or activities approved by order of the former
Federal Savings and Loan Insurance Corporation prior to March 5, 1987,
pursuant to its authority under section 408(c)(2)(F) of the National
Housing Act, as in effect at the time.
(c) Procedures for commencing services or activities. A notice to
engage in or acquire a company engaged in a service or activity
prescribed by paragraph (b) of this section (other than purchase or sale
of a government debt security) shall be filed by a savings and loan
holding company (including a company seeking to become a savings and
loan holding company) with the appropriate Reserve Bank in accordance
with this paragraph and the Board's Rules of Procedure (12 CFR 262.3).
(1) Engaging de novo in services or activities. A savings and loan
holding company seeking to commence or to engage de novo in a service or
activity pursuant to this section, either directly or through a
subsidiary, 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 services or activities. A savings
and loan holding company seeking to acquire or control voting securities
or assets of a company engaged in a service or activity pursuant to this
section, shall file a notice containing the following:
(i) A description of the proposal, including a description of each
proposed service or activity;
(ii) The identity of any entity involved in the proposal, and, if
the notificant proposes to conduct the service or activity through an
existing subsidiary, a description of the existing activities of the
subsidiary;
(iii) If the savings and loan holding company has consolidated
assets of $150 million or more:
(A) Parent company and consolidated pro forma balance sheets for the
acquiring savings and loan holding company as of the most recent quarter
[[Page 101]]
showing credit and debit adjustments that reflect the proposed
transaction;
(B) Consolidated pro forma risk-based capital and leverage ratio
calculations for the acquiring savings and loan 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;
(iv) If the savings and loan 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;
(v) 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
(vi) A description of the management expertise, internal controls
and risk management systems that will be utilized in the conduct of the
proposed service or activity; and
(vii) 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.
(d) Notice provided to Board. The Reserve Bank shall immediately
send to the Board a copy of any notice received under paragraphs (c)(1)
or (c)(2) of this section.
(e) Notice to public--(1) the Reserve Bank shall notify the Board
for publication in the Federal Register immediately upon receipt by the
Reserve Bank of:
(i) A notice under paragraph (c) of this section or
(ii) A written request that notice of a proposal under paragraph (c)
of this section 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.
(2) The Federal Register notice published under this paragraph (e)
shall invite public comment on the proposal, generally for a period of
15 days.
(f) 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 (c)(1) or (c)(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 section.
The return of such a notice shall be deemed action on the notice.
(iii) Notice of action. The Reserve Bank shall promptly notify the
savings and loan 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 (e)(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. The Board may extend
the 60-day period required for Board action under paragraph (e)(3)(i) of
this section for an additional 30 days upon notice to the notificant.
[[Page 102]]
(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.
(g) Modification or termination of service or activity. The Board
may require a savings and loan holding company or subsidiary thereof
which has commenced a service or activity pursuant to this section to
modify or terminate, in whole or in part, such service or activity as
the Board finds necessary in order to ensure compliance with the
provisions and purposes of this part and of section 10 of the Home
Owners' Loan Act, as amended, or to prevent evasions thereof.
(h) Alterations. Except as may be otherwise provided in a resolution
by or on behalf of the Board in a particular case, a service or activity
commenced pursuant to this section shall not be altered in any material
respect from that described in the notice filed under paragraph (c)(1)
of this section, unless before making such alteration notice of intent
to do so is filed in compliance with the appropriate procedures of said
paragraph (c)(1) of this section.
(i) Service corporation subsidiaries of savings associations. The
Board hereby approves without application the furnishing or performing
of such services or engaging in such activities as permitted by the OTS
pursuant to Sec. 545.74 of this title, as in effect on March 5, 1987,
if such service or activity is conducted by a service corporation
subsidiary of a subsidiary savings association of a savings and loan
holding company and if such service corporation has legal power to do
so.
Sec. 238.54 Permissible bank holding company activities of savings
and loan holding companies.
(a) General. For purposes of Sec. 238.51(b)(6)(i), the services and
activities permissible for bank holding companies pursuant to
regulations that the Board has promulgated pursuant to section 4(c) of
the Bank Holding Company Act are permissible for savings and loan
holding companies, or subsidiaries thereof that are neither savings
associations nor service corporation subsidiaries of subsidiary savings
associations: Provided, That no savings and loan holding company shall
commence any activity described in this paragraph (a) without the prior
approval of this Board pursuant to paragraph (b) of this section,
unless--
(1) The holding company received a rating of satisfactory or above
prior to January 1, 2008, or a composite rating of ``1'' or ``2''
thereafter, in its most recent examination, and is not in a troubled
condition as defined in Sec. 238.72, and the holding company does not
propose to commence the activity by an acquisition (in whole or in part)
of a going concern; or
(2) The activity is permissible under authority other than section
10(c)(2)(F)(i) of the HOLA without prior notice or approval. Where an
activity is within the scope of both Sec. 238.53 and this section, the
procedures of Sec. 238.53 shall govern.
(b) Procedures for applications. Applications to commence any
activity prescribed under paragraph (a) of this section shall be filed
with the appropriate Reserve Bank on the designated form. The Board must
act upon such application according to the procedures of Sec.
238.53(d), (e), and (f).
(c) Factors considered in acting on applications. In evaluating an
application filed under paragraph (b) of this section, the Board shall
consider whether the performance by the applicant of the activity can
reasonably be expected to produce benefits to the public (such as
greater convenience, increased competition, or gains in efficiency) that
outweigh possible adverse effects (such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, or
unsound financial practices). This consideration includes an evaluation
of the financial and managerial resources of the applicant, including
its subsidiaries, and of any company to be acquired, and the effect of
the proposed transaction on those resources.
[[Page 103]]
Subpart G_Financial Holding Company Activities
Sec. 238.61 Scope.
Section 10(c)(2)(H) of the HOLA (12 U.S.C. 1467a(c)(2)(H)) permits a
savings and loan holding company to engage in activities that are
permissible for a financial holding company if the savings and holding
company meets the criteria to qualify as a financial holding company and
complies with all of the requirements applicable to a financial holding
company under sections 4(l) and 4(m) of the BHC Act as if the savings
and loan holding company was a bank holding company. This subpart
provides the requirements and restrictions for a savings and holding
company to be treated as a financial holding company for the purpose of
engaging in financial holding company activities. This subpart does not
apply to savings and loan holding companies described in section
10(c)(9)(C) of the HOLA (12 U.S.C. 1467a(c)(9)(C)).
Sec. 238.62 Definitions.
For the purposes of this subpart:
(a) Financial holding company activities refers to activities
permissible under section 4(k) of the Bank Holding Company Act of 1956
(12 U.S.C. 1843(k)) and Sec. 225.86 of this chapter.
(b) [Reserved]
Sec. 238.63 Requirements to engage in financial holding company
activities.
(a) In general. In order for a savings and loan holding company to
engage in financial holding company activities:
(1) The savings and loan holding company and all depository
institutions controlled by the savings and loan holding company must be
and remain well capitalized;
(2) The savings and loan holding company and all depository
institutions controlled by the savings and loan company must be and
remain well managed; and
(3) The savings and loan holding company must have made an effective
election to be treated as a financial holding company.
Sec. 238.64 Election required.
(a) In general. Except as provided below, a savings and loan holding
company that wishes to engage in financial holding company activities
must have an effective election to be treated as a financial holding
company.
(b) Activities performed under separate HOLA authority. A savings
and loan holding company that conducts only the following activities is
not required to elect to be treated as a financial holding company:
(1) BHC Act section 4(c)(8) activities. Activities permissible under
section 10(c)(2)(F)(i) of the HOLA (12 U.S.C. 1467a(c)(2)(F)(i)).
(2) Insurance agency or escrow business activities. Activities
permissible under section 10(c)(2)(B) of the HOLA (12 U.S.C.
1467a(c)(2)(B)).
(3) ``1987 List'' activities. Activities permissible under section
10(c)(2)(F)(ii) of the HOLA (12 U.S.C. 1467a(c)(2)(F)(ii)).
(c) Existing requirements apply. A savings and loan holding company
that has not made an effective election to be treated as a financial
holding company and that conducts the activities described in paragraphs
(b)(1) through (3) of this section remains subject to any rules and
requirements applicable to the conduct of such activities.
Sec. 238.65 Election procedures.
(a) Filing requirement. A savings and loan holding company may elect
to be treated as a financial holding company by filing a written
declaration with the appropriate Reserve Bank. A declaration by a
savings and loan 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 savings and loan holding company elects to be
treated as a financial holding company in order to engage in financial
holding company activities;
(2) Provide the name and head office address of the savings and loan
holding company and of each depository institution controlled by the
savings and loan holding company;
(3) Certify that the savings and loan holding company and each
depository institution controlled by the savings
[[Page 104]]
and loan holding company is well capitalized as of the date the savings
and loan holding company submits its declaration;
(4) Certify that the savings and loan holding company and each
savings association controlled by the savings and loan holding company
is well managed as of the date the savings and loan holding company
submits its declaration;
(c) Effectiveness of election. An election by a savings and loan
holding company to be treated as a financial holding company shall not
be effective if, during the period provided in paragraph (d) 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 savings and
loan 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 savings association'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
savings association. Except as provided in paragraph (f) of this
section, a savings association 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 savings and loan holding company acquired the savings
association during the 12-month period preceding the filing of an
election under paragraph (a) of this section;
(2) The savings and loan holding company has submitted an
affirmative plan to the appropriate Federal banking agency for the
savings association 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 savings association; and
(3) The appropriate Federal banking agency for the savings
association 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 savings and loan 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 savings and loan 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 savings and loan holding
company that its election to be treated as 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.
(3) Special effective date rules for the OTS transfer date--(i)
Deadline for filing declaration. For savings and loan holding companies
that meet the requirements of Sec. 238.63 and that are engaged in
financial holding company activities pursuant to existing authority as
of July 21, 2011, an election under paragraph (a) must be filed with the
appropriate Reserve Bank by December 31, 2011. The election must be
accompanied by a description of the financial holding company activities
conducted by the savings and loan holding company.
(ii) Effective date of election. An election filed under paragraph
(e)(3)(i) of this section is effective on the 61st calendar day after
the date that a complete declaration was filed with the appropriate
Reserve Bank, unless the Board notifies the savings and loan holding
company prior to that time that the election is ineffective.
(iii) Earlier notification that an election is effective. The Board
or the appropriate Reserve Bank may notify a savings and loan holding
company that its election under paragraph (e)(3)(i) of this section to
be treated as a financial holding company is effective prior to the 61st
day after the date that a complete declaration was filed with the
appropriate Reserve Bank. Such notification must be in writing.
[[Page 105]]
(iv) Filings by savings and loan holding companies that do not meet
requirements. (A) For savings and loan holding companies that are
engaged in financial holding company activities as of July 21, 2011 but
do not meet the requirements of Sec. 238.63, a declaration must be
filed with the appropriate Reserve Bank by December 31, 2011,
specifying:
(1) The name and head office address of the savings and loan holding
company and of each despoitory institution controlled by the savings and
loan holding company;
(2) The financial holding company activities that the savings and
loan holding company is engaged in;
(3) The requirements of Sec. 238.63 that the savings and loan
holding company does not meet; and
(4) A description of how the savings and loan holding company will
achieve compliance with Sec. 238.63 prior to June 30, 2012.
(B) A savings and loan holding company covered by this subparagraph
will be subject to:
(1) The notice, remediation agreement, divestiture, and any other
requirements described in Sec. 225.83 of this chapter; or
(2) The activities limitations and any other requirements described
in Sec. 225.84 of this chapter, depending on which requirements of
Sec. 238.63 the savings and loan holding company does not meet.
(f) Requests to be treated as a financial holding company submitted
as part of an application to become a savings and loan holding company.
A company that is not a savings and loan holding company and has applied
for the Board's approval to become a savings and loan holding company
under section 10(e) of the HOLA (12 U.S.C. 1467a(e)) may as part of that
application submit a request to be treated as a financial holding
company. Such requests shall be made and reviewed by the Board as
described in Sec. 225.82(f) of this chapter.
(g) Board's authority to exercise supervisory authority over a
savings and loan holding company treated as a financial holding company.
An effective election to be treated as a financial holding company does
not in any way limit the Board's statutory authority under the HOLA, 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
savings and loan holding company that has elected to be treated as a
financial holding company, or enforcing compliance with applicable law.
Sec. 238.66 Ongoing requirements.
(a) In general. A savings and loan holding company with an effective
election to be treated as a financial holding company is subject to the
same requirements applicable to a financial holding company, under
sections 4(l) and 4(m) of the Bank Holding Company Act and section
804(c) of the Community Reinvestment Act of 1977 (12 U.S.C. 2903(c)) as
if the savings and loan holding company was a bank holding company.
(b) Consequences of failing to continue to meet applicable capital
and management requirements. A savings and loan holding company with an
effective election to be treated as a financial holding company that
fails to meet applicable capital and management requirements at Sec.
238.63 is subject to the notice, remediation agreement, divestiture, and
any other requirements described in Sec. 225.83 of this chapter.
(c) Consequences of failing to continue to maintain a satisfactory
or better rating under the Community Reinvestment Act at all insured
depository institution subsidiaries. A savings and loan holding company
with an effective election to be treated as a financial holding company
that fails to maintain a satisfactory or better rating under the
Community Reinvestment Act at all insured deposit institution
subsidiaries is subject to the activities limitations and any other
requirements described in Sec. 225.84 of this chapter.
(d) Notice and approval requirements for conducting financial
holding company activities; permissible activities. A savings and loan
holding company with an effective election to be treated as a financial
holding company may conduct the activities listed in Sec. 225.86 of
this chapter subject to the notice, approval, and any other requirements
described in Sec. Sec. 225.85 through 225.89 of this chapter.
[[Page 106]]
Subpart H_Notice of Change of Director or Senior Executive Officer
Sec. 238.71 Purpose.
This subpart implements 12 U.S.C. 1831i, which requires certain
savings and loan holding companies to notify the Board before appointing
or employing directors and senior executive officers.
Sec. 238.72 Definitions.
The following definitions apply to this subpart:
(a) Director means an individual who serves on the board of
directors of a savings and loan holding company. This term does not
include an advisory director who:
(1) Is not elected by the shareholders;
(2) Is not authorized to vote on any matters before the board of
directors or any committee of the board of directors;
(3) Provides only general policy advice to the board of directors or
any committee of the board of directors; and
(4) Has not been identified by the Board or Reserve Bank in writing
as an individual who performs the functions of a director, or who
exercises significant influence over, or participates in, major
policymaking decisions of the board of directors.
(b) Senior executive officer means an individual who holds the title
or performs the function of one or more of the following positions
(without regard to title, salary, or compensation): 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 in writing as an individual who exercises significant
influence over, or participates in, major policymaking decisions,
whether or not hired as an employee.
(c) Troubled condition means:
(1) A savings and loan holding company that has an unsatisfactory
rating under the applicable holding company rating system, or that is
informed in writing by the Board or Reserve Bank that it has an adverse
effect on its subsidiary savings association.
(2) A savings and loan holding company that is subject to a capital
directive, a cease-and-desist order, a consent order, a formal written
agreement, or a prompt corrective action directive relating to the
safety and soundness or financial viability of the savings association,
unless otherwise informed in writing by the Board or Reserve Bank; or
(3) A savings and loan holding company that is informed in writing
by the Board or Reserve Bank that it is in troubled condition based on
information available to the Board or Reserve Bank.
Sec. 238.73 Prior notice requirements.
(a) Savings and loan holding company. Except as provided under Sec.
238.78, a savings and loan holding company must give the Board 30 days'
written notice, as specified in Sec. 238.74, before adding or replacing
any member of its board of directors, employing any person as a senior
executive officer, or changing the responsibilities of any senior
executive officer so that the person would assume a different senior
executive position if the savings and loan holding company is in
troubled condition.
(b) Notice by individual. An individual seeking election to the
board of directors of a savings and loan holding company described in
paragraph (a) of this section that has not been nominated by management,
must either provide the prior notice required under paragraph (a) of
this section or follow the process under Sec. 238.78(b).
Sec. 238.74 Filing and processing procedures.
(a) Filing notice--(1) Content. The notice required in Sec. 238.73
shall be filed with the appropriate Reserve Bank and shall contain:
(i) The information required by paragraph 6(A) of the Change in Bank
Control Act (12 U.S.C. 1817(j)(6)(A)) as may be prescribed in the
designated Board form;
(ii) Additional information consistent with the Federal Financial
Institutions Examination Council's Joint Statement of Guidelines on
Conducting
[[Page 107]]
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 this section for a notice
filed under this subpart.
(3) Acceptance and processing of notice. The 30-day notice period
specified in section 238.73 shall begin on the date all information
required to be submitted by the notificant pursuant to this section is
received by the appropriate Reserve Bank. The Reserve Bank shall notify
the savings and loan holding company 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 savings and loan holding company 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) [Reserved]
Sec. 238.75 Standards for review.
(a) Notice of disapproval. The Board or Reserve Bank will disapprove
a notice if, pursuant to the standard set forth in 12 U.S.C. 1831i(e),
the Board or Reserve Bank finds that the competence, experience,
character, or integrity of the proposed individual indicates that it
would not be in the best interests of the depositors of the savings and
loan holding company or of the public to permit the individual to be
employed by, or associated with, the savings and loan holding company.
If the Board or Reserve Bank disapproves a notice, it will issue a
written notice that explains why the Board or Reserve Bank disapproved
the notice. The Board or Reserve Bank will send the notice to the
savings and loan holding company and the individual.
(b) 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.
(c) Informal hearing. (1) An individual or regulated institution
whose notice under this section has been disapproved may request an
informal hearing on the notice. A request for an informal hearing shall
be in writing and shall be submitted within 15 days of a notice of
disapproval. The Board may, in its sole discretion, order an informal
hearing if the Board finds that oral argument is appropriate or
necessary to resolve disputes regarding material issues of fact.
(2) An informal hearing shall be held within 30 days of a request,
if granted, unless the requesting party agrees to a later date.
(3) Written notice of the final decision of the Board shall be given
to the individual and the regulated institution within 60 days of the
conclusion of any informal hearing ordered by the Board, unless the
requesting party agrees to a later date.
Sec. 238.76 Waiting period.
(a) At expiration of period. A proposed director or senior executive
officer may begin service at the end of the 30-day period and any
extension as provided under Sec. 238.74 unless the Board or Reserve
Bank notifies you that it has disapproved the notice before the end of
the period.
(b) 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
[[Page 108]]
provided under section 238.74 of this section, if the Board or the
Reserve Bank notifies in writing the savings and loan holding company or
individual submitting the notice of the Board's or Reserve Bank's
intention not to disapprove the notice.
Sec. 238.77 Waiver of prior notice requirement.
(a) Waiver request. An individual may serve as a director or senior
executive officer before filing a notice under this subpart if the Board
or Reserve Bank finds that:
(1) Delay would threaten the safety or soundness of the savings and
loan holding company;
(2) Delay would not be in the public interest; or
(3) Other extraordinary circumstances exist that justify waiver of
prior notice.
(b) Automatic waiver. An individual may serve as a director upon
election to the board of directors before filing a notice under this
subpart, if the individual:
(1) Is not proposed by the management of the savings and loan
holding company;
(2) Is elected as a new member of the board of directors at a
meeting of the savings and loan holding company; and
(3) Provides to the appropriate Reserve Bank all the information
required in Sec. 238.74 within two (2) business days after the
individual's election.
(c) Subsequent Board or Reserve Bank action. The Board or Reserve
Bank may disapprove a notice within 30 days after the Board or Reserve
Bank issues a waiver under paragraph (a) of this section or within 30
days after the election of an individual who has filed a notice and is
serving pursuant to an automatic waiver under paragraph (b) of this
section.
Subpart I_Prohibited Service at Savings and Loan Holding Companies
Sec. 238.81 Purpose.
This subpart implements section 19(e)(1) of the Federal Deposit
Insurance Act (FDIA), which prohibits persons who have been convicted of
certain criminal offenses or who have agreed to enter into a pre-trial
diversion or similar program in connection with a prosecution for such
criminal offenses from occupying various positions with a savings and
loan holding company. This part also implements section 19(e)(2) of the
FDIA, which permits the Board to provide exemptions, by regulation or
order, from the application of the prohibition. This subpart provides an
exemption for savings and loan holding company employees whose
activities and responsibilities are limited solely to agriculture,
forestry, retail merchandising, manufacturing, or public utilities
operations, and a temporary exemption for certain persons who held
positions with respect to a savings and loan holding company as of
October 13, 2006. The subpart also describes procedures for applying to
the Board for an exemption.
Sec. 238.82 Definitions.
The following definitions apply to this subpart:
(a) Institution-affiliated party is defined at 12 U.S.C. 1813(u),
except that the phrase ``savings and loan holding company'' is
substituted for ``insured depository institution'' each place that it
appears in that definition.
(b) Enforcement Counsel means any individual who files a notice of
appearance to serve as counsel on behalf of the Board in the proceeding.
(c) Person means an individual and does not include a corporation,
firm or other business entity.
(d) Savings and loan holding company is defined at Sec. 238.2(m),
but excludes a subsidiary of a savings and loan holding company that is
not itself a savings and loan holding company.
Sec. 238.83 Prohibited actions.
(a) Person. If a person was convicted of a criminal offense
described in Sec. 238.84, or agreed to enter into a pretrial diversion
or similar program in connection with a prosecution for such a criminal
offense, he or she may not:
(1) Become, or continue as, an institution-affiliated party with
respect to any savings and loan holding company.
(2) Own or control, directly or indirectly, any savings and loan
holding company. A person will own or control a savings and loan holding
company if
[[Page 109]]
he or she owns or controls that company under subpart D of this part.
(3) Otherwise participate, directly or indirectly, in the conduct of
the affairs of any savings and loan holding company.
(b) Savings and loan holding company. A savings and loan holding
company may not permit any person described in paragraph (a) of this
section to engage in any conduct or to continue any relationship
prohibited under that paragraph.
Sec. 238.84 Covered convictions or agreements to enter into
pre-trial diversions or similar programs.
(a) Covered convictions and agreements. Except as described in Sec.
238.85, this subpart covers:
(1) Any conviction of a criminal offense involving dishonesty,
breach of trust, or money laundering. Convictions do not cover arrests,
pending cases not brought to trial, acquittals, convictions reversed on
appeal, pardoned convictions, or expunged convictions.
(2) Any agreement to enter into a pretrial diversion or similar
program in connection with a prosecution for a criminal offense
involving dishonesty, breach of trust or money laundering. A pretrial
diversion or similar program is a program involving a suspension or
eventual dismissal of charges or of a criminal prosecution based upon an
agreement for treatment, rehabilitation, restitution, or other non-
criminal or non-punitive alternative.
(b) Dishonesty or breach of trust. A determination whether a
criminal offense involves dishonesty or breach of trust is based on the
statutory elements of the crime.
(1) ``Dishonesty'' means directly or indirectly to cheat or defraud,
to cheat or defraud for monetary gain or its equivalent, or to
wrongfully take property belonging to another in violation of any
criminal statute. Dishonesty includes acts involving a want of
integrity, lack of probity, or a disposition to distort, cheat, or act
deceitfully or fraudulently, and may include crimes which federal, state
or local laws define as dishonest.
(2) ``Breach of trust'' means a wrongful act, use, misappropriation,
or omission with respect to any property or fund which has been
committed to a person in a fiduciary or official capacity, or the misuse
of one's official or fiduciary position to engage in a wrongful act,
use, misappropriation, or omission.
Sec. 238.85 Adjudications and offenses not covered.
(a) Youthful offender or juvenile delinquent. This subpart does not
cover any adjudication by a court against a person as:
(1) A youthful offender under any youthful offender law; or
(2) A juvenile delinquent by a court with jurisdiction over minors
as defined by state law.
(b) De minimis criminal offense. This subpart does not cover de
minimis criminal offenses. A criminal offense is de minimis if:
(1) The person has only one conviction or pretrial diversion or
similar program of record;
(2) The offense was punishable by imprisonment for a term of less
than one year, a fine of less than $1,000, or both, and the person did
not serve time in jail.
(3) The conviction or program was entered at least five years before
the date the person first held a position described in Sec. 238.83(a);
and
(4) The offense did not involve an insured depository institution,
insured credit union, or other banking organization (including a savings
and loan holding company, bank holding company, or financial holding
company).
(5) The person must disclose the conviction or pretrial diversion or
similar program to all insured depository institutions and other banking
organizations the affairs of which he or she participates.
(6) The person must be covered by a fidelity bond to the same extent
as others in similar positions with the savings and loan holding
company.
Sec. 238.86 Exemptions.
(a) Employees. An employee of a savings and loan holding company is
exempt from the prohibition in Sec. 238.83, if all of the following
conditions are met:
[[Page 110]]
(1) The employee's responsibilities and activities are limited
solely to agriculture, forestry, retail merchandising, manufacturing, or
public utilities operations.
(2) The savings and loan holding company maintains a list of all
policymaking positions and reviews this list annually.
(3) The employee's position does not appear on the savings and loan
holding company's list of policymaking positions, and the employee does
not, in fact, exercise any policymaking function with the savings and
loan holding company.
(4) The employee:
(i) Is not an institution-affiliated party of the savings and loan
holding company other than by virtue of the employment described in
paragraph (a) of this section.
(ii) Does not own or control, directly or indirectly, the savings
and loan holding company; and
(iii) Does not participate, directly or indirectly, in the conduct
of the affairs of the savings and loan holding company.
(b) Temporary exemption. (1) Any prohibited person who was an
institution affiliated party with respect to a savings and loan holding
company, who owned or controlled, directly or indirectly a savings and
loan holding company, or who otherwise participated directly or
indirectly in the conduct of the affairs of a savings and loan holding
company on October 13, 2006, may continue to hold the position with the
savings and loan holding company.
(2) This exemption expires on December 31, 2012, unless the savings
and loan holding company or the person files an application seeking a
case-by-case exemption for the person under Sec. 238.87 by that date.
If the savings and loan holding company or the person files such an
application, the temporary exemption expires on:
(i) The date of issuance of a Board approval of the application
under Sec. 238.89(a);
(ii) The expiration of the 20-day period for filing a request for
hearing under Sec. 238.90(a) provided there is no timely request for
hearing following the issuance by the Board of a denial of the
application under that section;
(iii) The date that the Board denies a timely request for hearing
under Sec. 238.90(b) following the issuance of a Board denial of the
application under Sec. 238.89(b);
(iv) The date that the Board issues a decision under Sec.
238.90(d); or
(v) The date an applicant withdraws the application.
Sec. 238.87 Filing procedures.
(a) Who may file. (1) A savings and loan holding company or a person
who was convicted of a criminal offense described in Sec. 238.84 or who
has agreed to enter into a pre-trial diversion or similar program in
connection with a prosecution for such a criminal offense may file an
application with the Board seeking an exemption from the prohibitions in
this subpart.
(2) A savings and loan holding company or a person may seek an
exemption only for a designated position (or positions) with respect to
a named savings and loan holding company.
(3) A savings and loan holding company or a person may not file an
application less than one year after the latter of the date of a denial
of the same exemption under Sec. 238.89(b), Sec. 238.90(a) or Sec.
238.90(d).
(b) Prohibition pending Board action. Unless a savings and loan
holding company or a person is exempt under Sec. 238.86(b), the
prohibitions in Sec. 238.83 continue to apply pending Board action on
the application.
Sec. 238.88 Factors for review.
(a) Board review. (1) In determining whether to approve an exemption
application filed under Sec. 238.87, the Board will consider the extent
to which the position that is the subject of the application enables a
person to:
(i) Participate in the major policymaking functions of the savings
and loan holding company; or
(ii) Threaten the safety and soundness of any insured depository
institution that is controlled by the savings and loan holding company,
the interests of its depositors, or the public confidence in the insured
depository institution.
(2) The Board will also consider whether the applicant has
demonstrated the person's fitness to hold
[[Page 111]]
the described position. Some positions may be approved without an
extensive review of a person's fitness because the position does not
enable a person to take the actions described in paragraph (a)(1) of
this section.
(b) Factors. In making the determinations under paragraph (a) of
this section, the Board will consider the following factors:
(1) The position;
(2) The amount of influence and control a person holding the
position will be able to exercise over the affairs and operations of the
savings and loan holding company and the insured depository institution;
(3) The ability of the management of the savings and loan holding
company to supervise and control the activities of a person holding the
position;
(4) The level of ownership that the person will have at the savings
and loan holding company;
(5) The specific nature and circumstances of the criminal offense.
The question whether a person who was convicted of a crime or who agreed
to enter into a pretrial diversion or similar program for a crime was
guilty of that crime is not relevant;
(6) Evidence of rehabilitation; and
(7) Any other relevant factor.
Sec. 238.89 Board action.
(a) Approval. The Board will notify an applicant if an application
under this subpart is approved. An approval by the Board may include
such conditions as the Board determines to be appropriate.
(b) Denial. If Board denies an application, the Board will notify an
applicant promptly.
Sec. 238.90 Hearings.
(a) Hearing requests. Within 20 days of the date of issuance of a
denial of an application filed under this subpart, a savings and loan
holding company or a person whose application the Board has denied may
file a written request demonstrating good cause for a hearing on the
denial.
(b) Board review of hearing request. The Board will review the
hearing request to determine if the savings and loan holding company or
person has demonstrated good cause for a hearing on the application.
Within 30 days after the filing of a timely request for a hearing, the
Board will notify the savings and loan holding company or person in
writing of its decision to grant or deny the hearing request. If the
Board grants the request for a hearing, it will order a hearing to be
commenced within 60 days of the issuance of the notification. Upon the
request of a party, the Board may at its discretion order a later
hearing date.
(c) Hearing procedures. The following procedures apply to hearings
under this subpart.
(1) The hearing shall be held in Washington, DC, or at another
designated place, before a presiding officer designated by the Board.
(2) An applicant may elect in writing to have the matter determined
on the basis of written submissions, rather than an oral hearing.
(3) The parties to the hearing are Enforcement Counsel and the
applicant.
(4) The provisions of Sec. Sec. 263.2, 263.4, 263.6 through 263.12,
and 263.16 of this chapter apply to the hearing.
(5) Discovery is not permitted.
(6) A party may introduce relevant and material documents and make
oral argument at the hearing.
(7) At the discretion of the presiding officer, witnesses may be
presented within specified time limits, provided that a list of
witnesses is furnished to the presiding officer and to all other parties
prior to the hearing. Witnesses must be sworn, unless otherwise directed
by the presiding officer. The presiding officer may ask questions of any
witness. Each party may cross-examine any witness presented by the
opposing party. The Board will furnish a transcript of the proceedings
upon an applicant's request and upon the payment of the costs of the
transcript.
(8) The presiding officer has the power to administer oaths and
affirmations, to take or cause to be taken depositions of unavailable
witnesses, and to issue, revoke, quash, or modify subpoenas and
subpoenas duces tecum. If the presentation of witnesses is permitted,
the presiding officer may require the attendance of witnesses from any
state, territory, or other place subject to the jurisdiction of the
United
[[Page 112]]
States at any location where the proceeding is being conducted. Witness
fees are paid in accordance with section 263.14 of this chapter.
(9) Upon the request of a party, the record will remain open for
five business days following the hearing for additional submissions to
the record.
(10) Enforcement Counsel has the burden of proving a prima facie
case that a person is prohibited from a position under section 19(e) of
the FDIA. The applicant has the burden of proof on all other matters.
(11) The presiding officer must make recommendations to the Board,
where possible, within 20 days after the last day for the parties to
submit additions to the record.
(12) The presiding officer must forward his or her recommendation to
the Board who shall promptly certify the entire record, including the
presiding officer's recommendations. The Board's certification will
close the record.
(d) Decision. After the certification of the record, the Board will
notify the parties of its decision by issuing an order approving or
denying the application.
(1) An approval order will require fidelity bond coverage for the
position to the same extent as similar positions with the savings and
loan holding company. The approval order may include such other
conditions as may be appropriate.
(2) A denial order will include a summary of the relevant factors
under Sec. 238.88(b).
Subpart J_Management Official Interlocks
Sec. 238.91 Authority, purpose, and scope.
(a) Authority. This subpart is issued under the provisions of the
Depository Institution Management Interlocks Act (Interlocks Act) (12
U.S.C. 3201 et seq.), as amended.
(b) Purpose. The purpose of the Interlocks Act and this subpart is
to foster competition by generally prohibiting a management official
from serving two nonaffiliated depository organizations in situations
where the management interlock likely would have an anticompetitive
effect.
(c) Scope. This subpart applies to management officials of savings
and loan holding companies, and their affiliates.
Sec. 238.92 Definitions.
For purposes of this subpart, the following definitions apply:
(a) Affiliate. (1) The term affiliate has the meaning given in
section 202 of the Interlocks Act (12 U.S.C. 3201). For purposes of that
section 202, shares held by an individual include shares held by members
of his or her immediate family. ``Immediate family'' means spouse,
mother, father, child, grandchild, sister, brother, or any of their
spouses, whether or not any of their shares are held in trust.
(2) For purposes of section 202(3)(B) of the Interlocks Act (12
U.S.C. 3201(3)(B)), an affiliate relationship involving a savings and
loan holding company based on common ownership does not exist if the
Board determines, after giving the affected persons the opportunity to
respond, that the asserted affiliation was established in order to avoid
the prohibitions of the Interlocks Act and does not represent a true
commonality of interest between the depository organizations. In making
this determination, the Board considers, among other things, whether a
person, including members of his or her immediate family, whose shares
are necessary to constitute the group owns a nominal percentage of the
shares of one of the organizations and the percentage is substantially
disproportionate to that person's ownership of shares in the other
organization.
(b) Area median income means:
(1) The median family income for the metropolitan statistical area
(MSA), if a depository organization is located in an MSA; or
(2) The statewide nonmetropolitan median family income, if a
depository organization is located outside an MSA.
(c) Community means a city, town, or village, and contiguous or
adjacent cities, towns, or villages.
(d) Contiguous or adjacent cities, towns, or villages means cities,
towns, or villages whose borders touch each other or whose borders are
within 10 road miles of each other at their closest
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points. The property line of an office located in an unincorporated
city, town, or village is the boundary line of that city, town, or
village for the purpose of this definition.
(e) Depository holding company means a bank holding company or a
savings and loan holding company (as more fully defined in section 202
of the Interlocks Act (12 U.S.C. 3201)) having its principal office
located in the United States.
(f) Depository institution means a commercial bank (including a
private bank), a savings bank, a trust company, a savings and loan
association, a building and loan association, a homestead association, a
cooperative bank, an industrial bank, or a credit union, chartered under
the laws of the United States and having a principal office located in
the United States. Additionally, a United States office, including a
branch or agency, of a foreign commercial bank is a depository
institution.
(g) Depository institution affiliate means a depository institution
that is an affiliate of a depository organization.
(h) Depository organization means a depository institution or a
depository holding company.
(i) Low- and moderate-income areas means census tracts (or, if an
area is not in a census tract, block numbering areas delineated by the
United States Bureau of the Census) where the median family income is
less than 100 percent of the area median income.
(j) Management official. (1) The term management official means:
(i) A director;
(ii) An advisory or honorary director of a depository institution
with total assets of $100 million or more;
(iii) A senior executive officer as that term is defined in Sec.
225.71(c) of this chapter;
(iv) A branch manager;
(v) A trustee of a depository organization under the control of
trustees; and
(vi) Any person who has a representative or nominee serving in any
of the capacities in this paragraph (j)(1).
(2) The term management official does not include:
(i) A person whose management functions relate exclusively to the
business of retail merchandising or manufacturing;
(ii) A person whose management functions relate principally to the
business outside the United States of a foreign commercial bank; or
(iii) A person described in the provisos of section 202(4) of the
Interlocks Act (12 U.S.C. 3201(4)) (referring to an officer of a State-
chartered savings bank, cooperative bank, or trust company that neither
makes real estate mortgage loans nor accepts savings).
(k) Office means a principal or branch office of a depository
institution located in the United States. Office does not include a
representative office of a foreign commercial bank, an electronic
terminal, or a loan production office.
(l) Person means a natural person, corporation, or other business
entity.
(m) Relevant metropolitan statistical area (RMSA) means an MSA, a
primary MSA, or a consolidated MSA that is not comprised of designated
Primary MSAs to the extent that these terms are defined and applied by
the Office of Management and Budget.
(n) Representative or nominee means a natural person who serves as a
management official and has an obligation to act on behalf of another
person with respect to management responsibilities. The Board will find
that a person has an obligation to act on behalf of another person only
if the first person has an agreement, express or implied, to act on
behalf of the second person with respect to management responsibilities.
The Board will determine, after giving the affected persons an
opportunity to respond, whether a person is a representative or nominee.
(o) Savings association means:
(1) Any Federal savings association (as defined in section 3(b)(2)
of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(2)));
(2) Any state savings association (as defined in section 3(b)(3) of
the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(3))) the deposits
of which are insured by the Federal Deposit Insurance Corporation; and
(3) Any corporation (other than a bank as defined in section 3(a)(1)
of the Federal Deposit Insurance Act (12 U.S.C. 1813(a)(1))) the
deposits of which
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are insured by the Federal Deposit Insurance Corporation, that the Board
of Directors of the Federal Deposit Insurance Corporation and the
Comptroller of the Currency jointly determine to be operating in
substantially the same manner as a savings association.
(p) Total assets. (1) The term total assets means assets measured on
a consolidated basis and reported in the most recent fiscal year-end
Consolidated Report of Condition and Income.
(2) The term total assets does not include:
(i) Assets of a diversified savings and loan holding company as
defined by section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C.
1467a(a)(1)(F)) other than the assets of its depository institution
affiliate;
(ii) Assets of a bank holding company that is exempt from the
prohibitions of section 4 of the Bank Holding Company Act of 1956
pursuant to an order issued under section 4(d) of that Act (12 U.S.C.
1843(d)) other than the assets of its depository institution affiliate;
or
(iii) Assets of offices of a foreign commercial bank other than the
assets of its United States branch or agency.
(q) United States means the United States of America, any State or
territory of the United States of America, the District of Columbia,
Puerto Rico, Guam, American Samoa, and the Virgin Islands.
Sec. 238.93 Prohibitions.
(a) Community. A management official of a depository organization
may not serve at the same time as a management official of an
unaffiliated depository organization if the depository organizations in
question (or a depository institution affiliate thereof) have offices in
the same community.
(b) RMSA. A management official of a depository organization may not
serve at the same time as a management official of an unaffiliated
depository organization if the depository organizations in question (or
a depository institution affiliate thereof) have offices in the same
RMSA and each depository organization has total assets of $50 million or
more.
(c) Major assets. A management official of a depository organization
with total assets exceeding $2.5 billion (or any affiliate of such an
organization) may not serve at the same time as a management official of
an unaffiliated depository organization with total assets exceeding $1.5
billion (or any affiliate of such an organization), regardless of the
location of the two depository organizations. The Board will adjust
these thresholds, as necessary, based on the year-to-year change in the
average of the Consumer Price Index for the Urban Wage Earners and
Clerical Workers, not seasonally adjusted, with rounding to the nearest
$100 million. The Board will announce the revised thresholds by
publishing a final rule without notice and comment in the Federal
Register.
Sec. 238.94 Interlocking relationships permitted by statute.
The prohibitions of Sec. 238.93 do not apply in the case of any one
or more of the following organizations or to a subsidiary thereof:
(a) A depository organization that has been placed formally in
liquidation, or which is in the hands of a receiver, conservator, or
other official exercising a similar function;
(b) A corporation operating under section 25 or section 25A of the
Federal Reserve Act (12 U.S.C. 601 et seq. and 12 U.S.C. 611 et seq.,
respectively) (Edge Corporations and Agreement Corporations);
(c) A credit union being served by a management official of another
credit union;
(d) A depository organization that does not do business within the
United States except as an incident to its activities outside the United
States;
(e) A State-chartered savings and loan guaranty corporation;
(f) A Federal Home Loan Bank or any other bank organized solely to
serve depository institutions (a bankers' bank) or solely for the
purpose of providing securities clearing services and services related
thereto for depository institutions and securities companies;
(g) A depository organization that is closed or is in danger of
closing as determined by the appropriate Federal depository institutions
regulatory agency and is acquired by another depository organization.
This exemption lasts for five years, beginning on the
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date the depository organization is acquired;
(h)(1) A diversified savings and loan holding company (as defined in
section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C.
1467a(a)(1)(F)) with respect to the service of a director of such
company who also is a director of an unaffiliated depository
organization if:
(i) Both the diversified savings and loan holding company and the
unaffiliated depository organization notify their appropriate Federal
depository institutions regulatory agency at least 60 days before the
dual service is proposed to begin; and
(ii) The appropriate regulatory agency does not disapprove the dual
service before the end of the 60-day period.
(2) The Board may disapprove a notice of proposed service if it
finds that:
(i) The service cannot be structured or limited so as to preclude an
anticompetitive effect in financial services in any part of the United
States;
(ii) The service would lead to substantial conflicts of interest or
unsafe or unsound practices; or
(iii) The notificant failed to furnish all the information required
by the Board.
(3) The Board may require that any interlock permitted under this
paragraph (h) be terminated if a change in circumstances occurs with
respect to one of the interlocked depository organizations that would
have provided a basis for disapproval of the interlock during the notice
period; and
(i) Any savings association or any savings and loan holding company
(as defined in section 10(a)(1)(D) of the Home Owners' Loan Act) which
has issued stock in connection with a qualified stock issuance pursuant
to section 10(q) of such Act, except that this paragraph (i) shall apply
only with regard to service by a single management official of such
savings association or holding company, or any subsidiary of such
savings association or holding company, by a single management official
of the savings and loan holding company which purchased the stock issued
in connection with such qualified stock issuance, and shall apply only
when the Board has determined that such service is consistent with the
purposes of the Interlocks Act and the Home Owners' Loan Act.
Sec. 238.95 Small market share exemption.
(a) Exemption. A management interlock that is prohibited by Sec.
238.93 is permissible, if:
(1) The interlock is not prohibited by Sec. 238.93(c); and
(2) The depository organizations (and their depository institution
affiliates) hold, in the aggregate, no more than 20 percent of the
deposits in each RMSA or community in which both depository
organizations (or their depository institution affiliates) have offices.
The amount of deposits shall be determined by reference to the most
recent annual Summary of Deposits published by the FDIC for the RMSA or
community.
(b) Confirmation and records. Each depository organization must
maintain records sufficient to support its determination of eligibility
for the exemption under paragraph (a) of this section, and must
reconfirm that determination on an annual basis.
Sec. 238.96 General exemption.
(a) Exemption. The Board may by agency order exempt an interlock
from the prohibitions in Sec. 238.93 if the Board finds that the
interlock would not result in a monopoly or substantial lessening of
competition and would not present safety and soundness concerns. A
depository organization may apply to the Board for an exemption.
(b) Presumptions. In reviewing an application for an exemption under
this section, the Board will apply a rebuttable presumption that an
interlock will not result in a monopoly or substantial lessening of
competition if the depository organization seeking to add a management
official:
(1) Primarily serves low- and moderate-income areas;
(2) Is controlled or managed by persons who are members of a
minority group, or women;
(3) Is a depository institution that has been chartered for less
than two years; or
(4) Is deemed to be in ``troubled condition'' as defined in Sec.
238.72.
[[Page 116]]
(c) Duration. Unless a shorter expiration period is provided in the
Board approval, an exemption permitted by paragraph (a) of this section
may continue so long as it does not result in a monopoly or substantial
lessening of competition, or is unsafe or unsound. If the Board grants
an interlock exemption in reliance upon a presumption under paragraph
(b) of this section, the interlock may continue for three years, unless
otherwise provided by the Board in writing.
Sec. 238.97 Change in circumstances.
(a) Termination. A management official shall terminate his or her
service or apply for an exemption if a change in circumstances causes
the service to become prohibited. A change in circumstances may include
an increase in asset size of an organization, a change in the
delineation of the RMSA or community, the establishment of an office, an
increase in the aggregate deposits of the depository organization, or an
acquisition, merger, consolidation, or reorganization of the ownership
structure of a depository organization that causes a previously
permissible interlock to become prohibited.
(b) Transition period. A management official described in paragraph
(a) of this section may continue to serve the depository organization
involved in the interlock for 15 months following the date of the change
in circumstances. The Board may shorten this period under appropriate
circumstances.
Sec. 238.98 Enforcement.
Except as provided in this section, the Board administers and
enforces the Interlocks Act with respect to savings and loan holding
companies and its affiliates, and may refer any case of a prohibited
interlocking relationship involving these entities to the Attorney
General of the United States to enforce compliance with the Interlocks
Act and this part. If an affiliate of a savings and loan holding company
is subject to the primary regulation of another Federal depository
organization supervisory agency, then the Board does not administer and
enforce the Interlocks Act with respect to that affiliate.
Sec. 238.99 Interlocking relationships permitted pursuant to Federal
Deposit Insurance Act.
A management official or prospective management official of a
depository organization may enter into an otherwise prohibited
interlocking relationship with another depository organization for a
period of up to 10 years if such relationship is approved by the Federal
Deposit Insurance Corporation pursuant to section 13(k)(1)(A)(v) of the
Federal Deposit Insurance Act, as amended (12 U.S.C. 1823(k)(1)(A)(v)).
Subpart K_Dividends by Subsidiary Savings Associations
Sec. 238.101 Authority and purpose.
This subpart implements section 10(f) of HOLA which requires savings
associations with holding companies to provide the Board not less than
30 days' notice of a proposed declaration of a dividend. This subpart
applies to all declarations of dividends by a subsidiary savings
association of a savings and loan holding company.
Sec. 238.102 Definitions.
The following definitions apply to this subpart:
(a) Appropriate Federal banking agency has the same meaning as in 12
U.S.C. 1813(q) and includes, with respect to agreements entered into and
conditions imposed prior to July 21, 2011, the Office of Thrift
Supervision.
(b) Dividend means:
(1) A distribution of cash or other property to owners of a savings
association made on account of their ownership, but not any dividend
consisting only of shares or rights to purchase shares; or
(2) Any transaction that the Board determines, by order or
regulation, to be in substance a dividend.
(c) Shares means common and preferred stock, and any options,
warrants, or other rights for the acquisition of such stock. The term
``share'' also includes convertible securities upon their conversion
into common or preferred stock. The term does not include convertible
debt securities prior to their conversion into common or preferred stock
or other securities that
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are not equity securities at the time of a dividend.
Sec. 238.103 Filing requirement.
(a) Filing. A subsidiary savings association of a savings and loan
holding company must file a notice with the appropriate Reserve Bank on
the designated form at least 30 days before the proposed declaration of
a dividend by its board of directors.
(b) Schedules. A notice may include a schedule proposing dividends
over a specified period, not to exceed 12 months.
Sec. 238.104 Board action and criteria for review.
(a) Board action. (1) A subsidiary savings association of a savings
and loan holding company may declare a proposed dividend after the end
of a 30-day review period commencing on the date of submission to the
Federal Reserve System of the complete record on the notice, unless the
Board or Reserve Bank disapproves the notice before the end of the
period.
(2) A subsidiary savings association of a savings and loan holding
company may declare a proposed dividend before the end of the 30-day
period if the Board or Reserve Bank notifies the applicant in writing of
the Board's or Reserve Bank's intention not to disapprove the notice.
(b) Criteria. The Board or Reserve Bank may disapprove a notice, in
whole or in part, if the Board or Reserve Bank makes any of the
following determinations.
(1) Following the dividend the subsidiary savings association will
be undercapitalized, significantly undercapitalized, or critically
undercapitalized as set forth in applicable regulations under 12 U.S.C.
1831o.
(2) The proposed dividend raises safety or soundness concerns.
(3) The proposed dividend violates a prohibition contained in any
statute, regulation, enforcement action, or agreement between the
subsidiary savings association or any savings and loan holding company
of which it is a subsidiary and an appropriate Federal banking agency, a
condition imposed on the subsidiary savings association or any savings
and loan holding company of which it is a subsidiary in an application
or notice approved by an appropriate Federal banking agency, or any
formal or informal enforcement action involving the subsidiary savings
association or any savings and loan holding company of which it is a
subsidiary. If so, the Board will determine whether it may permit the
dividend notwithstanding the prohibition, condition, or enforcement
action.
Subpart L_Investigative Proceedings and Formal Examination Proceedings
Sec. 238.111 Scope.
This part prescribes rules of practice and procedure applicable to
the conduct of investigative proceedings under section 10(g)(2) of the
Home Owners' Loan Act, as amended, 12 U.S.C. 1467a(g)(2) (``HOLA'') and
to the conduct of formal examination proceedings with respect to savings
and loan holding companies and their affiliates under section 5(d)(1)(B)
of the HOLA, as amended, 12 U.S.C. 1464(d)(1)(B) or section 7(j)(15) of
the Federal Deposit Insurance Act, as amended, 12 U.S.C. 1817(j)(15)
(``FDIA''), section 8(n) of the FDIA, 12 U.S.C. 1818(n), or section
10(c) of the FDIA, 12 U.S.C. 1820(c). This part does not apply to
adjudicatory proceedings as to which hearings are required by statute,
the rules for which are contained in part 262 of this chapter.
Sec. 238.112 Definitions.
As used in this part:
(a) Investigative proceeding means an investigation conducted under
section 10(g)(2) of the HOLA;
(b) Formal examination proceeding means the administration of oaths
and affirmations, taking and preserving of testimony, requiring the
production of books, papers, correspondence, memoranda, and all other
records, the issuance of subpoenas, and all related activities in
connection with examination of savings and loan holding companies and
their affiliates conducted pursuant to section 5(d)(1)(B) of the HOLA,
section 7(j)(15) of the FDIA, section 8(n) of the FDIA or section 10(c)
of the FDIA; and
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(c) Designated representative means the person or persons empowered
by the Board to conduct an investigative proceeding or a formal
examination proceeding.
Sec. 238.113 Confidentiality of proceedings.
All formal examination proceedings shall be private and, unless
otherwise ordered by the Board, all investigative proceedings shall also
be private. Unless otherwise ordered or permitted by the Board, or
required by law, and except as provided in Sec. Sec. 238.114 and
238.115, the entire record of any investigative proceeding or formal
examination proceeding, including the resolution of the Board or its
delegate(s) authorizing the proceeding, the transcript of such
proceeding, and all documents and information obtained by the designated
representative(s) during the course of said proceedings shall be
confidential.
Sec. 238.114 Transcripts.
Transcripts or other recordings, if any, of investigative
proceedings or formal examination proceedings shall be prepared solely
by an official reporter or by any other person or means authorized by
the designated representative. A person who has submitted documentary
evidence or given testimony in an investigative proceeding or formal
examination proceeding may procure a copy of his own documentary
evidence or transcript of his own testimony upon payment of the cost
thereof; provided, that a person seeking a transcript of his own
testimony must file a written request with the Board stating the reason
he desires to procure such transcript, and the Board may for good cause
deny such request. In any event, any witness (or his counsel) shall have
the right to inspect the transcript of the witness' own testimony.
Sec. 238.115 Rights of witnesses.
(a) Any person who is compelled or requested to furnish documentary
evidence or give testimony at an investigative proceeding or formal
examination proceeding shall have the right to examine, upon request,
the Board resolution authorizing such proceeding. Copies of such
resolution shall be furnished, for their retention, to such persons only
with the written approval of the Board.
(b) Any witness at an investigative proceeding or formal examination
proceeding may be accompanied and advised by an attorney personally
representing that witness.
(1) Such attorney shall be a member in good standing of the bar of
the highest court of any state, Commonwealth, possession, territory, or
the District of Columbia, who has not been suspended or debarred from
practice by the bar of any such political entity or before the Board in
accordance with the provisions of part 263 of this chapter and has not
been excluded from the particular investigative proceeding or formal
examination proceeding in accordance with paragraph (b)(3) of this
section.
(2) Such attorney may advise the witness before, during, and after
the taking of his testimony and may briefly question the witness, on the
record, at the conclusion of his testimony, for the sole purpose of
clarifying any of the answers the witness has given. During the taking
of the testimony of a witness, such attorney may make summary notes
solely for his use in representing his client. All witnesses shall be
sequestered, and, unless permitted in the discretion of the designated
representative, no witness or accompanying attorney may be permitted to
be present during the taking of testimony of any other witness called in
such proceeding. Neither attorney(s) for the association(s) that are the
subjects of the investigative proceedings or formal examination
proceedings, nor attorneys for any other interested persons, shall have
any right to be present during the testimony of any witness not
personally being represented by such attorney.
(3) The Board, for good cause, may exclude a particular attorney
from further participation in any investigation in which the Board has
found the attorney to have engaged in dilatory, obstructionist,
egregious, contemptuous or contumacious conduct. The person conducting
an investigation may report to the Board instances of apparently
dilatory, obstructionist, egregious, contemptuous or contumacious
conduct on the part of an attorney.
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After due notice to the attorney, the Board may take such action as the
circumstances warrant based upon a written record evidencing the conduct
of the attorney in that investigation or such other or additional
written or oral presentation as the Board may permit or direct.
Sec. 238.116 Obstruction of proceedings.
The designated representative shall report to the Board any
instances where any witness or counsel has engaged in dilatory,
obstructionist, or contumacious conduct or has otherwise violated any
provision of this part during the course of an investigative proceeding
or formal examination proceeding; and the Board may take such action as
the circumstances warrant, including the exclusion of counsel from
further participation in such proceeding.
Sec. 238.117 Subpoenas.
(a) Service. Service of a subpoena in connection with any
investigative proceeding or formal examination proceeding shall be
effected in the following manner:
(1) Service upon a natural person. Service of a subpoena upon a
natural person may be effected by handing it to such person; by leaving
it at his office with the person in charge thereof, or, if there is no
one in charge, by leaving it in a conspicuous place therein; by leaving
it at his dwelling place or usual place of abode with some person of
suitable age and discretion then residing therein; by mailing it to him
by registered or certified mail or by an express delivery service at his
last known address; or by any method whereby actual notice is given to
him.
(2) Service upon other persons. When the person to be served is not
a natural person, service of the subpoena may be effected by handing the
subpoena to a registered agent for service, or to any officer, director,
or agent in charge of any office of such person; by mailing it to any
such representative by registered or certified mail or by an express
delivery service at his last known address; or by any method whereby
actual notice is given to such person.
(b) Motions to quash. Any person to whom a subpoena is directed may,
prior to the time specified therein for compliance, but in no event more
than 10 days after the date of service of such subpoena, apply to the
Board or its designee to quash or modify such subpoena, accompanying
such application with a statement of the reasons therefore. The Board or
its designee, as appropriate, may:
(1) Deny the application;
(2) Quash or revoke the subpoena;
(3) Modify the subpoena; or
(4) Condition the granting of the application on such terms as the
Board or its designee determines to be just, reasonable, and proper.
(c) Attendance of witnesses. Subpoenas issued in connection with an
investigative proceeding or formal examination proceeding may require
the attendance and/or testimony of witnesses from any State or territory
of the United States and the production by such witnesses of documentary
or other tangible evidence at any designated place where the proceeding
is being (or is to be) conducted. Foreign nationals are subject to such
subpoenas if such service is made upon a duly authorized agent located
in the United States.
(d) Witness fees and mileage. Witnesses summoned in any proceeding
under this part shall be paid the same fees and mileage that are paid
witnesses in the district courts of the United States. Such fees and
mileage need not be tendered when the subpoena is issued on behalf of
the Board by any of its designated representatives.
PART 239_MUTUAL HOLDING COMPANIES (REGULATION MM)--Table of Contents
Subpart A_General Provisions
Sec.
239.1 Authority, purpose, and scope.
239.2 Definitions.
Subpart B_Mutual Holding Companies
239.3 Mutual holding company reorganizations.
239.4 Grounds for disapproval of reorganizations.
239.5 Membership rights.
239.6 Contents of Reorganization Plans.
239.7 Acquisition and disposition of savings associations, savings and
loan holding
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companies, and other corporations by mutual holding companies.
239.8 Operating restrictions.
239.9 Conversion or liquidation of mutual holding companies.
239.10 Procedural requirements.
239.11 Subsidiary holding companies.
239.12 Communication between members of a mutual holding company.
239.13 Charters.
239.14 Charter amendments.
239.15 Bylaws.
239.16 Voluntary dissolution.
Subpart C_Subsidiary Holding Companies
239.20 Scope.
239.21 Charters.
239.22 Charter amendments.
239.23 Bylaws.
239.24 Issuances of stock by subsidiary holding companies of mutual
holding companies.
239.25 Contents of Stock Issuance Plans.
239.26 Shareholders.
239.27 Board of directors.
239.28 Officers.
239.29 Certificates for shares and their transfer.
239.30 Annual reports; books and records.
239.31 Indemnification; employment contracts.
Subpart D_Indemnification; Employment Contracts
239.40 Indemnification of directors, officers and employees.
239.41 Employment contracts.
Subpart E_Conversions from Mutual to Stock Form
239.50 Purpose and scope.
239.51 Acquiring another insured stock depository institution as part of
a conversion.
239.52 Definitions.
239.53 Prior to conversion.
239.54 Plan of conversion.
239.55 Filing requirements.
239.56 Vote by members.
239.57 Proxy solicitation.
239.58 Offering circular.
239.59 Offers and sales of stock.
239.60 Completion of the offering.
239.61 Completion of the conversion.
239.62 Liquidation account.
239.63 Post-conversion.
239.64 Contributions to charitable organizations.
239.65 Voluntary supervisory conversions.
239.66 Board review of the voluntary supervisory conversion application.
Appendix A to Part 239--Mutual Holding Company Model Charter
Appendix B to Part 239--Subsidiary Holding Company of a Mutual Holding
Company Model Charter
Appendix C to Part 239--Mutual Holding Company Model Bylaws
Appendix D to Part 239--Subsidiary Holding Company of a Mutual Holding
Company Model Bylaws
Authority: 12 U.S.C. 1462, 1462a, 1464, 1467a, 1828, and 2901.
Source: Reg. MM, 76 FR 56357, Sept. 13, 2011, unless otherwise
noted.
Subpart A_General Provisions
Sec. 239.1 Authority, purpose, and scope.
(a) Authority. This part is issued by the Board of Governors of the
Federal Reserve System (``Board'') under section 10(g) and (o) of the
Home Owners' Loan Act (``HOLA'').
(b) Purpose. The principal purposes of this part are to:
(1) Regulate the reorganization of mutual savings associations to
mutual holding companies and the creation of subsidiary holding
companies of mutual holding companies;
(2) Define and regulate the operations of mutual holding companies
and subsidiary holding companies of mutual holding companies; and
(3) Set forth the procedures for securing approval for these
transactions.
(c) Scope. Except as the Board may otherwise determine, the
reorganization of mutual savings associations into mutual holding
companies, any related stock issuances by subsidiary holding companies,
and the conversion of mutual holding companies into stock form are
exclusively governed by the provisions of this part, and no mutual
savings association shall reorganize to a mutual holding company, no
subsidiary holding company of a mutual holding company shall issue
minority stock, and no mutual holding company shall convert into stock
form without the prior written approval of the Board. The Board may
grant a waiver in writing from any requirement of this part for good
cause shown.
Sec. 239.2 Definitions.
As used in this part and in the forms under this part, the following
definitions apply, unless the context otherwise requires:
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(a) Acquiree association means any savings association, other than a
resulting association, that:
(1) Is acquired by a mutual holding company as part of, and
concurrently with, a mutual holding company reorganization; and
(2) Is in the mutual form immediately prior to such acquisition.
(b) Acting in concert has the same meaning as in Sec. 238.31(b) of
this chapter.
(c) Affiliate has the same meaning as in Sec. 238.2(a) of this
chapter.
(d) Associate of a person is:
(1) A corporation or organization (other than the mutual holding
company, subsidiary holding company, or any majority-owned subsidiaries
of such holding companies), if the person is a senior officer or
partner, or beneficially owns, directly or indirectly, 10 percent or
more of any class of equity securities of the corporation or
organization.
(2) A trust or other estate, if the person has a substantial
beneficial interest in the trust or estate or is a trustee or fiduciary
of the trust or estate. For purposes of Sec. Sec. 239.59(k), 239.59(m),
239.59(n), 239.59(o), 239.59(p), 239.63(b), a person who has a
substantial beneficial interest in the mutual holding company or
subsidiary holding company's tax-qualified or non-tax-qualified employee
stock benefit plan, or who is a trustee or a fiduciary of the plan, is
not an associate of the plan. For the purposes of Sec. 239.59(k), the
mutual holding company or subsidiary holding company's tax-qualified
employee stock benefit plan is not an associate of a person.
(3) Any natural person who is related by blood or marriage to such
person and:
(i) Who lives in the same home as the person; or
(ii) Who is a director or senior officer of the mutual holding
company, subsidiary holding company, or other subsidiary.
(e) Company means any corporation, partnership, trust, association,
joint venture, pool, syndicate, unincorporated organization, joint-stock
company or similar organization, as defined in paragraph (u) of this
section; but a company does not include:
(1) The Federal Deposit Insurance Corporation, the Resolution Trust
Corporation, or any Federal Home Loan Bank, or
(2) Any company the majority of shares of which is owned by:
(i) The United States or any State,
(ii) An officer of the United States or any State in his or her
official capacity, or
(iii) An instrumentality of the United States or any State.
(f) Control has the same meaning as in Sec. 238.2(e) of this
chapter.
(g) Default means any adjudication or other official determination
of a court of competent jurisdiction or other public authority pursuant
to which a conservator, receiver, or other legal custodian is appointed
for a mutual holding company or subsidiary savings association of a
mutual holding company.
(h) Demand accounts mean non-interest-bearing demand deposits that
are subject to check or to withdrawal or transfer on negotiable or
transferable order to the savings association and that are permitted to
be issued by statute, regulation, or otherwise and are payable on
demand.
(i) Insider means any officer or director of a company or of any
affiliate of such company, and any person acting in concert with any
such officer or director.
(j) Member means any depositor or borrower of a mutual savings
association that is entitled, under the charter of the savings
association, to vote on matters affecting the association, and any
depositor or borrower of a subsidiary savings association of a mutual
holding company that is entitled, under the charter of the mutual
holding company, to vote on matters affecting the mutual holding
company.
(k) Mutual holding company means a holding company organized in
mutual form under this part, and unless otherwise indicated, a
subsidiary holding company controlled by a mutual holding company,
organized under this part.
(l) Parent means any company which directly or indirectly controls
any other company or companies.
(m) Person includes an individual, bank, corporation, partnership,
trust,
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association, joint venture, pool, syndicate, sole proprietorship,
unincorporated organization, or any other form of entity.
(n) Reorganization Notice means a notice of a proposed mutual
holding company reorganization that is in the form and contains the
information required by the Board.
(o) Reorganization Plan means a plan to reorganize into the mutual
holding company format containing the information required by Sec.
239.6.
(p) Reorganizing association means a mutual savings association that
proposes to reorganize to become a mutual holding company pursuant to
this part.
(q) Resulting association means a savings association in the stock
form that is organized as a subsidiary of a reorganizing association to
receive the substantial part of the assets and liabilities (including
all deposit accounts) of the reorganizing association upon consummation
of the reorganization.
(r) Savings account means any withdrawable account, except a demand
account, a tax and loan account, a note account, a United States
Treasury general account, or a United States Treasury time deposit-open
account.
(s) Savings Association has the same meaning as in Sec. 238.2(l) of
this chapter.
(t) Savings and loan holding company has the same meaning as
specified in section 10(a)(1) of the HOLA and Sec. 238.2(m) of this
chapter.
(u) Similar organization for purposes of paragraph (e) of this
section means a combination of parties with the potential for or
practical likelihood of continuing rather than temporary existence,
where the parties thereto have knowingly and voluntarily associated for
a common purpose pursuant to identifiable and binding relationships
which govern the parties with respect to either:
(1) The transferability and voting of any stock or other indicia of
participation in another entity, or
(2) Achievement of a common or shared objective, such as to
collectively manage or control another entity.
(v) Stock means common or preferred stock, or any other type of
equity security, including (without limitation) warrants or options to
acquire common or preferred stock, or other securities that are
convertible into common or preferred stock.
(w) Stock Issuance Plan means a plan, submitted pursuant to Sec.
239.24 and containing the information required by Sec. 239.25,
providing for the issuance of stock by a subsidiary holding company.
(x) Subsidiary means any company which is owned or controlled
directly or indirectly by a person, and includes any service corporation
owned in whole or in part by a savings association, or a subsidiary of
such service corporation.
(y) Subsidiary holding company means a federally chartered stock
holding company controlled by a mutual holding company that owns the
stock of a savings association whose depositors have membership rights
in the parent mutual holding company.
(z) Tax and loan account means an account, the balance of which is
subject to the right of immediate withdrawal, established for receipt of
payments of Federal taxes and certain United States obligations. Such
accounts are not savings accounts or savings deposits.
(aa) Tax-qualified employee stock benefit plan means any defined
benefit plan or defined contribution plan, such as an employee stock
ownership plan, stock bonus plan, profit-sharing plan, or other plan,
and a related trust, that is qualified under sec. 401 of the Internal
Revenue Code (26 U.S.C. 401).
(bb) United States Treasury General Account means an account
maintained in the name of the United States Treasury the balance of
which is subject to the right of immediate withdrawal, except in the
case of the closure of the member, and in which a zero balance may be
maintained. Such accounts are not savings accounts or savings deposits.
(cc) United States Treasury Time Deposit Open Account means a non-
interest-bearing account maintained in the name of the United States
Treasury which may not be withdrawn prior to the expiration of 30 days'
written notice from the United States Treasury, or such other period of
notice as the Treasury may require. Such accounts are not savings
accounts or savings deposits.
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Subpart B_Mutual Holding Companies
Sec. 239.3 Mutual holding company reorganizations.
(a) A mutual savings association may not reorganize to become a
mutual holding company, or join in a mutual holding company
reorganization as an acquiree association, unless it satisfies the
following conditions:
(1) A Reorganization Plan is approved by a majority of the board of
directors of the reorganizing association and any acquiree association;
(2) A Reorganization Notice is filed with the Board pursuant to
Sec. 238.14 of this chapter;
(3) The Reorganization Plan is submitted to the members of the
reorganizing association and any acquiree association pursuant and is
approved by a majority of the total votes of the members of each
association eligible to be cast at a meeting held at the call of each
association's directors in accordance with the procedures prescribed by
each association's charter and bylaws; and
(4) All necessary regulatory approvals have been obtained and all
conditions imposed by the Board have been satisfied.
(b) Upon receipt of an application under this section, the Reserve
Bank will promptly furnish notice and a copy of the Reorganization Plan
to the primary federal supervisor of any savings association involved in
the transaction. The primary supervisor will have 30 calendar days from
the date of the letter giving notice in which to submit its views and
recommendations to the Board.
Sec. 239.4 Grounds for disapproval of reorganizations.
(a) Basic standards. The Board may disapprove a proposed mutual
holding company reorganization filed pursuant to Sec. 239.3(a) if:
(1) Disapproval is necessary to prevent unsafe or unsound practices;
(2) The financial or managerial resources of the reorganizing
association or any acquiree association warrant disapproval;
(3) The proposed capitalization of the mutual holding company fails
to meet the requirements of paragraph (b) of this section;
(4) A stock issuance is proposed in connection with the
reorganization pursuant to Sec. 239.24 that fails to meet the standards
established by that section;
(5) The reorganizing association or any acquiree association fails
to furnish the information required to be included in the Reorganization
Notice or any other information requested by the Board in connection
with the proposed reorganization; or
(6) The proposed reorganization would violate any provision of law,
including (without limitation) Sec. 239.3(a) and (c) (regarding board
of directors and membership approval) or Sec. 239.5(a) (regarding
continuity of membership rights).
(b) Capitalization. (1) The Board shall disapprove a proposal by a
reorganizing association or any acquiree association to capitalize a
mutual holding company in an amount in excess of a nominal amount if
immediately following the reorganization, the resulting association or
the acquiree association would fail to be ``adequately capitalized''
under the regulatory capital requirements applicable to the savings
association.
(2) Proposals by reorganizing associations and acquiree associations
to capitalize mutual holding companies shall also comply with any
applicable statutes, and with regulations or written policies of the
Comptroller of the Currency or the Federal Deposit Insurance
Corporation, as applicable, governing capital distributions by savings
associations in effect at the time of the reorganization.
(c) Presumptive disqualifiers--(1) Managerial resources. The factors
specified in Sec. 238.15(d)(1)(i) through (vi) of this chapter shall
give rise to a rebuttable presumption that the managerial resources test
of paragraph (a)(2) of this section is not met. For this purpose, each
place the term acquiror appears in Sec. 238.15(d)(1)(i) through (vi) of
this chapter, it shall be read to mean the reorganizing association or
any acquiree association, and the reference in Sec. 238.15(d)(1)(v) of
this chapter to filings
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under this part shall be deemed to include filings under either part 238
of this chapter or this part.
(2) Safety and soundness and financial resources. Failure by a
reorganizing association and any acquiree association to submit a
business plan in connection with a Reorganization Notice, or submission
of a business plan that projects activities that are inconsistent with
the credit and lending needs of the reorganizing association or acquiree
association's proposed market area or that fails to demonstrate that the
capital of the mutual holding company will be deployed in a safe and
sound manner, shall give rise to a rebuttable presumption that the
safety and soundness and financial resources tests of paragraphs (a)(1)
and (a)(2) of this section are not met.
(d) Failure of the Board to act on a Reorganization Notice within
the prescribed time period. A proposed reorganization that obtains
regulatory clearance from the Board due to the operation of Sec. 238.14
of this chapter may take place in the manner proposed, subject to the
following conditions:
(1) The reorganization shall be consummated within one year of the
date of the expiration of the Board's review period under Sec. 238.14
of this chapter;
(2) The mutual holding company shall not be capitalized in an amount
in excess of what is permissible under Sec. 239.4(b);
(3) No request for regulatory waivers or forbearances shall be
deemed granted;
(4) The following information shall be submitted within the
specified time frames:
(i) On the business day prior to the date of the reorganization, the
chief financial officers of the reorganizing association and any
acquiree association shall certify to the Board in writing that no
material adverse events or material adverse changes have occurred with
respect to the financial condition or operations of their respective
associations since the date of the financial statements submitted with
the Reorganization Notice;
(ii) No later than thirty days after the reorganization, the mutual
holding company shall file with the Board a certification by legal
counsel stating the effective date of the reorganization, the exact
number of shares of stock of the resulting association and any acquiree
association acquired by the mutual holding company and by any other
persons, and that the reorganization has been consummated in accordance
with Sec. 239.3 and all other applicable laws and regulations and the
Reorganization Notice;
(iii) No later than thirty days after the reorganization, the mutual
holding company shall file with the Board an opinion from its
independent auditors certifying that the reorganization was consummated
in accordance with generally accepted accounting principles; and
(iv) No later than thirty days after the reorganization, the mutual
holding company shall file with the Board a certification stating that
the mutual holding company will not deviate materially, or cause its
subsidiary savings associations to deviate materially, from the business
plan submitted in connection with the Reorganization Notice, unless
prior written approval from the Board is obtained.
Sec. 239.5 Membership rights.
(a) Depositors and borrowers of resulting associations, acquiree
associations, and associations in mutual form when acquired. The charter
of a mutual holding company must:
(1) Confer upon existing and future depositors of the resulting
association the same membership rights in the mutual holding company as
were conferred upon depositors by the charter of the reorganizing
association as in effect immediately prior to the reorganization;
(2) Confer upon existing and future depositors of any acquiree
association or any association that is in the mutual form when acquired
by the mutual holding company the same membership rights in the mutual
holding company as were conferred upon depositors by the charter of the
acquired association immediately prior to acquisition, provided that if
the acquired association is merged into another association from which
the mutual holding company draws members, the depositors of the acquired
association shall receive the
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same membership rights as the depositors of the association into which
the acquired association is merged;
(3) Confer upon the borrowers of the resulting association who are
borrowers at the time of reorganization the same membership rights in
the mutual holding company as were conferred upon them by the charter of
the reorganizing association immediately prior to reorganization, but
shall not confer any membership rights in connection with any borrowings
made after the reorganization; and
(4) Confer upon the borrowers of any acquiree association or any
association that is in the mutual form when acquired by the mutual
holding company who are borrowers at the time of the acquisition the
same membership rights in the mutual holding company as were conferred
upon them by the charter of the acquired association immediately prior
to acquisition, but shall not confer any membership rights in connection
with any borrowings made after the acquisition, provided that if the
acquired association is merged into another association from which the
mutual holding company draws members, the borrowers of the acquired
association shall instead receive the same grandfathered membership
rights as the borrowers of the association into which the acquired
association is merged received at the time that association became a
subsidiary of the mutual holding company.
(b) Depositors and borrowers of associations in the stock form when
acquired. A mutual holding company that acquires a savings association
in the stock form, other than a resulting association or an acquiree
association, shall not confer any membership rights upon the depositors
and borrowers of such association, unless such association is merged
into an association from which the mutual holding company draws members,
in which case the depositors of the stock association shall receive the
same membership rights as other depositors of the association into which
the stock association is merged.
Sec. 239.6 Contents of Reorganization Plans.
Each Reorganization Plan shall contain a complete description of all
significant terms of the proposed reorganization, shall attach and
incorporate any Stock Issuance Plan proposed in connection with the
Reorganization Plan, and shall:
(a) Provide for amendment of the charter and bylaws of the
reorganizing association to read in the form of the charter and bylaws
of a mutual holding company, and attach and incorporate such charter and
bylaws;
(b) Provide for the organization of the resulting association, which
shall be an interim federal or state subsidiary savings association of
the reorganizing association, and attach and incorporate the proposed
charter and bylaws of such association;
(c) If the reorganizing association proposes to form a subsidiary
holding company, provide for the organization of a subsidiary holding
company and attach and incorporate the proposed charter and bylaws of
such subsidiary holding company.
(d) Provide for amendment of the charter and bylaws of any acquiree
association to read in the form of the charter and bylaws of a state or
federal savings association in the stock form, and attach and
incorporate such charter and bylaws;
(e) Provide that, upon consummation of the reorganization,
substantially all of the assets and liabilities (including all savings
accounts, demand accounts, tax and loan accounts, United States Treasury
General Accounts, or United States Treasury Time Deposit Open Accounts,
as those terms are defined in this part) of the reorganizing association
shall be transferred to the resulting association, which shall thereupon
become an operating subsidiary savings association of the mutual holding
company;
(f) Provide that all assets, rights, obligations, and liabilities of
whatever nature of the reorganizing association that are not expressly
retained by the mutual holding company shall be deemed transferred to
the resulting association;
(g) Provide that each depositor in the reorganizing association or
any acquiree association immediately prior to the reorganization shall
upon consummation of the reorganization receive, without payment, an
identical
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account in the resulting association or the acquiree association, as the
case may be (Appropriate modifications should be made to this provision
if savings associations are being merged as a part of the
reorganization);
(h) Provide that the Reorganization Plan as adopted by the boards of
directors of the reorganizing association and any acquiree association
may be substantively amended by those boards of directors as a result of
comments from regulatory authorities or otherwise prior to the
solicitation of proxies from the members of the reorganizing association
and any acquiree association to vote on the Reorganization Plan and at
any time thereafter with the concurrence of the Board; and that the
reorganization may be terminated by the board of directors of the
reorganizing association or any acquiree association at any time prior
to the meeting of the members of the association called to consider the
Reorganization Plan and at any time thereafter with the concurrence of
the Board;
(i) Provide that the Reorganization Plan shall be terminated if not
completed within a specified period of time (The time period shall not
be more than 24 months from the date upon which the members of the
reorganizing association or the date upon which the members of any
acquiree association, whichever is earlier, approve the Reorganization
Plan and may not be extended by the reorganizing or acquiree
association); and
(j) Provide that the expenses incurred in connection with the
reorganization shall be reasonable.
Sec. 239.7 Acquisition and disposition of savings associations,
savings and loan holding companies, and other corporations by
mutual holding companies.
(a) Acquisitions--(1) Stock savings associations. A mutual holding
company may not acquire control of a savings association that is in the
stock form unless the necessary approvals are obtained from the Board,
including approval pursuant to Sec. 238.11 of this chapter.
(2) Mutual savings associations. A mutual holding company may not
acquire a savings association in the mutual form by merger of such
association into any subsidiary savings association of such holding
company from which the parent mutual holding company draws members or
into an interim subsidiary savings association of the mutual holding
company, unless:
(i) The proposed acquisition is approved by a majority of the board
of directors of the mutual association;
(ii) The proposed acquisition is submitted to the mutual
association's members and is approved by a majority of the total votes
of the association's members eligible to be cast at a meeting held at
the call of the association's directors in accordance with the
procedures prescribed by the association's charter and bylaws;
(iii) The necessary approvals are obtained from the Board, including
approval pursuant to Sec. 238.11 of this chapter, and any other
approvals required to form an interim association, to amend the charter
and bylaws of the association being acquired, and/or to amend the
charter and bylaws of the mutual holding company consistent with Sec.
239.6(a); and
(iv) The approval of the members of the mutual holding company is
obtained, if the Board advises the mutual holding company in writing
that such approval will be required.
(3) Mutual holding companies. A mutual holding company that is not a
subsidiary holding company may not acquire control of another mutual
holding company, including a subsidiary holding company, by merging with
or into such company, unless the necessary approvals are obtained from
the Board, including approval pursuant to Sec. 238.11 of this chapter.
The approval of the members of the mutual holding companies shall also
be obtained if the Board advises the mutual holding companies in writing
that such approval will be required.
(4) Stock holding companies. A mutual holding company may not
acquire control of a savings and loan holding company in the stock form
that is not a subsidiary holding company, unless the necessary approvals
are obtained from the Board, including approval pursuant to Sec. 238.11
of this chapter. The acquired holding company may be held as a
subsidiary of the mutual holding company
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or merged into the mutual holding company.
(5) Non-controlling acquisitions of savings association stock. A
mutual holding company may acquire non-controlling amounts of the stock
of savings associations and savings and loan holding companies subject
to the restrictions imposed by 12 U.S.C. 1467a(e) and (q) and Sec. Sec.
238.41 and 238.11 of this chapter.
(6) Other corporations. A mutual holding company may not acquire
control of, or make non-controlling investments in the stock of, any
corporation other than a savings association or savings and loan holding
company unless:
(i)(A) Such corporation is engaged exclusively in activities that
are permissible for mutual holding companies pursuant to Sec. 239.8(a);
or
(B) It is lawful for the stock of such corporation to be purchased
by a federal savings association under the applicable regulations of the
Comptroller of the Currency or by a state savings association under the
applicable regulations of the Federal Deposit Insurance Corporation and
the laws of any state where any subsidiary savings association of the
mutual holding company has its home office; and
(ii) Such corporation is not controlled, directly or indirectly, by
a subsidiary savings association of the mutual holding company.
(b) Dispositions. (1) A mutual holding company shall provide written
notice to the appropriate Reserve Bank at least 30 days prior to the
effective date of any direct or indirect transfer of any of the stock
that it holds in a subsidiary holding company, a resulting association,
an acquiree association, or any subsidiary savings association that was
in the mutual form when acquired by the mutual holding company,
including stock transferred in connection with a pledge pursuant to
Sec. 239.8(b) or any transfer of all or a substantial portion of the
assets or liabilities of any such subsidiary holding company or
association. Any such disposition shall comply with the requirements of
this part, as appropriate, and with any other applicable statute or
regulation.
(2) A mutual holding company may, subject to applicable laws and
regulations, transfer any or all of the stock or cause or permit the
transfer of any or all of the assets and liabilities of:
(i) Any subsidiary savings association that was in the stock form
when acquired, provided such association is not a resulting association
or an acquiree association;
(ii) Any subsidiary holding company acquired pursuant to paragraph
(a)(4) of this section; or
(iii) Any corporation other than a savings association or savings
and loan holding company.
(3) A mutual holding company may, subject to applicable laws and
regulations, transfer any stock acquired pursuant to paragraph (a)(5) of
this section.
(4) No transfer authorized by this section may be made to any
insider of the mutual holding company, any associate of an insider of
the mutual holding company, or any tax-qualified or non-tax-qualified
employee stock benefit plan of the mutual holding company unless the
mutual holding company provides notice to the appropriate Reserve Bank
at least 30 days prior to the effective date of the proposed transfer.
This notice shall be in addition to any other application or notice
required under applicable laws or regulations, including those imposed
by this part or Regulation LL.
Sec. 239.8 Operating restrictions.
(a) Activities restrictions. A mutual holding company may engage in
any business activity specified in 12 U.S.C. 1467a(c)(2) or
(c)(9)(A)(ii). In addition, the business activities of subsidiaries of
mutual holding companies may include the activities specified in Sec.
239.7(a)(6). A mutual holding company or its subsidiaries may engage in
the foregoing activities only upon compliance with the procedures
specified in Sec. Sec. 238.53(c) or 238.54(b) of this chapter.
(b) Pledging stock. (1) No mutual holding company may pledge the
stock of its resulting association, an acquiree association, or any
subsidiary savings association that was in the mutual form when acquired
by the mutual holding company (or its parent mutual holding company),
unless the proceeds of the loan secured by the pledge are infused into
the association whose stock is pledged. No mutual holding
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company may pledge the stock of its subsidiary holding company unless
the proceeds of the loan secured by the pledge are infused into any
subsidiary savings association of the subsidiary holding company that is
a resulting association, an acquiree association, or a subsidiary
savings association that was in the mutual form when acquired by the
subsidiary holding company (or its parent mutual holding company). In
the event the subsidiary holding company has more than one subsidiary
savings association, the loan proceeds shall, unless otherwise approved
by the Board, be infused in equal amounts to each subsidiary savings
association. Any amount of the stock of such association or subsidiary
holding company may be pledged for these purposes. Nothing in this
paragraph shall be deemed to prohibit:
(i) The payment of dividends from a subsidiary savings association
to its mutual holding company parent to the extent otherwise
permissible; or
(ii) The payment of dividends from a subsidiary holding company to
its mutual holding company parent to the extent otherwise permissible;
or
(iii) A mutual holding company from pledging the stock of more than
one subsidiary savings association provided that the stock pledged of
each such subsidiary association is proportionate to the proceeds of the
loan infused into each subsidiary association.
(2) Any mutual holding company that fails to make any payment on a
loan secured by the pledge of stock pursuant to paragraph (b)(1) of this
section on or before the date on which such payment is due shall, on the
first day after such payment is due, provide written notice of
nonpayment to the appropriate Reserve Bank.
(c) Restrictions on stock repurchases. (1) No subsidiary holding
company that has any stockholders other than its parent mutual holding
company may repurchase any share of stock within one year of its date of
issuance (which may include the time period the shares issued by the
savings association were outstanding if the subsidiary holding company
was formed after the initial issuance by the savings association),
unless the repurchase:
(i) Is in compliance with the requirements set forth in Sec.
239.63;
(ii) Is part of a general repurchase made on a pro rata basis
pursuant to an offer approved by the Board and made to all stockholders
of the association or subsidiary holding company (except that the parent
mutual holding company may be excluded from the repurchase with the
Board's approval);
(iii) Is limited to the repurchase of qualifying shares of a
director; or
(iv) Is purchased in the open market by a tax-qualified or non-tax-
qualified employee stock benefit plan of the savings association (or of
a subsidiary holding company) in an amount reasonable and appropriate to
fund such plan.
(2) No mutual holding company may purchase shares of its subsidiary
savings association or subsidiary holding company within one year after
a stock issuance, except if the purchase complies with Sec. 239.63. For
purposes of this section, the reference in Sec. 239.63 to five percent
refers to minority shareholders.
(d) Restrictions on waiver of dividends. (1) A mutual holding
company may waive the right to receive any dividend declared by a
subsidiary of the mutual holding company, if--
(i) No insider of the mutual holding company, associate of an
insider, or tax-qualified or non-tax-qualified employee stock benefit
plan of the mutual holding company holds any share of the stock in the
class of stock to which the waiver would apply; or
(ii) The mutual holding company gives written notice to the Board of
the intent of the mutual holding company to waive the right to receive
dividends, not later than 30 days before the date of the proposed date
of payment of the dividend, and the Board does not object to the waiver.
(2) A notice of a waiver under paragraph (d)(1)(ii) of this section
shall include a copy of the resolution of the board of directors of the
mutual holding company together with any supporting materials relied
upon by the board of directors of the mutual holding company, concluding
that the proposed dividend waiver is consistent with the fiduciary
duties of the board
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of directors to the mutual members of the mutual holding company.
The resolution shall include:
(i) A description of the conflict of interest that exists because of
a mutual holding company director's ownership of stock in the subsidiary
declaring dividends and any actions the mutual holding company and board
of directors have taken to eliminate the conflict of interest, such as
waiver by the directors of their right to receive dividends;
(ii) A finding by the mutual holding company's board of directors
that the waiver of dividends is consistent with the board of directors'
fiduciary duties despite any conflict of interest;
(iii) If the mutual holding company has pledged the stock of a
subsidiary holding company or subsidiary savings association as
collateral for a loan made to the mutual holding company, or is subject
to any other loan agreement, an affirmation that the mutual holding
company is able to meet the terms of the loan agreement; and
(iv) An affirmation that a majority of the mutual members of the
mutual holding company eligible to vote have, within the 12 months prior
to the declaration date of the dividend by the subsidiary of the mutual
holding company, approved a waiver of dividends by the mutual holding
company, and any proxy statement used in connection with the member vote
contained--
(A) A detailed description of the proposed waiver of dividends by
the mutual holding company and the reasons the board of directors
requested the waiver of dividends;
(B) The disclosure of any mutual holding company director's
ownership of stock in the subsidiary declaring dividends and any actions
the mutual holding company and board of directors have taken to
eliminate the conflict of interest, such as the directors waiving their
right to receive dividends; and
(C) A provision providing that the proxy concerning the waiver of
dividends given by the mutual members may be used for no more than 12
months from the date it is given.
(3) The Board may not object to a waiver of dividends under
paragraph (d)(1)(ii) of this section if:
(i) The waiver would not be detrimental to the safe and sound
operation of the savings association;
(ii) The board of directors of the mutual holding company expressly
determines that a waiver of the dividend by the mutual holding company
is consistent with the fiduciary duties of the board of directors to the
mutual members of the mutual holding company; and
(iii) The mutual holding company has, prior to December 1, 2009--
(A) Reorganized into a mutual holding company under section 10(o) of
HOLA;
(B) Issued minority stock either from its mid-tier stock holding
company or its subsidiary stock savings association; and
(C) Waived dividends it had a right to receive from the subsidiary
stock savings association.
(4) For a mutual holding company that does not meet each of the
conditions in paragraph (d)(3) of this section, the Board will not
object to a waiver of dividends under paragraph (d)(1)(ii) of this
section if--:
(i) The savings association currently operates in a manner
consistent with the safe and sound operation of a savings association,
and the waiver is not detrimental to the safe and sound operation of the
savings association;
(ii) If the mutual holding company has pledged the stock of a
subsidiary holding company or subsidiary savings association as
collateral for a loan made to the mutual holding company, or is subject
to any other loan agreement, an affirmation that the mutual holding
company is able to meet the terms of the loan agreement;
(iii) Within the 12 months prior to the declaration date of the
dividend by the subsidiary of the mutual holding company, a majority of
the mutual members of the mutual holding company has approved the waiver
of dividends by the mutual holding company. Any proxy statement used in
connection with the member vote must contain--
(A) A detailed description of the proposed waiver of dividends by
the mutual holding company and the reasons the board of directors
requested the waiver of dividends;
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(B) The disclosure of any mutual holding company director's
ownership of stock in the subsidiary declaring dividends and any actions
the mutual holding company and board of directors have taken to
eliminate the conflict of interest, such as the directors waiving their
right to receive dividends; and
(C) A provision providing that the proxy concerning the waiver of
dividends given by the mutual members may be used for no more than 12
months from the date it is given;
(iv) The board of directors of the mutual holding company expressly
determines that the waiver of dividends is consistent with the board of
directors' fiduciary duties despite any conflict of interest;
(v)(A) A majority of the entire board of directors of the mutual
holding company approves the waiver of dividends and any director with
direct or indirect ownership, control, or the power to vote shares of
the subsidiary declaring the dividend, or who otherwise directly or
indirectly benefits through an associate from the waiver of dividends,
has abstained from the board vote; or
(B) Each officer or director of the mutual holding company or its
affiliates, associate of such officer or director, and any tax-qualified
or non-tax-qualified employee stock benefit plan in which such officer
or director participates that holds any share of the stock in the class
of stock to which the waiver would apply waives the right to receive any
dividend declared by a subsidiary of the mutual holding company;
(vi) The Board does not object to the amount of dividends declared
by a subsidiary of the mutual holding company. In reviewing whether a
declaration by a subsidiary of the mutual holding company is
appropriate, the Board may consider, among other factors, the
reasonableness of the entire dividend distribution declared if the
waiver is not approved;
(vii) The waived dividends are excluded from the capital accounts of
the subsidiary holding company or savings association, as applicable,
for purposes of calculating any future dividend payments;
(viii) The mutual holding company appropriately accounts for all
waived dividends in a manner that permits the Board to consider the
waived dividends in evaluating the proposed exchange ratio in the event
of a full conversion of the mutual holding company to stock form; and
(ix) The mutual holding company complies with such other conditions
as the Board may require to prevent conflicts of interest or actions
detrimental to the safe and sound operation of the savings association.
(5) Valuation. (i) The Board will consider waived dividends in
determining an appropriate exchange ratio in the event of a full
conversion to stock form.
(ii) In the case of a savings association that has reorganized into
a mutual holding company, has issued minority stock from a mid-tier
stock holding company or a subsidiary stock savings association of the
mutual holding company, and has waived dividends it had a right to
receive from a subsidiary savings association before December 1, 2009,
the Board shall not consider waived dividends in determining an
appropriate exchange ratio in the event of a full conversion to stock
form.
(e) Restrictions on issuance of stock to insiders. A subsidiary of a
mutual holding company that is not a savings association or subsidiary
holding company may issue stock to any insider, associate of an insider
or tax-qualified or non-tax-qualified employee stock benefit plan of the
mutual holding company or any subsidiary of the mutual holding company,
provided that such persons or plans provide written notice to the
appropriate Reserve Bank at least 30 days prior to the stock issuance,
and the Reserve Bank or the Board does not object to the subsequent
stock issuance. Subsidiary holding companies may issue stock to such
persons only in accordance with Sec. 239.24.
(f) Applicability of rules governing savings and loan holding
companies. Except as expressly provided in this part, mutual holding
companies shall be subject to the provisions of 12 U.S.C. 1467a and 3201
et seq. and the provisions of parts 207, 228, and 238 of this chapter.
(g) Separate vote for charitable organization contribution. In a
mutual holding company stock issuance, a separate
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vote of a majority of the outstanding shares of common stock held by
stockholders other than the mutual holding company or subsidiary holding
company must approve any charitable organization contribution.
Sec. 239.9 Conversion or liquidation of mutual holding companies.
(a) Conversion--(1) Generally. A mutual holding company may convert
to the stock form in accordance with the rules and regulations set forth
in subpart E of this part.
(2) Exchange of subsidiary savings association or subsidiary holding
company stock. Any stock issued by a subsidiary savings association, or
by a subsidiary holding company pursuant to Sec. 239.24, of a mutual
holding company to persons other than the parent mutual holding company
may be exchanged for the stock issued by the successor to parent mutual
holding company in connection with the conversion of the parent mutual
holding company to stock form. The parent mutual holding company and the
subsidiary holding company must demonstrate to the satisfaction of the
Board that the basis for the exchange is fair and reasonable.
(3) If a subsidiary holding company or subsidiary savings
association has issued shares to an entity other than the mutual holding
company, the conversion of the mutual holding company to stock form may
not be consummated unless a majority of the shares issued to entities
other than the mutual holding company vote in favor of the conversion.
This requirement applies in addition to any otherwise required account
holder or shareholder votes.
(b) Involuntary liquidation. (1) The Board may file a petition with
the federal bankruptcy courts requesting the liquidation of a mutual
holding company pursuant to 12 U.S.C. 1467a(o)(9) and title 11, United
States Code, upon the occurrence of any of the following events:
(i) The default of the resulting association, any acquiree
association, or any subsidiary savings association of the mutual holding
company that was in the mutual form when acquired by the mutual holding
company;
(ii) The default of the parent mutual holding company or its
subsidiary holding company; or
(iii) Foreclosure on any pledge by the mutual holding company of
subsidiary savings association stock or subsidiary holding company
stock.
(2) Except as provided in paragraph (b)(3) of this section, the net
proceeds of any liquidation of any mutual holding company shall be
transferred to the members of the mutual holding company and, if
applicable, the stock holders of the subsidiary holding company in
accordance with the charter of the mutual holding company and, if
applicable, the charter of the subsidiary holding company.
(3) If the FDIC incurs a loss as a result of the default of any
subsidiary savings association of a mutual holding company and that
mutual holding company is liquidated pursuant to paragraph (b)(1) of
this section, the FDIC shall succeed to the membership interests of the
depositors of such savings association in the mutual holding company to
the extent of the FDIC's loss.
(c) Voluntary liquidation. The provisions of Sec. 239.16 shall
apply to mutual holding companies.
Sec. 239.10 Procedural requirements.
(a) Proxies and proxy statements--(1) Solicitation of proxies. The
provisions of Sec. Sec. 239.56 and 239.57(a) through (d) and (f)
through (h) shall apply to all solicitations of proxies by any person in
connection with any membership vote required by this part. Proxy
materials must be in the form specified by the Board and contain the
information specified in Sec. Sec. 239.57(b) and 239.57(d), to the
extent such information is relevant to the action that members are being
asked to approve, with such additions, deletions, and other
modifications as are required under this part, or as are necessary or
appropriate under the disclosure standard set forth in Sec. 239.57(f).
File proxies and proxy statements in accordance with Sec. 239.55(c) and
address them to the appropriate Reserve Bank. For purposes of this
paragraph, the term conversion, as it appears in the provisions of part
subpart E of this part, refers to the reorganization, the stock
issuance, or other corporate action, as appropriate.
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(2) Additional proxy disclosure requirements. In addition to the
requirements in paragraph (a) of this section, all proxies requesting
accountholder approval of a mutual holding company reorganization shall
address in detail:
(i) The reasons for the reorganization, including the relative
advantages and disadvantages of undertaking the transaction proposed
instead of a standard conversion;
(ii) Whether management believes the reorganization is in the best
interests of the association and its accountholders and the basis of
that belief;
(iii) The fiduciary duties owed to accountholders by the
association's officers and directors and why the reorganization is in
accord with those duties and is otherwise equitable to the
accountholders and the association;
(iv) Any compensation agreements that will be entered into by
management in connection with the reorganization; and
(v) Whether the mutual holding company intends to waive dividends,
the implications to accountholders, and the reasons such waivers are
consistent with the fiduciary duties of the directors of the mutual
holding company.
(3) Nonconforming minority stock issuances. Subsidiary holding
companies proposing non-conforming minority stock issuances pursuant to
Sec. 239.24(c)(6)(ii) must include in the proxy materials to
accountholders seeking approval of a proposed reorganization an
additional disclosure statement that serves as a cover sheet that
clearly addresses:
(i) The consequences to accountholders of voting to approve a
reorganization in which their subscription rights are prioritized
differently and potentially eliminated; and
(ii) Any intent by the mutual holding company to waive dividends,
and the implications to accountholders.
(4) Use of ``running'' proxies. Unless otherwise prohibited, a
mutual holding company may make use of any proxy conferring general
authority to vote on any and all matters at any meeting of members,
provided that the member granting such proxy has been furnished a proxy
statement regarding the matters and the member does not grant a later-
dated proxy to vote at the meeting at which the matter will be
considered or attend such meeting and vote in person, and further
provided that ``running'' proxies or similar proxies may not be used to
vote for a mutual holding company reorganization, mutual-to-stock
conversion undertaken by a mutual holding company, dividend waiver, or
any other material transaction. Subject to the limitations set forth in
this paragraph, any proxy conferring on the board of directors or
officers of a mutual savings association general authority to cast a
member's votes on any and all matters presented to the members shall be
deemed to cover the member's votes as a member of the mutual holding
company and such authority shall be conferred on the board of directors
or officers of a mutual holding company.
(b) Applications under this part. Except as provided in paragraph
(c) of this section, any application, notice or certification required
to be filed with the Board under this part must be filed in accordance
with Sec. 238.14 of this chapter. The Board will review any filing made
under this part in accordance with Sec. 238.14 of this chapter.
(c) Reorganization Notices and stock issuance applications--(1)
Contents. Each Reorganization Notice submitted to the appropriate
Reserve Bank pursuant to Sec. 239.3(a) and each application for
approval of the issuance of stock submitted to the appropriate Reserve
Bank pursuant to Sec. 239.24(a) shall be in the form and contain the
information specified by the Board.
(2) Filing instructions. Any Reorganization Notice submitted under
Sec. 239.3(a) must be filed in accordance with Sec. 238.14 of this
chapter. Any stock issuance application submitted pursuant to Sec.
239.24(a) shall be filed in accordance with Sec. 239.55.
(3) Public notice, public comment, and meetings. Mutual holding
company reorganizations are subject to applicable public notice, public
comment, and meeting requirements under the Bank Merger Act regulations
at Sec. 238.11(e) of this chapter and the Savings and Loan Holding
Company Act regulations at Sec. 238.14 of this chapter.
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(d) Amendments. Any mutual holding company may amend any notice or
application submitted pursuant to this part or file additional
information with respect thereto upon request of the Board or upon the
mutual holding company's own initiative.
(e) Time-frames. All Reorganization Notices and applications filed
pursuant to this part must be processed in accordance with the
processing procedures at Sec. 238.14 of this chapter. Any related
approvals requested in connection with Reorganization Notices or
applications for approval of stock issuances (including, without
limitation, requests for approval to transfer assets to resulting
associations, to acquire acquiree associations, and to organize
resulting associations or interim associations, and requests for
approval of charters, bylaws, and stock forms) shall be processed
pursuant to the procedures specified in this section in conjunction with
the Reorganization Notice or stock issuance application to which they
pertain, rather than pursuant to any inconsistent procedures specified
elsewhere in this chapter. The approval standards for all such related
applications, however, shall remain unchanged. The review by the Board
of any materials used in connection with the issuance of stock under
Sec. 239.24 must not be subject to the applications processing time-
frames set forth in Sec. Sec. 238.14(f) and (g) of this chapter.
(f) Disclosure. The rules governing disclosure of any notice or
application submitted pursuant to this part, or any public comment
submitted pursuant to paragraph (c) of this section, shall be the same
as set forth in Sec. 238.14(b) of this chapter for notices,
applications, and public comments filed under Sec. 238.14 of this
chapter.
(g) Appeals. Any party aggrieved by a final action by the Board
which approves or disapproves any application or notice pursuant to this
part may obtain review of such action in accordance with 12 U.S.C.
1467a(j).
(h) Federal preemption. This part preempts state law with regard to
the creation and regulation of mutual holding companies.
Sec. 239.11 Subsidiary holding companies.
(a) Subsidiary holding companies. A mutual holding company may
establish a subsidiary holding company as a direct subsidiary to hold
100 percent of the stock of its subsidiary savings association. The
formation and operation of the subsidiary holding company may not be
utilized as a means to evade or frustrate the purposes of this part. The
subsidiary holding company may be established either at the time of the
initial mutual holding company reorganization or at a subsequent date,
subject to the approval of the Board.
(b) Stock issuances. Sec. Sec. 239.24 and 239.25 apply to issuance
of stock by a subsidiary holding company. In the case of a stock
issuance by a subsidiary holding company, the aggregate amount of
outstanding common stock of the association owned or controlled by
persons other than the subsidiary holding company's mutual holding
company parent at the close of the proposed issuance shall be less than
50 percent of the subsidiary holding company's total outstanding common
stock.
(c) Charters and bylaws for subsidiary holding companies. The
charter and bylaws of a subsidiary holding company shall be in the form
set forth in Appendices B and D, respectively.
Sec. 239.12 Communication between members of a mutual holding company.
(a) Right of communication with other members. A member of a mutual
holding company has the right to communicate, as prescribed in paragraph
(b) of this section, with other members of the mutual holding company
regarding any matter related to the mutual holding company's affairs,
except for ``improper'' communications, as defined in paragraph (c) of
this section. The mutual holding company may not defeat that right by
redeeming a savings member's savings account in the subsidiary savings
association.
(b) Member communication procedures. If a member of a mutual holding
company desires to communicate with other members, the following
procedures shall be followed:
(1) The member shall give the mutual holding company a written
request to communicate;
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(2) If the proposed communication is in connection with a meeting of
the mutual holding company's members, the request shall be given at
least thirty days before the annual meeting or 10 days before a special
meeting;
(3) The request shall contain--
(i) The member's full name and address;
(ii) The nature and extent of the member's interest in the mutual
holding company at the time the information is given;
(iii) A copy of the proposed communication; and
(iv) If the communication is in connection with a meeting of the
members, the date of the meeting;
(4) The mutual holding company shall reply to the request within
either--
(i) Fourteen days;
(ii) Ten days, if the communication is in connection with the annual
meeting; or
(iii) Three days, if the communication is in connection with a
special meeting;
(5) The reply shall provide either--
(i) The number of the mutual holding company's members and the
estimated reasonable cost to the mutual holding company of mailing to
them the proposed communication; or
(ii) Notification that the mutual holding company has determined not
to mail the communication because it is ``improper'', as defined in
paragraph (c) of this section;
(6) After receiving the amount of the estimated costs of mailing and
sufficient copies of the communication, the mutual holding company shall
mail the communication to all members, by a class of mail specified by
the requesting member, either--
(i) Within fourteen days;
(ii) Within seven days, if the communication is in connection with
the annual meeting;
(iii) As soon as practicable before the meeting, if the
communication is in connection with a special meeting; or
(iv) On a later date specified by the member;
(7) If the mutual holding company refuses to mail the proposed
communication, it shall return the requesting member's materials
together with a written statement of the specific reasons for refusal,
and shall simultaneously send to the appropriate Reserve Bank a copy of
each of the requesting member's materials, the mutual holding company's
written statement, and any other relevant material. The materials shall
be sent within:
(i) Fourteen days,
(ii) Ten days if the communication is in connection with the annual
meeting, or
(iii) Three days, if the communication is in connection with a
special meeting, after the mutual holding company receives the request
for communication.
(c) Improper communication. A communication is an ``improper
communication'' if it contains material which:
(1) At the time and in the light of the circumstances under which it
is made:
(i) Is false or misleading with respect to any material fact; or
(ii) Omits a material fact necessary to make the statements therein
not false or misleading, or necessary to correct a statement in an
earlier communication on the same subject which has become false or
misleading;
(2) Relates to a personal claim or a personal grievance, or is
solicitous of personal gain or business advantage by or on behalf of any
party;
(3) Relates to any matter, including a general economic, political,
racial, religious, social, or similar cause, that is not significantly
related to the business of the mutual holding company or is not within
the control of the mutual holding company; or
(4) Directly or indirectly and without expressed factual foundation:
(i) Impugns character, integrity, or personal reputation,
(ii) Makes charges concerning improper, illegal, or immoral conduct,
or
(iii) Makes statements impugning the stability and soundness of the
mutual holding company.
Sec. 239.13 Charters.
(a) Charters. The charter of a mutual holding company shall be in
the form set forth in appendix A of this part and may be amended
pursuant to this paragraph. The Board may amend the form of charter set
forth in appendix A to this part.
[[Page 135]]
(b) Corporate title. The corporate title of each mutual holding
company shall include the term ``mutual'' or the abbreviation ``M.H.C.''
(c) Availability of charter. A mutual holding company shall make
available to its members at all times in the offices of each subsidiary
savings association from which the mutual holding company draws members
a true copy of its charter, including any amendments, and shall deliver
such a copy to any member upon request.
Sec. 239.14 Charter amendments.
(a) General. In order to adopt a charter amendment, a mutual holding
company must comply with the following requirements:
(1) Board of directors approval. The board of directors of the
mutual holding company must adopt a resolution proposing the charter
amendment that states the text of such amendment;
(2) Form of filing--(i) Application requirement. If the proposed
charter amendment would render more difficult or discourage a merger,
proxy contest, the assumption of control by a mutual account holder of
the mutual holding company, or the removal of incumbent management; or
involve a significant issue of law or policy; then, the mutual holding
shall submit the charter amendment to the appropriate Reserve Bank for
approval. Applications submitted under this paragraph are subject to the
processing procedures at Sec. 238.14 of this chapter.
(ii) Notice requirement. If the proposed charter amendment does not
implicate paragraph (a)(2)(i) of this section and is permissible under
all applicable laws, rules and regulations, the mutual holding company
shall submit the proposed amendment to the appropriate Reserve Bank at
least 30 days prior to the effective date of the proposed charter
amendment.
(b) Approval--Any charter amendment filed pursuant to paragraph
(a)(2)(ii) of this section shall automatically be approved 30 days from
the date of filing of such amendment with the appropriate Reserve Bank,
provided that the mutual holding company follows the requirements of its
charter in adopting such amendment, unless the Reserve Bank or the Board
notifies the mutual holding company prior to the expiration of such 30-
day period that such amendment is rejected or is deemed to be filed
under the provisions of paragraph (a)(2)(i) of this section.
Notwithstanding anything in paragraph (a) of this section to the
contrary, the following charter amendments, including the adoption of
the Federal mutual holding company charter as set forth in appendix A,
shall be effective and deemed approved at the time of adoption, if
adopted without change and filed with Board, within 30 days after
adoption, provided the mutual holding company follows the requirements
of its charter in adopting such amendments.
(1) Title change. (i) Subject to Sec. 239.13 and this paragraph
(b), a mutual holding company may amend its charter by substituting a
new corporate title in section 1 of its charter.
(ii) Prior to changing its corporate title, a mutual holding company
must file with the Board a written notice indicating the intended
change. The Board shall provide to the mutual holding company a timely
written acknowledgment stating when the notice was received. If, within
30 days of receipt of notice, the Board does not notify the mutual
holding company of its objection to the corporate title change on the
grounds that the title misrepresents the nature of the institution or
the services it offers, the mutual holding company may change its title
by amending its charter in accordance with Sec. 239.14(b) or Sec.
239.22 and the amendment provisions of its charter.
(2) Maximum number of votes. A mutual holding company may amend
section 5 of its charter by substituting the maximum number of votes per
member to any number from 1 to 1000.
(c) Reissuance of charter. A mutual holding company that has amended
its charter may apply to have its charter, including the amendments,
reissued by the Board. Such request for reissuance should be filed with
the appropriate Reserve Bank.
Sec. 239.15 Bylaws.
(a) General. A mutual holding company shall operate under bylaws
that contain provisions that comply with all requirements specified by
the
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Board, the provisions of this section, the mutual holding company's
charter, and all other applicable laws, rules, and regulations provided
that, a bylaw provision inconsistent with the provisions of this section
may be adopted with the approval of the Board. Bylaws may be adopted,
amended or repealed by a majority of the votes cast by the members at a
legal meeting or a majority of the mutual holding company's board of
directors. Throughout this section, the term ``trustee'' may be
substituted for the term ``director'' as relevant.
(b) The following requirements are applicable to mutual holding
companies:
(1) Annual meetings of members. A mutual holding company shall
provide for and conduct an annual meeting of its members for the
election of directors and at which any other business of the mutual
holding company may be conducted. Such meeting shall be held, as
designated by its board of directors, at a location within the state
that constitutes the principal place of business of the subsidiary
savings association, or at any other convenient place the board of
directors may designate, and at a date and time within 150 days after
the end of the mutual holding company's fiscal year. At each annual
meeting, the officers shall make a full report of the financial
condition of the mutual holding company and of its progress for the
preceding year and shall outline a program for the succeeding year.
(2) Special meetings of members. Procedures for calling any special
meeting of the members and for conducting such a meeting shall be set
forth in the bylaws. The subject matter of such special meeting must be
established in the notice for such meeting. The board of directors of
the mutual holding company or the holders of 10 percent or more of the
voting capital shall be entitled to call a special meeting. For purposes
of this section, ``voting capital'' means FDIC-insured deposits as of
the voting record date.
(3) Notice of meeting of members. Notice specifying the date, time,
and place of the annual or any special meeting and adequately describing
any business to be conducted shall be published for two successive weeks
immediately prior to the week in which such meeting shall convene in a
newspaper of general circulation in the city or county in which the
principal place of business of the subsidiary savings association is
located, or mailed postage prepaid at least 15 days and not more than 45
days prior to the date on which such meeting shall convene to each of
its members of record at the last address appearing on the books of the
mutual holding company. A similar notice shall be posted in a
conspicuous place in each of the offices of the subsidiary savings
association during the 14 days immediately preceding the date on which
such meeting shall convene. The bylaws may permit a member to waive in
writing any right to receive personal delivery of the notice. When any
meeting is adjourned for 30 days or more, notice of the adjournment and
reconvening of the meeting shall be given as in the case of the original
meeting.
(4) Fixing of record date. For the purpose of determining members
entitled to notice of or to vote at any meeting of members or any
adjournment thereof, or in order to make a determination of members for
any other proper purpose, the bylaws shall provide for the fixing of a
record date and a method for determining from the books of the
subsidiary savings association the members entitled to vote. Such date
shall be not more than 60 days or fewer than 10 days prior to the date
on which the action, requiring such determination of members, is to be
taken. The same determination shall apply to any adjourned meeting.
(5) Member quorum. Any number of members present and voting,
represented in person or by proxy, at a regular or special meeting of
the members shall constitute a quorum. A majority of all votes cast at
any meeting of the members shall determine any question, unless
otherwise required by regulation. At any adjourned meeting, any business
may be transacted that might have been transacted at the meeting as
originally called. Members present at a duly constituted meeting may
continue to transact business until adjournment.
(6) Voting by proxy. Procedures shall be established for voting at
any annual
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or special meeting of the members by proxy pursuant to the rules and
regulations of the Board, including the placing of such proxies on file
with the secretary of the mutual holding company, for verification,
prior to the convening of such meeting. Proxies may be given
telephonically or electronically as long as the holder uses a procedure
for verifying the identity of the member. All proxies with a term
greater than eleven months or solicited at the expense of the subsidiary
savings association must run to the board of directors as a whole, or to
a committee appointed by a majority of such board.
(7) Communications between members. Provisions relating to
communications between members shall be consistent with Sec. 239.12. No
member, however, shall have the right to inspect or copy any portion of
any books or records of a mutual holding company containing:
(i) A list of depositors in or borrowers from the subsidiary savings
association;
(ii) Their addresses;
(iii) Individual deposit or loan balances or records; or
(iv) Any data from which such information could be reasonably
constructed.
(8) Number of directors, membership. The bylaws shall set forth a
specific number of directors, not a range. The number of directors shall
be not fewer than five nor more than fifteen, unless a higher or lower
number has been authorized by the Board. Each director of the mutual
holding company shall be a member of the mutual holding company.
Directors may be elected for periods of one to three years and until
their successors are elected and qualified, but if a staggered board is
chosen, provision shall be made for the election of approximately one-
third or one-half of the board each year, as appropriate.
(9) Meetings of the board. The board of directors shall determine
the place, frequency, time, procedure for notice, which shall be at
least 24 hours unless waived by the directors, and waiver of notice for
all regular and special meetings. The meetings shall be under the
direction of a chairman, appointed annually by the board; or in the
absence of the chairman, the meetings shall be under the direction of
the president. The board also may permit telephonic participation at
meetings. The bylaws may provide for action to be taken without a
meeting if unanimous written consent is obtained for such action. A
majority of the authorized directors shall constitute a quorum for the
transaction of business. The act of a majority of the directors present
at any meeting at which there is a quorum shall be the act of the board.
(10) Officers, employees, and agents. (i) The bylaws shall contain
provisions regarding the officers of the mutual holding company, their
functions, duties, and powers. The officers of the mutual holding
company shall consist of a president, one or more vice presidents, a
secretary, and a treasurer or comptroller, each of whom shall be elected
annually by the board of directors. Such other officers and assistant
officers and agents as may be deemed necessary may be elected or
appointed by the board of directors or chosen in such other manner as
may be prescribed in the bylaws. Any two or more offices may be held by
the same person, except the offices of president and secretary.
(ii) All officers and agents of the mutual holding company, as
between themselves and the mutual holding company, shall have such
authority and perform such duties in the management of the mutual
holding company as may be provided in the bylaws, or as may be
determined by resolution of the board of directors not inconsistent with
the bylaws. In the absence of any such provision, officers shall have
such powers and duties as generally pertain to their respective offices.
Any officer may be removed by the board of directors with or without
cause, but such removal, other than for cause, shall be without
prejudice to the contractual rights, if any, of the officer so removed.
(iii) Any indemnification provision must provide that any
indemnification is subject to applicable Federal law, rules, and
regulations.
(11) Vacancies, resignation or removal of directors. Members of the
mutual holding company shall elect directors by ballot: Provided, that
in the event of a vacancy on the board, the board of directors may, by
their affirmative vote, fill such vacancy, even if the remaining
directors constitute less than
[[Page 138]]
a quorum. A director elected to fill a vacancy shall be elected to serve
only until the next election of directors by the members. The bylaws
shall set out the procedure for the resignation of a director, which
shall be by written notice or by any other procedure established in the
bylaws. Directors may be removed only for cause as defined in Sec.
239.41, by a vote of the holders of a majority of the shares then
entitled to vote at an election of directors.
(12) Powers of the board. The board of directors shall have the
power:
(i) By resolution, to appoint from among its members and remove an
executive committee and one or more other committees, which committee[s]
shall have and may exercise all the powers of the board between the
meetings or the board; but no such committee shall have the authority of
the board to amend the charter or bylaws, adopt a plan of merger,
consolidation, dissolution, or provide for the disposition of all or
substantially all the property and assets of the mutual holding company.
Such committee shall not operate to relieve the board, or any member
thereof, of any responsibility imposed by law;
(ii) To fix the compensation of directors, officers, and employees;
and to remove any officer or employee at any time with or without cause;
(iii) To exercise any and all of the powers of the mutual holding
company not expressly reserved by the charter to the members.
(13) Nominations for directors. The bylaws shall provide that
nominations for directors may be made at the annual meeting by any
member and shall be voted upon, except, however, the bylaws may require
that nominations by a member must be submitted to the secretary and then
prominently posted in the principal place of business, at least 10 days
prior to the date of the annual meeting. However, if such provision is
made for prior submission of nominations by a member, then the bylaws
must provide for a nominating committee, which, except in the case of a
nominee substituted as a result of death or other incapacity, must
submit nominations to the secretary and have such nominations similarly
posted at least 15 days prior to the date of the annual meeting.
(14) New business. The bylaws shall provide procedures for the
introduction of new business at the annual meeting. Those provisions may
require that such new business be stated in writing and filed with the
secretary prior to the annual meeting at least 30 days prior to the date
of the annual meeting.
(15) Amendment. Bylaws may include any provision for their amendment
that would be consistent with applicable law, rules, and regulations and
adequately addresses its subject and purpose.
(i) Amendments shall be effective:
(A) After approval by a majority vote of the authorized board, or by
a majority of the vote cast by the members of the mutual holding company
at a legal meeting; and
(B) After receipt of any applicable regulatory approval.
(ii) When a mutual holding company fails to meet its quorum
requirement, solely due to vacancies on the board, the bylaws may be
amended by an affirmative vote of a majority of the sitting board.
(16) Miscellaneous. The bylaws may also address the subject of age
limitations for directors or officers as long as they are consistent
with applicable Federal law, rules or regulations, and any other
subjects necessary or appropriate for effective operation of the mutual
holding company.
(c) Form of filing--(1) Application requirement. (i) Any bylaw
amendment shall be submitted to the appropriate Reserve Bank for
approval if it would:
(A) Render more difficult or discourage a merger, proxy contest, the
assumption of control by a mutual account holder of the mutual holding
company, or the removal of incumbent management;
(B) Involve a significant issue of law or policy, including
indemnification, conflicts of interest, and limitations on director or
officer liability; or
(C) Be inconsistent with the requirements of this section or with
applicable laws, rules, regulations, or the mutual holding company's
charter.
(ii) Applications submitted under paragraph (c)(1)(i) of this
section are
[[Page 139]]
subject to the processing procedures at Sec. 238.14 of this chapter.
(iii) For purposes of this paragraph (c), bylaw provisions that
adopt the language of the model bylaws contained in appendix C to this
part, if adopted without change, and filed with Board within 30 days
after adoption, are effective upon adoption. The Board may amend the
model bylaws provided in appendix C to this part.
(2) Filing requirement. If the proposed bylaw amendment does not
implicate paragraph (c)(1) or (c)(3) of this section, then the mutual
holding company shall submit the amendment to the appropriate Reserve
Bank at least 30 days prior to the date the bylaw amendment is to be
adopted by the mutual holding company.
(3) Corporate governance procedures. A mutual holding company may
elect to follow the corporate governance procedures of the laws of the
state where the main office of the institution is located, provided that
such procedures may be elected only to the extent not inconsistent with
applicable Federal statutes, regulations, and safety and soundness, and
such procedures are not of the type described in paragraph (c)(1)(i) of
this section. If this election is selected, a mutual holding company
shall designate in its bylaws the provision or provisions from the body
of law selected for its corporate governance procedures, and shall file
a copy of such bylaws, which are effective upon adoption, within 30 days
after adoption. The submission shall indicate, where not obvious, why
the bylaw provisions do not require an application under paragraph
(c)(1)(i) of this section.
(d) Effectiveness. Any bylaw amendment filed pursuant to paragraph
(c)(2) of this section shall automatically be effective 30 days from the
date of filing of such amendment, provided that the mutual holding
company follows the requirements of its charter and bylaws in adopting
such amendment, unless the Board notifies the mutual holding company
prior to the expiration of the 30-day period that such amendment is
rejected or that such amendment requires an application to be filed
pursuant to paragraph (c)(1) of this section.
(e) Availability of bylaws. A mutual holding company shall make
available to its members at all times in the offices of each subsidiary
savings association from which the mutual holding company draws members
a true copy of its bylaws, including any amendments, and shall deliver
such a copy to any member upon request.
Sec. 239.16 Voluntary dissolution.
(a) A mutual holding company's board of directors may propose a plan
for dissolution of the mutual holding company. All references in this
section to mutual holding company shall also apply to a subsidiary
holding company organized under this part. The plan may provide for
either:
(1) Transfer of all the mutual holding company's assets to another
mutual holding company or home-financing institutions under Federal
charter either for cash sufficient to pay all obligations of the mutual
holding company and retire all outstanding accounts or in exchange for
that mutual holding company's payment of all the mutual holding
company's outstanding obligations and issuance of share accounts or
other evidence of interest to the mutual holding company's members on a
pro rata basis; or
(2) Dissolution in a manner proposed by the directors which they
consider best for all concerned.
(b) The plan, and a statement of reasons for proposing dissolution
and for proposing the plan, shall be submitted to the appropriate
Reserve Bank for approval. The Board will approve the plan if the Board
believes dissolution is advisable and the plan is best for all
concerned. If the Board considers the plan inadvisable, the Board may
either make recommendations to the mutual holding company concerning the
plan or disapprove it. When the plan is approved by the mutual holding
company's board of directors and by the Board, it shall be submitted to
the mutual holding company's members at a duly called meeting and, when
approved by a majority of votes cast at that meeting, shall become
effective. After dissolution in accordance with the plan, a certificate
evidencing dissolution, supported by such evidence as
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the Board may require, shall immediately be filed with the Board. When
the Board receives such evidence satisfactory to the Board, it will
terminate the corporate existence of the dissolved mutual holding
company and the mutual holding company's charter shall thereby be
canceled.
Subpart C_Subsidiary Holding Companies
Sec. 239.20 Scope.
This subpart applies only to a subsidiary holding company of a
mutual holding company.
Sec. 239.21 Charters.
(a) Charters. The charter of a subsidiary holding company of a
mutual holding company shall be in the form set forth in appendix B of
this part and may be amended pursuant to Sec. 239.22. The Board may
amend the form of charter provided in appendix B.
(b) Optional charter provision limiting minority stock ownership.
(1) A subsidiary holding company that engages in its initial minority
stock issuance after October 1, 2008 may, before it conducts its initial
minority stock issuance, at the time it conducts its initial minority
stock issuance, or, subject to the condition below, at any time during
the five years following a minority stock issuance that such subsidiary
holding company conducts in accordance with the purchase priorities set
forth in subpart E of this part, include in its charter the provision
set forth in paragraph (b)(2) of this section. For purposes of the
charter provision set forth in paragraph (b)(2), the definitions set
forth at Sec. 239.22(b)(8) apply. This charter provision expires a
maximum of five years from the date of the minority stock issuance. The
subsidiary holding company may adopt the charter provision set forth in
paragraph (b)(2) of this section after a minority stock issuance only if
it provided, in the offering materials related to its previous minority
stock issuance or issuances, full disclosure of the possibility that the
subsidiary holding company might adopt such a charter provision.
(2) Beneficial ownership limitation. No person may directly or
indirectly offer to acquire or acquire the beneficial ownership of more
than 10 percent of the outstanding stock of any class of voting stock of
the subsidiary holding company held by persons other than the subsidiary
holding company's mutual holding company parent. This limitation expires
on [insert date within five years of minority stock issuance] and does
not apply to a transaction in which an underwriter purchases stock in
connection with a public offering, or the purchase of stock by an
employee stock ownership plan or other tax-qualified employee stock
benefit plan which is exempt from the approval requirements under Sec.
238.12(a)(7) of this chapter.
(c) In the event a person acquires stock in violation of this
section, all stock beneficially owned in excess of 10 percent shall be
considered ``excess stock'' and shall not be counted as stock entitled
to vote and shall not be voted by any person or counted as voting stock
in connection with any matters submitted to the stockholders for a vote.
Sec. 239.22 Charter amendments.
(a) General. In order to adopt a charter amendment, a subsidiary
holding company must comply with the following requirements:
(1) Board of directors approval. The board of directors of the
subsidiary holding company must adopt a resolution proposing the charter
amendment that states the text of such amendment.
(2) Form of filing--(i) Application requirement. If the proposed
charter amendment would render more difficult or discourage a merger,
tender offer, or proxy contest, the assumption of control by a holder of
a block of the subsidiary holding company's stock, the removal of
incumbent management, or involve a significant issue of law or policy,
the subsidiary holding company shall file the proposed amendment with
and shall obtain the prior approval of the Board pursuant to Sec.
238.14 of this chapter; and
(ii) Notice requirement. If the proposed charter amendment does not
implicate paragraph (a)(2)(i) of this section and such amendment is
permissible under
[[Page 141]]
all applicable laws, rules or regulations, the subsidiary holding
company shall submit the proposed amendments to the appropriate Reserve
Bank, at least 30 days prior to the date the proposed charter amendment
is to be mailed for consideration by the subsidiary holding company's
shareholders.
(b) Approval. Any charter amendment filed pursuant to paragraph
(a)(2)(ii) of this section shall automatically be approved 30 days from
the date of filing of such amendment, provided that the subsidiary
holding company follows the requirements of its charter in adopting such
amendment, unless the Board notifies the mutual holding company prior to
the expiration of such 30-day period that such amendment is rejected or
is deemed to be filed under the provisions of paragraph (a)(2)(i) of
this section. In addition, the following charter amendments, including
the adoption of the charter as set forth in appendix B of this part,
shall be approved at the time of adoption, if adopted without change and
filed with the Board within 30 days after adoption, provided the
subsidiary holding company follows the requirements of its charter in
adopting such amendments.
(1) Title change. Prior to changing its corporate title, a
subsidiary holding company must file with the appropriate Reserve Bank a
written notice indicating the intended change. The Reserve Bank shall
provide to the subsidiary holding company a timely written
acknowledgment stating when the notice was received. If, within 30 days
of receipt of notice, the Reserve Bank or the Board does not notify the
subsidiary holding company of its objection on the grounds that the
title misrepresents the nature of the institution or the services it
offers, the subsidiary holding company may change its title by amending
section 1 of its charter in accordance with this section and the
amendment provisions of its charter.
(2) Home office. A subsidiary holding company may amend its charter
by substituting a new domicile in section 2 of its charter.
(3) Number of shares of stock and par value. A subsidiary holding
company may amend Section 5 of its charter to change the number of
authorized shares of stock, the number of shares within each class of
stock, and the par or stated value of such shares.
(4) Capital stock. A subsidiary holding company may amend its
charter by revising Section 5 to read as follows:
Section 5. Capital stock. The total number of shares of all classes
of capital stock that the subsidiary holding company has the authority
to issue is ------, of which ------ shall be common stock of par [or if
no par value is specified the stated] value of ------ per share and of
which [list the number of each class of preferred and the par or if no
par value is specified the stated value per share of each such class].
The shares may be issued from time to time as authorized by the board of
directors without further approval of shareholders, except as otherwise
provided in this Section 5 or to the extent that such approval is
required by governing law, rule, or regulation. The consideration for
the issuance of the shares shall be paid in full before their issuance
and shall not be less than the par [or stated] value. Neither promissory
notes nor future services shall constitute payment or part payment for
the issuance of shares of the subsidiary holding company. The
consideration for the shares shall be cash, tangible or intangible
property (to the extent direct investment in such property would be
permitted), labor, or services actually performed for the subsidiary
holding company, or any combination of the foregoing. In the absence of
actual fraud in the transaction, the value of such property, labor, or
services, as determined by the board of directors of the subsidiary
holding company, shall be conclusive. Upon payment of such
consideration, such shares shall be deemed to be fully paid and
nonassessable. In the case of a stock dividend, that part of the
retained earnings of the subsidiary holding company that is transferred
to common stock or paid-in capital accounts upon the issuance of shares
as a stock dividend shall be deemed to be the consideration for their
issuance.
Except for shares issued in the initial organization of the
subsidiary holding company, no shares of capital stock (including shares
issuable upon conversion, exchange, or exercise of other securities)
shall be issued, directly or indirectly, to officers, directors, or
controlling persons of the association or subsidiary holding company
other than as part of a general public offering or as qualifying shares
to a director, unless their issuance or the plan under which they would
be issued has been approved by a majority of the total votes eligible to
be cast at a legal meeting.
Nothing contained in this Section 5 (or in any supplementary
sections hereto) shall entitle the holders of any class of a series of
capital stock to vote as a separate class or
[[Page 142]]
series or to more than one vote per share, except as to the cumulation
of votes for the election of directors, unless the charter otherwise
provides that there shall be no such cumulative voting: Provided, That
this restriction on voting separately by class or series shall not
apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the board
of directors, less than a majority thereof, in the event of default in
the payment of dividends on any class or series of preferred stock;
(ii) To any provision that would require the holders of preferred
stock, voting as a class or series, to approve the merger or
consolidation of the subsidiary holding company with another corporation
or the sale, lease, or conveyance (other than by mortgage or pledge) of
properties or business in exchange for securities of a corporation other
than the subsidiary holding company if the preferred stock is exchanged
for securities of such other corporation: Provided, That no provision
may require such approval for transactions undertaken with the
assistance or pursuant to the direction of the Board or the Federal
Deposit Insurance Corporation;
(iii) To any amendment which would adversely change the specific
terms of any class or series of capital stock as set forth in this
Section 5 (or in any supplementary sections hereto), including any
amendment which would create or enlarge any class or series ranking
prior thereto in rights and preferences. An amendment which increases
the number of authorized shares of any class or series of capital stock,
or substitutes the surviving subsidiary holding company in a merger or
consolidation for the subsidiary holding company, shall not be
considered to be such an adverse change.
A description of the different classes and series (if any) of the
subsidiary holding company's capital stock and a statement of the
designations, and the relative rights, preferences, and limitations of
the shares of each class of and series (if any) of capital stock are as
follows:
A. Common stock. Except as provided in this Section 5 (or in any
supplementary sections thereto) the holders of the common stock shall
exclusively possess all voting power. Each holder of shares of the
common stock shall be entitled to one vote for each share held by each
holder, except as to the cumulation of votes for the election of
directors, unless the charter otherwise provides that there shall be no
such cumulative voting.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock
having preference over the common stock as to the payment of dividends,
the full amount of dividends and of sinking fund, retirement fund, or
other retirement payments, if any, to which such holders are
respectively entitled in preference to the common stock, then dividends
may be paid on the common stock and on any class or series of stock
entitled to participate therewith as to dividends out of any assets
legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the
subsidiary holding company, the holders of the common stock (and the
holders of any class or series of stock entitled to participate with the
common stock in the distribution of assets) shall be entitled to
receive, in cash or in kind, the assets of the subsidiary holding
company available for distribution remaining after: (i) Payment or
provision for payment of the subsidiary holding company's debts and
liabilities; (ii) distributions or provision for distributions in
settlement of its liquidation account; and (iii) distributions or
provision for distributions to holders of any class or series of stock
having preference over the common stock in the liquidation, dissolution,
or winding up of the subsidiary holding company. Each share of common
stock shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
B. Preferred stock. The subsidiary holding company may provide in
supplementary sections to its charter for one or more classes of
preferred stock, which shall be separately identified. The shares of any
class may be divided into and issued in series, with each series
separately designated so as to distinguish the shares thereof from the
shares of all other series and classes. The terms of each series shall
be set forth in a supplementary section to the charter. All shares of
the same class shall be identical except as to the following relative
rights and preferences, as to which there may be variations between
different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so,
from which date(s), the payment date(s) for dividends, and the
participating or other special rights, if any, with respect to
dividends;
(c) The voting powers, full or limited, if any, of shares of such
series;
(d) Whether the shares of such series shall be redeemable and, if
so, the price(s) at which, and the terms and conditions on which, such
shares may be redeemed;
(e) The amount(s) payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution, or winding
up of the subsidiary holding company;
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(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund
and the manner of its application, including the price(s) at which such
shares may be redeemed or purchased through the application of such
fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the
subsidiary holding company and, if so, the conversion price(s) or the
rate(s) of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions
of such conversion or exchange.
(h) The price or other consideration for which the shares of such
series shall be issued; and
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of
serial preferred stock and whether such shares may be reissued as shares
of the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the
same relative rights as and be identical in all respects with all the
other shares of the same series.
The board of directors shall have authority to divide, by the
adoption of supplementary charter sections, any authorized class of
preferred stock into series, and, within the limitations set forth in
this section and the remainder of this charter, fix and determine the
relative rights and preferences of the shares of any series so
established.
Prior to the issuance of any preferred shares of a series
established by a supplementary charter section adopted by the board of
directors, the subsidiary holding company shall file with the
appropriate Reserve Bank a dated copy of that supplementary section of
this charter established and designating the series and fixing and
determining the relative rights and preferences thereof.
(5) Limitations on subsequent issuances. A subsidiary holding
company may amend its charter to require shareholder approval of the
issuance or reservation of common stock or securities convertible into
common stock under circumstances which would require shareholder
approval under the rules of the New York or American Stock Exchange if
the shares were then listed on the New York or American Stock Exchange.
(6) Cumulative voting. A subsidiary holding company may amend its
charter by substituting the following sentence for the second sentence
in the third paragraph of Section 5: ``Each holder of shares of common
stock shall be entitled to one vote for each share held by such holder
and there shall be no right to cumulate votes in an election of
directors.''
(7) [Reserved]
(8) Anti-takeover provisions following mutual to stock conversion.
Notwithstanding the law of the state in which the subsidiary holding
company is located, a subsidiary holding company may amend its charter
by renumbering existing sections as appropriate and adding a new section
8 as follows:
Section 8. Certain Provisions Applicable for Five Years.
Notwithstanding anything contained in the subsidiary holding company's
charter or bylaws to the contrary, for a period of [specify number of
years up to five] years from the date of completion of the conversion of
the subsidiary holding company from mutual to stock form, the following
provisions shall apply:
A. Beneficial Ownership Limitation. No person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of more
than 10 percent of any class of an equity security of the subsidiary
holding company. This limitation shall not apply to a transaction in
which the subsidiary holding company forms a holding company without
change in the respective beneficial ownership interests of its
stockholders other than pursuant to the exercise of any dissenter and
appraisal rights, the purchase of shares by underwriters in connection
with a public offering, or the purchase of shares by a tax-qualified
employee stock benefit plan which is exempt from the approval
requirements under Sec. 238.12(a) of this chapter.
In the event shares are acquired in violation of this section 8, all
shares beneficially owned by any person in excess of 10 percent shall be
considered ``excess shares'' and shall not be counted as shares entitled
to vote and shall not be voted by any person or counted as voting shares
in connection with any matters submitted to the stockholders for a vote.
For purposes of this section 8, the following definitions apply:
(1) The term ``person'' includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock
company, a trust, an unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring,
holding or disposing of the equity securities of the subsidiary holding
company.
(2) The term ``offer'' includes every offer to buy or otherwise
acquire, solicitation of an offer to sell, tender offer for, or request
or
[[Page 144]]
invitation for tenders of, a security or interest in a security for
value.
(3) The term ``acquire'' includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
(4) The term ``acting in concert'' means (a) knowing participation
in a joint activity or conscious parallel action towards a common goal
whether or not pursuant to an express agreement, or (b) a combination or
pooling of voting or other interests in the securities of an issuer for
a common purpose pursuant to any contract, understanding, relationship,
agreement or other arrangements, whether written or otherwise.
B. Cumulative Voting Limitation. Stockholders shall not be permitted
to cumulate their votes for election of directors.
C. Call for Special Meetings. Special meetings of stockholders
relating to changes in control of the subsidiary holding company or
amendments to its charter shall be called only upon direction of the
board of directors.
(c) Anti-takeover provisions. The Board may grant approval to a
charter amendment not listed in paragraph (b) of this section regarding
the acquisition by any person or persons of its equity securities
provided that the subsidiary holding company shall file as part of its
application for approval an opinion, acceptable to the Board, of counsel
independent from the subsidiary holding company that the proposed
charter provision would be permitted to be adopted by a corporation
chartered by the state in which the principal office of the subsidiary
holding company is located. Any such provision must be consistent with
applicable statutes, regulations, and Board policies. Further, any such
provision that would have the effect of rendering more difficult a
change in control of the subsidiary holding company and would require
for any corporate action (other than the removal of directors) the
affirmative vote of a larger percentage of shareholders than is required
by this part, shall not be effective unless adopted by a percentage of
shareholder vote at least equal to the highest percentage that would be
required to take any action under such provision.
(d) Reissuance of charter. A subsidiary holding company that has
amended its charter may apply to have its charter, including the
amendments, reissued by the Board. Such requests for reissuance should
be filed with the appropriate Reserve Bank, and contain signatures
required by the charter in appendix B to this part, together with such
supporting documents as needed to demonstrate that the amendments were
properly adopted.
Sec. 239.23 Bylaws.
(a) General. At its first organizational meeting, the board of
directors of a subsidiary holding company shall adopt a set of bylaws
for the administration and regulation of its affairs. Bylaws may be
adopted, amended or repealed by either a majority of the votes cast by
the shareholders at a legal meeting or a majority of the board of
directors. The bylaws shall contain sufficient provisions to govern the
subsidiary holding company in accordance with the requirements of
Sec. Sec. 239.26, 239.27, 239.28, and 239.29 and shall not contain any
provision that is inconsistent with those sections or with applicable
laws, rules, regulations or the subsidiary holding company's charter,
except that a bylaw provision inconsistent with Sec. Sec. 239.26,
239.27, 239.28, and 239.29 may be adopted with the approval of the
Board.
(b) Form of filing--(1) Application requirement. (i) Any bylaw
amendment shall be submitted to the appropriate Reserve Bank for
approval if it would:
(A) Render more difficult or discourage a merger, tender offer, or
proxy contest, the assumption of control by a holder of a large block of
the subsidiary holding company's stock, or the removal of incumbent
management; or
(B) Be inconsistent with Sec. Sec. 239.26, 239.27, 239.28, and
239.29, with applicable laws, rules, regulations or the subsidiary
holding company's charter or involve a significant issue of law or
policy, including indemnification, conflicts of interest, and
limitations on director or officer liability.
(ii) Applications submitted under paragraph (b)(1)(i) of this
section are subject to the processing procedures under Sec. 238.14 of
this chapter;
(iii) For purposes of this paragraph (b), bylaw provisions that
adopt the language of the model bylaws contained in appendix D to this
part, if adopted without change and filed with Board within 30 days
after adoption, are effective upon adoption. The Board
[[Page 145]]
may amend the model bylaws provided in appendix D.
(2) Filing requirement. If the proposed bylaw amendment does not
implicate paragraph (b)(1) or (b)(3) of this section and is permissible
under all applicable laws, rules, or regulations, the subsidiary holding
company shall submit the amendment to the appropriate Reserve Bank at
least 30 days prior to the date the bylaw amendment is to be adopted by
the subsidiary holding company.
(3) Corporate governance procedures. A subsidiary holding company
may elect to follow the corporate governance procedures of: The laws of
the state where the main office of the subsidiary holding company is
located; Delaware General Corporation law; or The Model Business
Corporation Act, provided that such procedures may be elected to the
extent not inconsistent with applicable Federal statutes and regulations
and safety and soundness, and such procedures are not of the type
described in paragraph (b)(1)(i) of this section. If this election is
selected, a subsidiary holding company shall designate in its bylaws the
provision or provisions from the body or bodies of law selected for its
corporate governance procedures, and shall file a copy of such bylaws,
which are effective upon adoption, within 30 days after adoption. The
submission shall indicate, where not obvious, why the bylaw provisions
do not require an application under paragraph (b)(1)(i) of this section.
(c) Effectiveness. Any bylaw amendment filed pursuant to paragraph
(b)(2) of this section shall automatically be effective 30 days from the
date of filing of such amendment, provided that the subsidiary holding
company follows the requirements of its charter and bylaws in adopting
such amendment, unless the Board notifies the subsidiary holding company
prior to the expiration of such 30-day period that such amendment is
rejected or requires an application to be filed pursuant to paragraph
(b)(1) of this section.
(d) Effect of subsequent charter or bylaw change. Notwithstanding
any subsequent change to its charter or bylaws, the authority of a
subsidiary holding company to engage in any transaction shall be
determined only by the subsidiary holding company's charter or bylaws
then in effect, unless otherwise provided by Federal law or regulation.
Sec. 239.24 Issuances of stock by subsidiary holding companies
of mutual holding companies.
(a) Requirements. No subsidiary holding company of a mutual holding
company may issue stock to persons other than its mutual holding company
parent in connection with a mutual holding company reorganization, or at
any time subsequent to the subsidiary holding company's acquisition by
the mutual holding company, unless the subsidiary holding company
obtains advance approval of each such issuance from the Board. Approval
of a mutual holding company reorganization filed pursuant to Sec.
239.3(a) shall be deemed to constitute approval of any stock issuance
specifically applied for pursuant to this section in connection with the
reorganization, unless otherwise specified by the Board. The Board shall
approve any proposed issuance that meets each of the criteria set forth
below in paragraphs (a)(1) through (a)(7) of this section.
(1) The proposed issuance is to be made pursuant to a Stock Issuance
Plan that contains all the provisions required by Sec. 239.25.
(2) The Stock Issuance Plan is consistent with the terms of the
subsidiary holding company's charter (or any proposed amendments
thereto), including terms governing the type and amount of stock that
may be issued.
(3) The Stock Issuance Plan would provide the subsidiary holding
company, its mutual holding company parent, and any subsidiary savings
associations of the subsidiary holding company with fully sufficient
capital and would not be inequitable or detrimental to the subsidiary
holding company or its mutual holding company parent or to members of
the mutual holding company parent.
(4) The proposed price or price range of the stock to be issued is
reasonable. The Board shall review the reasonableness of the proposed
price or price range.
[[Page 146]]
(5) The aggregate amount of outstanding common stock of the
subsidiary holding company owned or controlled by persons other than the
subsidiary holding company's mutual holding company parent at the close
of the proposed issuance shall be less than 50 percent of the subsidiary
holding company's total outstanding common stock, unless the subsidiary
holding company was a stock holding company when acquired by the mutual
holding company, in which case the foregoing restriction shall not
apply. Any amount of preferred stock may be issued by any subsidiary
holding company of a mutual holding company to persons other than the
subsidiary holding company's mutual holding company, consistent with any
other applicable laws and regulations.
(6) The subsidiary holding company furnishes the information
required by the Board in connection with the proposed issuance.
(7) The proposed stock issuance meets the convenience and needs
standard of Sec. 239.55(g).
(8) The proposed issuance complies with all other applicable laws
and regulations.
(9) Unless otherwise determined by the Board, the limitations on the
minimum and maximum amounts of the estimated price range required by
Sec. 239.59(c) shall apply.
(b) Related approvals. Approval by the Board of any stock issuance
pursuant to this section shall also be deemed to constitute:
(1) Approval of the form of stock certificate proposed to be
utilized in connection with the stock issuance, provided such form was
included in the application materials filed pursuant to this section;
and
(2) Approval of any charter or bylaw amendment required to authorize
issuance of the stock, provided such amendment was proposed in the
application materials filed pursuant to this section.
(c) Offering restrictions. (1) No representations may be made in any
manner in connection with the offer or sale of any stock issued pursuant
to this section that the price, price range or any other pricing
information related to such stock issuance has been approved by the
Board or that the stock has been approved or disapproved by the Board or
that the Board has endorsed the accuracy or adequacy of any securities
offering documents disseminated in connection with such stock.
(2) The sale of minority stock of the subsidiary holding company to
be made under the minority stock issuance plan, including any sale in a
public offering or direct community marketing, shall be completed as
promptly as possible and within 45 calendar days after the last day of
the subscription period, unless extended by the Board.
(3) In the offer, sale, or purchase of stock issued pursuant to this
section, no person shall:
(i) Employ any device, scheme, or artifice to defraud;
(ii) Make any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading;
or
(iii) Engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon a purchaser or
seller.
(4) Prior to the completion of a stock issuance pursuant to this
section, no person shall transfer, or enter into any agreement or
understanding to transfer, the legal or beneficial ownership of the
stock to be issued to any other person.
(5) Prior to the completion of a stock issuance pursuant to this
section, no person shall make any offer, or any announcement of any
offer, to purchase any stock to be issued, or knowingly acquire any
stock in the issuance, in excess of the maximum purchase limitations
established in the Stock Issuance Plan.
(6) All stock issuances pursuant to this section must:
(i) Comply with Sec. 239.59 and, to the extent applicable, the form
or forms specified by the Board; and
(ii) Provide that the offering be structured in a manner similar to
a standard conversion under subpart E of this part, including the stock
purchase priorities accorded members of the issuing subsidiary holding
company's mutual holding company, unless the subsidiary holding company
would
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qualify for a supervisory conversion if it were to undertake a
conversion under subpart E of this part; or demonstrates to the
satisfaction of the Board that a non-conforming issuance would be more
beneficial to the savings association and subsidiary holding company
compared to a conforming offering, considering, in the aggregate, the
effect of each on the savings association and subsidiary holding
company's financial and managerial resources and future prospects, the
effect of the issuance upon the savings association and subsidiary
holding company, the insurance risk to the Deposit Insurance Fund, and
the convenience and needs of the community to be served.
(7) Notwithstanding the restrictions in paragraph (c)(6)(ii) of this
section, a subsidiary holding company of a mutual holding company may
issue stock as part of a stock benefit plan to any insider, associate of
an insider, or tax qualified or non-tax qualified employee stock benefit
plan of the mutual holding company or subsidiary of the mutual holding
company without including the purchase priorities of subpart E of this
part.
(8) As part of a reorganization, a reasonable amount of shares or
proceeds may be contributed to a charitable organization that complies
with Sec. Sec. 239.64(b) to 239.64(f), provided such contribution does
not result in any taxes on excess business holdings under section 4943
of the Internal Revenue Code (26 U.S.C. 4943).
(d) Procedural and substantive requirements. The procedural and
substantive requirements of subpart E of this part shall apply to all
mutual holding company stock issuances and subsidiary holding company
stock issuances under this section, unless clearly inapplicable, as
determined by the Board. For purposes of this paragraph, the term
conversion as it appears in the provisions of subpart E of this part
shall refer to the stock issuance, and the term mutual holding company
shall refer to the subsidiary holding company undertaking the stock
issuance.
Sec. 239.25 Contents of Stock Issuance Plans.
(a) Mandatory provisions. Each of the provisions mandatory for all
stock issuance plans under this paragraph (a) shall be deemed regulatory
requirements. Each Stock Issuance Plan shall contain a complete
description of all significant terms of the proposed stock issuance
(including the information specified in Sec. 239.65(f) to the extent
known), shall attach and incorporate the proposed form of stock
certificate, the proposed stock order form, and any agreements or other
documents defining the rights of the stockholders, and shall:
(1) Provide that the stock shall be sold at a total price equal to
the estimated pro forma market value of such stock, based upon an
independent valuation;
(2) Provide that the aggregate amount of outstanding common stock of
the subsidiary holding company owned or controlled by persons other than
the subsidiary holding company's mutual holding company parent at the
close of the proposed issuance shall be less than fifty percent of the
subsidiary holding company's total outstanding common stock (This
provision may be omitted if the proposed issuance will be conducted by a
subsidiary holding company that was in the stock form when acquired by
its mutual holding company parent);
(3) Provide that all employee stock ownership plans or other tax-
qualified employee stock benefit plans (collectively, ESOPs) must not
encompass, in the aggregate, more than either 4.9 percent of the
outstanding shares of the subsidiary holding company's common stock or
4.9 percent of the subsidiary holding company's stockholders' equity at
the close of the proposed issuance;
(4) Provide that all ESOPs and management recognition plans (MRPs)
must not encompass, in the aggregate, more than either 4.9 percent of
the outstanding shares of the subsidiary holding company's common stock
or 4.9 percent of the subsidiary holding company's stockholders' equity
at the close of the proposed issuance. However, if the subsidiary
holding company's tangible capital equals at least
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ten percent at the time of implementation of the plan, the Board may
permit such ESOPs and MRPs to encompass, in the aggregate, up to 5.88
percent of the outstanding common stock or stockholders' equity at the
close of the proposed issuance;
(5) Provide that all MRPs must not encompass, in the aggregate, more
than either 1.47 percent of the common stock of the subsidiary holding
company or 1.47 percent of the subsidiary holding company's
stockholders' equity at the close of the proposed issuance. However, if
the subsidiary holding company's tangible capital is at least ten
percent at the time of implementation of the plan, the Board may permit
MRPs to encompass, in the aggregate, up to 1.96 percent of the
outstanding shares of the subsidiary holding company's common stock or
1.96 percent of the savings subsidiary holding company's stockholders'
equity at the close of the proposed issuance;
(6) Provide that all stock option plans (Option Plans) must not
encompass, in the aggregate, more than either 4.9 percent of the
subsidiary holding company's outstanding common stock at the close of
the proposed issuance or 4.9 percent of the subsidiary holding company's
stockholders' equity at the close of the proposed issuance;
(7) Provide that an ESOP, a MRP or an Option Plan modified or
adopted no earlier than one year after the close of: the proposed
issuance, or any subsequent issuance that is made in substantial
conformity with the purchase priorities Sec. 239.59(a) set forth in
subpart E of this part, may exceed the percentage limitations contained
in paragraphs (a)(3) through (6) of this section (plan expansion),
subject to the following two requirements. First, all common stock
awarded in connection with any plan expansion must be acquired for such
awards in the secondary market. Second, such acquisitions must begin no
earlier than when such plan expansion is permitted to be made;
(8)(i) Provide that the aggregate amount of common stock that may be
encompassed under all Option Plans and MRPs, or acquired by all insiders
of the subsidiary holding company and subsidiary savings association and
associates of insiders of the subsidiary holding company and subsidiary
savings association, must not exceed the following percentages of common
stock or stockholders' equity of the subsidiary holding company, held by
persons other than the subsidiary holding company's mutual holding
company parent at the close of the proposed issuance:
------------------------------------------------------------------------
Officer and
director
Institution size purchases
(percent)
------------------------------------------------------------------------
$ 50,000,000 or less.................................... 35
$ 50,000,001-100,000,000................................ 34
$100,000,001-150,000,000................................ 33
$150,000,001-200,000,000................................ 32
$200,000,001-250,000,000................................ 31
$250,000,001-300,000,000................................ 30
$300,000,001-350,000,000................................ 29
$350,000,001-400,000,000................................ 28
$400,000,001-450,000,000................................ 27
$450,000,001-500,000,000................................ 26
Over $500,000,000....................................... 25
------------------------------------------------------------------------
(ii) The percentage limitations contained in paragraph 8(i) of this
section may be exceeded provided that all stock acquired by insiders and
associates of insiders or awarded under all MRPs and Option Plans in
excess of those limitations is acquired in the secondary market. If
acquired for such awards on the secondary market, such acquisitions must
begin no earlier than one year after the close of the proposed issuance
or any subsequent issuance that is made in substantial conformity with
the purchase priorities set forth in subpart E of this part.
(iii) In calculating the number of shares held by insiders and their
associates under this provision, shares awarded but not delivered under
an ESOP, MRP, or Option Plan that are attributable to such persons shall
not be counted as being acquired by such persons.
(9) Provide that the amount of common stock that may be encompassed
under all Option Plans and MRPs must not exceed, in the aggregate, 25
percent of the outstanding common stock held by persons other than the
subsidiary holding company's mutual holding company parent at the close
of the proposed issuance;
(10) Provide that the issuance shall be conducted in compliance
with, to the extent applicable, the forms required by the Board;
[[Page 149]]
(11) Provide that the sales price of the shares of stock to be sold
in the issuance shall be a uniform price determined in accordance with
Sec. 239.24;
(12) Provide that, if at the close of the stock issuance the
subsidiary holding company has more than thirty-five shareholders of any
class of stock, the subsidiary holding company shall promptly register
that class of stock pursuant to the Securities Exchange Act of 1934, as
amended (15 U.S.C. 78a-78jj), and undertake not to deregister such stock
for a period of three years thereafter;
(13) Provide that, if at the close of the stock issuance the
subsidiary holding company has more than one hundred shareholders of any
class of stock, the subsidiary holding company shall use its best
efforts to:
(i) Encourage and assist a market maker to establish and maintain a
market for that class of stock; and
(ii) List that class of stock on a national or regional securities
exchange or on the NASDAQ quotation system;
(14) Provide that, for a period of three years following the
proposed issuance, no insider of the subsidiary holding company or his
or her associates shall purchase, without the prior written approval of
the Board, any stock of the subsidiary holding company except from a
broker dealer registered with the Securities and Exchange Commission,
except that the foregoing restriction shall not apply to:
(i) Negotiated transactions involving more than one percent of the
outstanding stock in the class of stock; or
(ii) Purchases of stock made by and held by any tax-qualified or
non-tax-qualified employee stock benefit plan of the subsidiary holding
company even if such stock is attributable to insiders of the subsidiary
holding company and subsidiary savings association or their associates;
(15) Provide that stock purchased by insiders of the subsidiary
holding company and subsidiary savings association and their associates
in the proposed issuance shall not be sold for a period of at least one
year following the date of purchase, except in the case of death of the
insider or associate;
(16) Provide that, in connection with stock subject to restriction
on sale for a period of time:
(i) Each certificate for such stock shall bear a legend giving
appropriate notice of such restriction;
(ii) Appropriate instructions shall be issued to the subsidiary
holding company's transfer agent with respect to applicable restrictions
on transfer of such stock; and
(iii) Any shares issued as a stock dividend, stock split, or
otherwise with respect to any such restricted stock shall be subject to
the same restrictions as apply to the restricted stock;
(17) Provide that the subsidiary holding company will not offer or
sell any of the stock proposed to be issued to any person whose purchase
would be financed by funds loaned, directly or indirectly, to the person
by the subsidiary holding company;
(18) Provide that, if necessary, the subsidiary holding company's
charter will be amended to authorize issuance of the stock and attach
and incorporate by reference the text of any such amendment;
(19) Provide that the expenses incurred in connection with the
issuance shall be reasonable;
(20) Provide that the Stock Issuance Plan, if proposed as part of a
Reorganization Plan, may be amended or terminated in the same manner as
the Reorganization Plan. Otherwise, the Stock Issuance Plan shall
provide that it may be substantively amended by the board of directors
of the issuing subsidiary holding company as a result of comments from
regulatory authorities or otherwise prior to approval of the Plan by the
Board, and at any time thereafter with the concurrence of the Board; and
that the Stock Issuance Plan may be terminated by the board of directors
at any time prior to approval of the Plan by the Board, and at any time
thereafter with the concurrence of the Board;
(21) Provide that, unless an extension is granted by the Board, the
Stock Issuance Plan shall be terminated if not completed within 90 days
of the date of such approval; or
(22) Provide that the subsidiary holding company may make scheduled
discretionary contributions to a tax-
[[Page 150]]
qualified employee stock benefit plan provided such contributions do not
cause the subsidiary holding company to fail to meet any of its
regulatory capital requirements.
(b) Optional provisions. A Stock Issuance Plan may:
(1) Provide that, in the event the proposed stock issuance is part
of a Reorganization Plan, the stock offering may be commenced
concurrently with or at any time after the mailing to the members of the
reorganizing association and any acquiree association of any proxy
statement(s). The offering may be closed before the required membership
vote(s), provided the offer and sale of the stock shall be conditioned
upon the approval of the Reorganization Plan and Stock Issuance Plan by
the members of the reorganizing association and any acquiree
association;
(2) Provide that any insignificant residue of stock of the
subsidiary holding company not sold in the offering may be sold in such
other manner as provided in the Stock Issuance Plan, with the Board's
approval;
(3) Provide that the subsidiary holding company may issue and sell,
in lieu of shares of its stock, units of securities consisting of stock
and long-term warrants or other equity securities, in which event any
reference in the provisions of this section and in Sec. 239.24 to stock
shall apply to such units of equity securities unless the context
otherwise requires; or
(4) Provide that the subsidiary holding company may reserve shares
representing up to ten percent of the proposed offering for issuance in
connection with an employee stock benefit plan.
(c) Applicability of provisions of Sec. 239.63(a)(1) to minority
stock issuances. Notwithstanding Sec. 239.24(d), Sec. 239.63(a)(1)(ii)
do not apply to minority stock issuances, because the permissible sizes
of ESOPs, MRPs, and Option Plans in minority stock issuances are subject
to each of the requirements set forth at paragraphs (a)(3) through
(a)(9) of this section. Section 239.63(a)(4) through (a)(14), apply for
one year after the subsidiary holding company engages in a minority
stock issuance that is conducted in accordance with the purchase
priorities set forth in subpart E of this part. In addition to the
shareholder vote requirement for Option Plans and MRPs set forth at
Sec. 239.63(a)(1)(vi), any Option Plans and MRPs put to a shareholder
vote after a minority stock issuance that is conducted in accordance
with the purchase priorities set forth in subpart E of this part must be
approved by a majority of the votes cast by stockholders other than the
mutual holding company.
Sec. 239.26 Shareholders.
(a) Shareholder meetings. An annual meeting of the shareholders of
the subsidiary holding company for the election of directors and for the
transaction of any other business of the subsidiary holding company
shall be held annually within 150 days after the end of the subsidiary
holding company's fiscal year. Unless otherwise provided in the
subsidiary holding company's charter, special meetings of the
shareholders may be called by the board of directors or on the request
of the holders of 10 percent or more of the shares entitled to vote at
the meeting, or by such other persons as may be specified in the bylaws
of the subsidiary holding company. All annual and special meetings of
shareholders shall be held at such place as the board of directors may
determine in the state in which the subsidiary savings association has
its principal place of business, or at any other convenient place the
board of directors may designate.
(b) Notice of shareholder meetings. Written notice stating the
place, day, and hour of the meeting and the purpose or purposes for
which the meeting is called shall be delivered not fewer than 20 nor
more than 50 days before the date of the meeting, either personally or
by mail, by or at the direction of the chairman of the board, the
president, the secretary, or the directors, or other natural persons
calling the meeting, to each shareholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the mail, addressed to the shareholder at the address
appearing on the stock transfer
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books or records of the subsidiary holding company as of the record date
prescribed in paragraph (c) of this section, with postage thereon
prepaid. When any shareholders' meeting, either annual or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be
given as in the case of an original meeting. Notwithstanding anything in
this section, however, a subsidiary holding company that is wholly owned
shall not be subject to the shareholder notice requirement.
(c) Fixing of record date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or shareholders entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the board of directors shall
fix in advance a date as the record date for any such determination of
shareholders. Such date in any case shall be not more than 60 days and,
in case of a meeting of shareholders, not less than 10 days prior to the
date on which the particular action, requiring such determination of
shareholders, is to be taken. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any
adjournment thereof.
(d) Voting lists. (1) At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer
books for the shares of the subsidiary holding company shall make a
complete list of the stockholders of record entitled to vote at such
meeting, or any adjournments thereof, arranged in alphabetical order,
with the address and the number of shares held by each. This list of
shareholders shall be kept on file at the home office of the subsidiary
holding company and shall be subject to inspection by any shareholder of
record or the stockholder's agent during the entire time of the meeting.
The original stock transfer book shall constitute prima facie evidence
of the stockholders entitled to examine such list or transfer books or
to vote at any meeting of stockholders. Notwithstanding anything in this
section, however, a subsidiary holding company that is wholly owned
shall not be subject to the voting list requirements.
(2) In lieu of making the shareholders list available for inspection
by any shareholders as provided in paragraph (d)(1) of this section, the
board of directors may perform such acts as required by paragraphs (a)
and (b) of Rule 14a-7 of the General Rules and Regulations under the
Securities and Exchange Act of 1934 (17 CFR 240.14a-7) as may be duly
requested in writing, with respect to any matter which may be properly
considered at a meeting of shareholders, by any shareholder who is
entitled to vote on such matter and who shall defray the reasonable
expenses to be incurred by the subsidiary holding company in performance
of the act or acts required.
(e) Shareholder quorum. A majority of the outstanding shares of the
subsidiary holding company entitled to vote, represented in person or by
proxy, shall constitute a quorum at a meeting of shareholders. The
shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum. If a quorum is present,
the affirmative vote of the majority of the shares represented at the
meeting and entitled to vote on the subject matter shall be the act of
the stockholders, unless the vote of a greater number of stockholders
voting together or voting by classes is required by law or the charter.
Directors, however, are elected by a plurality of the votes cast at an
election of directors.
(f) Shareholder voting-- (1) Proxies. Unless otherwise provided in
the subsidiary holding company's charter, at all meetings of
shareholders, a shareholder may vote in person or by proxy executed in
writing by the shareholder or by a duly authorized attorney in fact.
Proxies may be given telephonically or electronically as long as the
holder uses a procedure for verifying the identity of the shareholder. A
proxy may designate as holder a corporation, partnership or company, or
other person. Proxies solicited on behalf of the management shall be
voted as directed by the shareholder or,
[[Page 152]]
in the absence of such direction, as determined by a majority of the
board of directors. No proxy shall be valid more than eleven months from
the date of its execution except for a proxy coupled with an interest.
(2) Shares controlled by subsidiary holding company. Neither
treasury shares of its own stock held by the subsidiary holding company
nor shares held by another corporation, if a majority of the shares
entitled to vote for the election of directors of such other corporation
are held by the subsidiary holding company, shall be voted at any
meeting or counted in determining the total number of outstanding shares
at any given time for purposes of any meeting.
(g) Nominations and new business submitted by shareholders.
Nominations for directors and new business submitted by shareholders
shall be voted upon at the annual meeting if such nominations or new
business are submitted in writing and delivered to the secretary of the
subsidiary holding company at least five days prior to the date of the
annual meeting. Ballots bearing the names of all the natural persons
nominated shall be provided for use at the annual meeting.
(h) Informal action by stockholders. If the bylaws of the subsidiary
holding company so provide, any action required to be taken at a meeting
of the stockholders, or any other action that may be taken at a meeting
of the stockholders, may be taken without a meeting if consent in
writing has been given by all the stockholders entitled to vote with
respect to the subject matter.
Sec. 239.27 Board of directors.
(a) General powers and duties. The business and affairs of the
subsidiary holding company shall be under the direction of its board of
directors. The board of directors shall annually elect a chairman of the
board from among its members and shall designate the chairman of the
board, when present, to preside at its meeting. Directors need not be
stockholders unless the bylaws so require.
(b) Number and term. The bylaws shall set forth a specific number of
directors, not a range. The number of directors shall be not fewer than
five nor more than fifteen, unless a higher or lower number has been
authorized by the Board. Directors shall be elected for a term of one to
three years and until their successors are elected and qualified. If a
staggered board is chosen, the directors shall be divided into two or
three classes as nearly equal in number as possible and one class shall
be elected by ballot annually. In the case of a converting or newly
chartered subsidiary holding company where all directors shall be
elected at the first election of directors, if a staggered board is
chosen, the terms shall be staggered in length from one to three years.
(c) Regular meetings. A regular meeting of the board of directors
shall be held immediately after, and at the same place as, the annual
meeting of shareholders. The board of directors shall determine the
place, frequency, time and procedure for notice of regular meetings.
(d) Quorum. A majority of the number of directors shall constitute a
quorum for the transaction of business at any meeting of the board of
directors. The act of the majority of the directors present at a meeting
at which a quorum is present shall be the act of the board of directors,
unless a greater number is prescribed by regulation of the Board.
(e) Vacancies. Any vacancy occurring in the board of directors may
be filled by the affirmative vote of a majority of the remaining
directors although less than a quorum of the board of directors. A
director elected to fill a vacancy shall be elected to serve only until
the next election of directors by the shareholders. Any directorship to
be filled by reason of an increase in the number of directors may be
filled by election by the board of directors for a term of office
continuing only until the next election of directors by the
shareholders.
(f) Removal or resignation of directors. (1) At a meeting of
shareholders called expressly for that purpose, any director may be
removed only for cause, as defined in Sec. 239.41, by a vote of the
holders of a majority of the shares then entitled to vote at an election
of directors.
[[Page 153]]
Subsidiary holding companies may provide for procedures regarding
resignations in the bylaws.
(2) If less than the entire board is to be removed, no one of the
directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election
of the class of directors of which such director is a part.
(3) Whenever the holders of the shares of any class are entitled to
elect one or more directors by the provisions of the charter or
supplemental sections thereto, the provisions of this section shall
apply, in respect to the removal of a director or directors so elected,
to the vote of the holders of the outstanding shares of that class and
not to the vote of the outstanding shares as a whole.
(g) Executive and other committees. The board of directors, by
resolution adopted by a majority of the full board, may designate from
among its members an executive committee and one or more other
committees each of which, to the extent provided in the resolution or
bylaws of the subsidiary holding company, shall have and may exercise
all of the authority of the board of directors, except no committee
shall have the authority of the board of directors with reference to:
the declaration of dividends; the amendment of the charter or bylaws of
the subsidiary holding company; recommending to the stockholders a plan
of merger, consolidation, or conversion; the sale, lease, or other
disposition of all, or substantially all, of the property and assets of
the subsidiary holding company otherwise than in the usual and regular
course of its business; a voluntary dissolution of the subsidiary
holding company; a revocation of any of the foregoing; or the approval
of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest. The
designation of any committee and the delegation of authority thereto
shall not operate to relieve the board of directors, or any director, of
any responsibility imposed by law or regulation.
(h) Notice of special meetings. Written notice of at least 24 hours
regarding any special meeting of the board of directors or of any
committee designated thereby shall be given to each director in
accordance with the bylaws, although such notice may be waived by the
director. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened. Neither
the business to be transacted at, nor the purpose of, any meeting need
be specified in the notice or waiver of notice of such meeting. The
bylaws may provide for telephonic participation at a meeting.
(i) Action without a meeting. Any action required or permitted to be
taken by the board of directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the actions so taken,
shall be signed by all of the directors.
(j) Presumption of assent. A director of the subsidiary holding
company who is present at a meeting of the board of directors at which
action on any subsidiary holding company matter is taken shall be
presumed to have assented to the action taken unless his or her dissent
or abstention shall be entered in the minutes of the meeting or unless a
written dissent to such action shall be filed with the individual acting
as the secretary of the meeting before the adjournment thereof or shall
be forwarded by registered mail to the secretary of the subsidiary
holding company within five days after the date on which a copy of the
minutes of the meeting is received. Such right to dissent shall not
apply to a director who voted in favor of such action.
(k) Age limitation on directors. A subsidiary holding company may
provide a bylaw on age limitation for directors. Bylaws on age
limitations must comply with all Federal laws, rules and regulations.
Sec. 239.28 Officers.
(a) Positions. The officers of the subsidiary holding company shall
be a president, one or more vice presidents, a secretary, and a
treasurer or comptroller, each of whom shall be elected by the board of
directors. The board of
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directors may also designate the chairman of the board as an officer.
The offices of the secretary and treasurer or comptroller may be held by
the same individual and the vice president may also be either the
secretary or the treasurer or comptroller. The board of directors may
designate one or more vice presidents as executive vice president or
senior vice president. The board of directors may also elect or
authorize the appointment of such other officers as the business of the
subsidiary holding company may require. The officers shall have such
authority and perform such duties as the board of directors may from
time to time authorize or determine. In the absence of action by the
board of directors, the officers shall have such powers and duties as
generally pertain to their respective offices.
(b) Removal. Any officer may be removed by the board of directors
whenever in its judgment the best interests of the subsidiary holding
company will be served thereby; but such removal, other than for cause,
shall be without prejudice to the contractual rights, if any, of the
individual so removed. Employment contracts shall conform with Sec.
239.41.
(c) Age limitation on officers. A subsidiary holding company may
provide a bylaw on age limitation for officers. Bylaws on age
limitations must comply with all Federal laws, rules, and regulations.
Sec. 239.29 Certificates for shares and their transfer.
(a) Certificates for shares. Certificates representing shares of
capital stock of the subsidiary holding company shall be in such form as
shall be determined by the board of directors and approved by the Board.
The certificates shall be signed by the chief executive officer or by
any other officer of the subsidiary holding company authorized by the
board of directors, attested by the secretary or an assistant secretary,
and sealed with the corporate seal or a facsimile thereof. The
signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a
registrar other than the subsidiary holding company itself or one of its
employees. Each certificate for shares of capital stock shall be
consecutively numbered or otherwise identified. The name and address of
the person to whom the shares are issued, with the number of shares and
date of issue, shall be entered on the stock transfer books of the
subsidiary holding company. All certificates surrendered to the
subsidiary holding company for transfer shall be cancelled and no new
certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and cancelled, except that
in the case of a lost or destroyed certificate a new certificate may be
issued upon such terms and indemnity to the subsidiary holding company
as the board of directors may prescribe.
(b) Transfer of shares. Transfer of shares of capital stock of the
subsidiary holding company shall be made only on its stock transfer
books. Authority for such transfer shall be given only by the holder of
record or by a legal representative, who shall furnish proper evidence
of such authority, or by an attorney authorized by a duly executed power
of attorney and filed with the subsidiary holding company. The transfer
shall be made only on surrender for cancellation of the certificate for
the shares. The person in whose name shares of capital stock stand on
the books of the subsidiary holding company shall be deemed by the
subsidiary holding company to be the owner for all purposes.
Sec. 239.30 Annual reports; books and records.
(a) Annual reports to stockholders. A subsidiary holding company not
wholly-owned by a holding company shall, within 130 days after the end
of its fiscal year, mail to each of its stockholders entitled to vote at
its annual meeting an annual report containing financial statements that
satisfy the requirements of rule 14a-3 under the Securities Exchange Act
of 1934. (17 CFR 240.14a-3). Concurrently with such mailing a
certification of such mailing signed by the chairman of the board, the
president or a vice president of the subsidiary holding company,
together with a copy of the report, shall be transmitted by the
subsidiary holding
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company to the appropriate Reserve Bank.
(b) Books and records. (1) Each subsidiary holding company shall
keep correct and complete books and records of account; shall keep
minutes of the proceedings of its stockholders, board of directors, and
committees of directors; and shall keep at its home office or at the
office of its transfer agent or registrar, a record of its stockholders,
giving the names and addresses of all stockholders, and the number,
class and series, if any, of the shares held by each.
(2) Any stockholder or group of stockholders of a subsidiary holding
company, holding of record the number of voting shares of such
subsidiary holding company specified below, upon making written demand
stating a proper purpose, shall have the right to examine, in person or
by agent or attorney, at any reasonable time or times, nonconfidential
portions of its books and records of account, minutes and record of
stockholders and to make extracts therefrom. Such right of examination
is limited to a stockholder or group of stockholders holding of record:
(i) Voting shares having a cost of not less than $100,000 or
constituting not less than one percent of the total outstanding voting
shares, provided in either case such stockholder or group of
stockholders have held of record such voting shares for a period of at
least six months before making such written demand, or
(ii) Not less than five percent of the total outstanding voting
shares.
No stockholder or group of stockholders of a subsidiary holding
company shall have any other right under this section or common law to
examine its books and records of account, minutes and record of
stockholders, except as provided in its bylaws with respect to
inspection of a list of stockholders.
(3) The right to examination authorized by paragraph (b)(2) of this
section and the right to inspect the list of stockholders provided by a
subsidiary holding company's bylaws may be denied to any stockholder or
group of stockholders upon the refusal of any such stockholder or group
of stockholders to furnish such subsidiary holding company, its transfer
agent or registrar an affidavit that such examination or inspection is
not desired for any purpose which is in the interest of a business or
object other than the business of the subsidiary holding company, that
such stockholder has not within the five years preceding the date of the
affidavit sold or offered for sale, and does not now intend to sell or
offer for sale, any list of stockholders of the subsidiary holding
company or of any other corporation, and that such stockholder has not
within said five-year period aided or abetted any other person in
procuring any list of stockholders for purposes of selling or offering
for sale such list.
(4) Notwithstanding any provision of this section or common law, no
stockholder or group of stockholders shall have the right to obtain,
inspect or copy any portion of any books or records of a subsidiary
holding company containing:
(i) A list of depositors in or borrowers from such subsidiary
holding company;
(ii) Their addresses;
(iii) Individual deposit or loan balances or records; or
(iv) Any data from which such information could be reasonably
constructed.
Sec. 239.31 Indemnification; employment contracts.
(a) Restrictions on indemnification. The provisions of Sec. 239.40
shall apply to subsidiary holding companies.
(b) Restrictions on employment contracts. The provisions of Sec.
239.41 and any policies of the Board thereunder shall apply to
subsidiary holding companies.
Subpart D_Indemnification; Employment Contracts
Sec. 239.40 Indemnification of directors, officers and employees.
A mutual holding company shall indemnify its directors, officers,
and employees in accordance with the following requirements:
(a) Definitions and rules of construction. (1) Definitions for
purposes of this section.
(i) Action means any judicial or administrative proceeding, or
threatened proceeding, whether civil, criminal, or
[[Page 156]]
otherwise, including any appeal or other proceeding for review;
(ii) Court includes, without limitation, any court to which or in
which any appeal or any proceeding for review is brought.
(iii) Final judgment means a judgment, decree, or order which is not
appealable or as to which the period for appeal has expired with no
appeal taken.
(iv) Settlement includes entry of a judgment by consent or
confession or a plea of guilty or nolo contendere.
(2) References in this section to any individual or other person,
including any mutual holding company, shall include legal
representatives, successors, and assigns thereof.
(b) General. Subject to paragraphs (c) and (g) of this section, a
mutual holding company shall indemnify any person against whom an action
is brought or threatened because that person is or was a director,
officer, or employee of the mutual holding company, for:
(1) Any amount for which that person becomes liable under a judgment
if such action; and
(2) Reasonable costs and expenses, including reasonable attorney's
fees, actually paid or incurred by that person in defending or settling
such action, or in enforcing his or her rights under this section if he
or she attains a favorable judgment in such enforcement action.
(c) Requirements. Indemnification shall be made to such period under
paragraph (b) of this section only if:
(1) Final judgment on the merits is in his or her favor; or
(2) In case of:
(i) Settlement,
(ii) Final judgment against him or her, or
(iii) Final judgment in his or her favor, other than on the merits,
if a majority of the disinterested directors of the mutual holding
company determine that he or she was acting in good faith within the
scope of his or her employment or authority as he or she could
reasonably have perceived it under the circumstances and for a purpose
he or she could reasonably have believed under the circumstances was in
the best interests of the mutual holding company or its members.
However, no indemnification shall be made unless the mutual holding
company gives the Board at least 60 days' notice of its intention to
make such indemnification. Such notice shall state the facts on which
the action arose, the terms of any settlement, and any disposition of
the action by a court. Such notice, a copy thereof, and a certified copy
of the resolution containing the required determination by the board of
directors shall be sent to the appropriate Reserve Bank, who shall
promptly acknowledge receipt thereof. The notice period shall run from
the date of such receipt. No such indemnification shall be made if the
Board advises the mutual holding company in writing, within such notice
period, of its objection to the indemnification.
(d) Insurance. A mutual holding company may obtain insurance to
protect it and its directors, officers, and employees from potential
losses arising from claims against any of them for alleged wrongful
acts, or wrongful acts, committed in their capacity as directors,
officers, or employees. However, no mutual holding company may obtain
insurance which provides for payment of losses of any individual
incurred as a consequence of his or her willful or criminal misconduct.
(e) Payment of expenses. If a majority of the directors of a mutual
holding company concludes that, in connection with an action, any person
ultimately may become entitled to indemnification under this section,
the directors may authorize payment of reasonable costs and expenses,
including reasonable attorneys' fees, arising from the defense or
settlement of such action. Nothing in this paragraph shall prevent the
directors of a mutual holding company from imposing such conditions on a
payment of expenses as they deem warranted and in the interests of the
mutual holding company. Before making advance payment of expenses under
this paragraph, the mutual holding company shall obtain an agreement
that the mutual holding company will be repaid if the person on whose
behalf payment is made is later determined not to be entitled to such
indemnification.
(f) Exclusiveness of provisions. No mutual holding company shall
indemnify
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any person referred to in paragraph (b) of this section or obtain
insurance referred to in paragraph (d) of the section other than in
accordance with this section. However, a mutual holding company which
has a bylaw in effect relating to indemnification of its personnel shall
be governed solely by that bylaw, except that its authority to obtain
insurance shall be governed by paragraph (d) of this section.
(g) The indemnification provided for in paragraph (b) of this
section is subject to and qualified by 12 U.S.C. 1821(k).
Sec. 239.41 Employment contracts.
(a) General. A mutual holding company may enter into an employment
contract with its officers and other employees only in accordance with
the requirements of this section. All employment contracts shall be in
writing and shall be approved specifically by the respective mutual
holding company's board of directors. A mutual holding company shall not
enter into an employment contract with any of its officers or other
employees if such contract would constitute an unsafe or unsound
practice. The making of such an employment contract would be an unsafe
or unsound practice if such contract could lead to material financial
loss or damage to the mutual holding company or could interfere
materially with the exercise by the members of its board of directors of
their duty or discretion provided by law, charter, bylaw or regulation
as to the employment or termination of employment of an officer or
employee of the mutual holding company. This may occur, depending upon
the circumstances of the case, where an employment contract provides for
an excessive term.
(b) Required provisions. Each employment contract shall provide
that:
(1) The mutual holding company's board of directors may terminate
the officer or employee's employment at any time, but any termination by
the mutual holding company's board of directors other than termination
for cause, shall not prejudice the officer or employee's right to
compensation or other benefits under the contract. The officer or
employee shall have no right to receive compensation or other benefits
for any period after termination for cause. Termination for cause shall
include termination because of the officer or employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of the contract.
(2) If the officer or employee is suspended and/or temporarily
prohibited from participating in the conduct of the mutual holding
company's affairs by a notice served under section 8 (e)(3) or (g)(1) of
Federal Deposit Insurance Act (12 U.S.C. 1818 (e)(3) and (g)(1)) the
mutual holding company's obligations under the contract shall be
suspended as of the date of service unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the mutual
holding company may in its discretion:
(i) Pay the officer or employee all or part of the compensation
withheld while its contract obligations were suspended, and
(ii) Reinstate (in whole or in part) any of its obligations which
were suspended.
(3) If the officer or employee is removed and/or permanently
prohibited from participating in the conduct of the mutual holding
company's affairs by an order issued under section 8 (e)(4) or (g)(1) of
the Federal Deposit Insurance Act (12 U.S.C. 1818 (e)(4) or (g)(1)), all
obligations of the mutual holding company under the contract shall
terminate as of the effective date of the order, but vested rights of
the contracting parties shall not be affected.
(4) If the subsidiary savings association is in default (as defined
in section 3(x)(1) of the Federal Deposit Insurance Act), all
obligations under the contract shall terminate as of the date of
default, but this paragraph (b) shall not affect any vested rights of
the contracting parties: Provided, that this paragraph (b) need not be
included in an employment contract if prior written approval is secured
from the Board.
(5) If the mutual holding company is subject to bankruptcy
proceedings
[[Page 158]]
under title 11 of the United States Code, all obligations of the mutual
holding company under the contract shall terminate as of the date that
the petition is filed, but vested rights of the contracting parties
shall not be affected: Provided, that this paragraph (b) need not be
included in an employment contract if prior written approval is secured
from the Board.
(6) All obligations under the contract shall be terminated, except
to the extent determined that continuation of the contract is necessary
to the continued operation of the mutual holding company--
(i) By the Board, at the time the Federal Deposit Insurance
Corporation enters into an agreement to provide assistance to or on
behalf of the subsidiary savings association under the authority
contained in 13(c) of the Federal Deposit Insurance Act; or
(ii) By the Board, at the time the Board approves a supervisory
merger to resolve problems related to operation of the mutual holding
company or when the mutual holding company is determined by the Board to
be in an unsafe or unsound condition.
Subpart E_Conversions From Mutual to Stock Form
Sec. 239.50 Purpose and scope.
(a) General. This subpart governs how a mutual holding company may
convert from the mutual to the stock form of ownership. This subpart
supersedes all inconsistent charter and bylaw provisions of mutual
holding companies converting to stock form.
(b) Prescribed forms. A mutual holding company must use the forms
prescribed under this subpart and provide such information as the Board
may require under the forms by regulation or otherwise. The forms
required under this subpart include: Form AC (Application for
Conversion); Form PS (Proxy Statement); Form OC (Offering Circular); and
Form OF (Order Form).
(c) Waivers. The Board may waive any requirement of this subpart or
a provision in any prescribed form. To obtain a waiver, a mutual holding
company must file a written request with the Board that:
(1) Specifies the requirement(s) or provision(s) that the mutual
holding company wants the Board to waive;
(2) Demonstrates that the waiver is equitable; is not detrimental to
the mutual holding company, mutual members, or other mutual holding
companies or savings associations; and is not contrary to the public
interest; and
(3) Includes an opinion of counsel demonstrating that applicable law
does not conflict with the waiver of the requirement or provision.
Sec. 239.51 Acquiring another insured stock depository institution
as part of a conversion.
When a mutual holding company converts to stock form, the subsidiary
savings association may acquire for cash or stock another insured
depository institution that is already in the stock form of ownership.
Sec. 239.52 Definitions.
The following definitions apply to this subpart and the forms
prescribed under this subpart:
(a) Association members or members are persons who, under applicable
law, are eligible to vote at the meeting on conversion.
(b) Eligibility record date is the date for determining eligible
account holders. The eligibility record date must be at least one year
before the date that the board of directors adopts the plan of
conversion.
(c) Eligible account holders are any persons holding qualifying
deposits on the eligibility record date.
(d) IRS is the United States Internal Revenue Service.
(e) Local community includes:
(1) Every county, parish, or similar governmental subdivision in
which the mutual holding company has a home or branch office;
(2) Each county's, parish's, or subdivision's metropolitan
statistical area;
(3) All zip code areas in the mutual holding company's Community
Reinvestment Act assessment area; and
(4) Any other area or category the mutual holding company sets out
in its plan of conversion, as approved by the Board.
[[Page 159]]
(f) Mutual holding company has the same meaning in this subpart as
that term is given in subpart A. For purposes of this subpart,
references to mutual holding company shall also include a resulting
stock holding company, where applicable.
(g) Offer, offer to sell, or offer for sale is an attempt or offer
to dispose of, or a solicitation of an offer to buy, a security or
interest in a security for value. Preliminary negotiations or agreements
with an underwriter, or among underwriters who are or will be in privity
of contract with the mutual holding company or resulting stock holding
company, are not offers, offers to sell, or offers for sale.
(h) Proxy soliciting material includes a proxy statement, form of
proxy, or other written or oral communication regarding the conversion.
(i) Purchase or buy includes every contract to acquire a security or
interest in a security for value.
(j) Qualifying deposit is the total balance in an account holder's
savings accounts at the close of business on the eligibility or
supplemental eligibility record date. The mutual holding company's plan
of conversion may provide that only savings accounts with total deposit
balances of $50 or more will qualify.
(k) Resulting stock holding company means the stock savings and loan
holding company that is issuing stock in connection with conversion of a
mutual holding company pursuant to this subpart.
(l) Sale or sell includes every contract to dispose of a security or
interest in a security for value. An exchange of securities in a merger
or acquisition approved by the Board is not a sale.
(m) Solicitation and solicit is a request for a proxy, whether or
not accompanied by or included in a form of proxy; a request to execute,
not execute, or revoke a proxy; or the furnishing of a form of proxy or
other communication reasonably calculated to cause the members to
procure, withhold, or revoke a proxy. Solicitation or solicit does not
include providing a form of proxy at the unsolicited request of a
member, the acts required to mail communications for members, or
ministerial acts performed on behalf of a person soliciting a proxy.
(n) Subscription offering is the offering of shares through
nontransferable subscription rights to:
(1) Eligible account holders under Sec. 239.59(h);
(2) Tax-qualified employee stock ownership plans under Sec.
239.59(m);
(3) Supplemental eligible account holders under Sec. 239.59(h); and
(4) Other voting members under Sec. 239.59(j).
(o) Supplemental eligibility record date is the date for determining
supplemental eligible account holders. The supplemental eligibility
record date is the last day of the calendar quarter before the Board
approves the conversion and will occur only if the Board has not
approved the conversion within 15 months of the eligibility record date.
(p) Supplemental eligible account holders are any persons, except
officers, directors, and their associates of the mutual holding company
or subsidiary savings association, holding qualifying deposits on the
supplemental eligibility record date.
(q) Underwriter is any person who purchases any securities from the
mutual holding company or resulting stock holding company with a view to
distributing the securities, offers or sells securities for the mutual
stock holding company or resulting stock holding company in connection
with the securities' distribution, or participates or has a direct or
indirect participation in the direct or indirect underwriting of any
such undertaking. Underwriter does not include a person whose interest
is limited to a usual and customary distributor's or seller's commission
from an underwriter or dealer.
Sec. 239.53 Prior to conversion.
(a) Pre-filing meeting and consultation. (1) The mutual holding
company's board, or a subcommittee of the board, may meet with the staff
of the appropriate Reserve Bank or Board staff before the mutual holding
company's board of directors votes on the plan of conversion. At that
meeting the mutual holding company may provide the Reserve Bank or Board
staff with a written strategic plan that outlines the objectives of the
proposed conversion
[[Page 160]]
and the intended use of the conversion proceeds.
(2) The mutual holding company should also consult with the Board or
appropriate Reserve Bank before it files its application for conversion.
The Reserve Bank or Board will discuss the information that the mutual
holding company must include in the application for conversion, general
issues that the mutual holding company may confront in the conversion
process, and any other pertinent issues.
(b) Business plan. (1) Prior to filing an application for
conversion, the mutual holding company must adopt a business plan
reflecting the mutual holding company's intended plans for deployment of
the proposed conversion proceeds. The business plan is required, under
Sec. 239.55(b), to be included in the mutual holding company's
conversion application. At a minimum, the business plan must address:
(i) The subsidiary savings association's projected operations and
activities for three years following the conversion. The business plan
must describe how the conversion proceeds will be deployed at the
savings association (and holding company, if applicable), what
opportunities are available to reasonably achieve the planned deployment
of conversion proceeds in the relevant proposed market areas, and how
its deployment will provide a reasonable return on investment
commensurate with investment risk, investor expectations, and industry
norms, by the final year of the business plan. The business plan must
include three years of projected financial statements. The business plan
must provide that the subsidiary savings associations receive at least
50 percent of the net conversion proceeds. The Board may require that a
larger percentage of proceeds be contributed to the subsidiary savings
associations.
(ii) The mutual holding company's plan for deploying conversion
proceeds to meet credit and lending needs in the proposed market areas.
The Board strongly discourages business plans that provide for a
substantial investment in mortgage securities or other securities,
except as an interim measure to facilitate orderly, prudent deployment
of proceeds during the three years following the conversion, or as part
of a properly managed leverage strategy.
(iii) The risks associated with the plan for deployment of
conversion proceeds, and the effect of this plan on management
resources, staffing, and facilities.
(iv) The expertise of the mutual holding company and saving
association subsidiary's management and board of directors, or that the
mutual holding company has planned for adequate staffing and controls to
prudently manage the growth, expansion, new investment, and other
operations and activities proposed in its business plan.
(2) The mutual holding company may not project returns of capital or
special dividends in any part of the business plan. A newly converted
company may not plan on stock repurchases in the first year of the
business plan.
(c) Management and board review of business plan. (1) The chief
executive officer and members of the board of directors of the mutual
holding company must review, and at least two-thirds of the board of
directors must approve, the business plan.
(2) The chief executive officer and at least two-thirds of the board
of directors of the mutual holding company must certify that the
business plan accurately reflects the intended plans for deployment of
conversion proceeds, and that any new initiatives reflected in the
business plan are reasonably achievable. The mutual holding company must
submit these certifications with its business plan, as part of the
conversion application under paragraph (b) of this section.
(d) Board review of the business plan. (1) The Board will review the
business plan to determine whether it demonstrates a safe and sound
deployment of conversion proceeds, as part of its review of the
conversion application. In making its determination, the Board will
consider how the mutual holding company has addressed the applicable
factors of paragraph (b) of this section. No single factor will be
determinative. The Board will review every case on its merits.
(2) The mutual holding company must file its business plan with the
appropriate Reserve Bank. The Board or
[[Page 161]]
appropriate Reserve Bank may request additional information, if
necessary, to support its determination under paragraph (d)(1) of this
section. The mutual holding company must file its business plan as a
confidential exhibit to the Form AC.
(3) If the Board approves the application for conversion and the
mutual holding company completes the conversion, the resulting stock
holding company must operate within the parameters of the business plan.
The Board must approve any material deviation from the business plan in
writing prior to such material deviation.
(e) Disclosure of business plan. (1) The mutual holding company may
discuss information about the conversion with individuals that it
authorizes to prepare documents for the conversion.
(2) Except as permitted under paragraph (e)(1) of this section, the
mutual holding company must keep all information about the conversion
confidential until the board of directors adopts the plan of conversion.
(3) If the mutual holding company violates this section, the Board
may require it to take remedial action. For example, the Board may
require the mutual holding company to take any or all of the following
actions:
(i) Publicly announce that the mutual holding company is considering
a conversion;
(ii) Set an eligibility record date acceptable to the Board;
(iii) Limit the subscription rights of any person who violates or
aids in a violation of this section; or
(iv) Take any other action to ensure that the conversion is fair and
equitable.
Sec. 239.54 Plan of conversion.
(a) Adoption by the board of directors. Prior to filing an
application for conversion, the board of directors of the mutual holding
company must adopt a plan of conversion that conforms to Sec. Sec.
239.59 through 239.62 and 239.63(b). The board of directors must adopt
the plan by at least a two-thirds vote. The plan of conversion is
required, under Sec. 239.55(b), to be included in the conversion
application.
(b) Contents of the plan of conversion. The mutual holding company
must include the information included in Sec. Sec. 239.59 through
239.62 and 239.63(b) in the plan of conversion. The Board may require
the mutual holding company to delete or revise any provision in the plan
of conversion if the Board determines the provision is inequitable; is
detrimental to the mutual holding company, the account holders, other
mutual holding companies, or other savings associations; or is contrary
to public interest.
(c) Notice of board of directors' approval of the plan of
conversion--(1) Notice. The mutual holding company must promptly notify
its members that the board of directors adopted a plan of conversion and
that a copy of the plan is available for the members' inspection in the
mutual holding company's home office and in each of the subsidiary
savings association's branch offices. The mutual holding company must
mail a letter to each member or publish a notice in the local newspaper
in every local community where the savings association has an office.
The mutual holding company may also issue a press release. The Board may
require broader publication, if necessary, to ensure adequate notice to
the members.
(2) Contents of notice. The mutual holding company may include any
of the following statements and descriptions in the letter, notice, or
press release.
(i) The board of directors adopted a proposed plan to convert from
mutual to stock form.
(ii) The mutual holding company will send its members a proxy
statement with detailed information on the proposed conversion before
the mutual holding company convenes a members' meeting to vote on the
conversion.
(iii) The members will have an opportunity to approve or disapprove
the proposed conversion at a meeting. At least a majority of the
eligible votes must approve the conversion.
(iv) The mutual holding company will not vote existing proxies to
approve or disapprove the conversion. The mutual holding company will
solicit new proxies for voting on the proposed conversion.
(v) The Board must approve the conversion before the conversion will
be
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effective. The members will have an opportunity to file written
comments, including objections and materials supporting the objections,
with the Board.
(vi) The IRS must issue a favorable tax ruling, or a tax expert must
issue an appropriate tax opinion, on the tax consequences of the
conversion before the Board will approve the conversion. The ruling or
opinion must indicate the conversion will be a tax-free reorganization.
(vii) The Board might not approve the conversion, and the IRS or a
tax expert might not issue a favorable tax ruling or tax opinion.
(viii) Savings account holders will continue to hold accounts in the
savings association with the same dollar amounts, rates of return, and
general terms as existing deposits. The FDIC will continue to insure the
accounts.
(ix) The mutual holding company's conversion will not affect
borrowers' loans, including the amount, rate, maturity, security, and
other contractual terms.
(x) The savings association's business of accepting deposits and
making loans will continue without interruption.
(xi) The current management and staff will continue to conduct
current services for depositors and borrowers under current policies and
in existing offices.
(xii) The subsidiary savings association may continue to be a member
of the Federal Home Loan Bank System.
(xiii) The mutual holding company may substantively amend the
proposed plan of conversion before the members' meeting.
(xiv) The mutual holding company may terminate the proposed
conversion.
(xv) After the Board approves the proposed conversion, the mutual
holding company will send proxy materials providing additional
information. After the mutual holding company sends proxy materials,
members may telephone or write to the mutual holding company with
additional questions.
(xvi) The proposed record date for determining the eligible account
holders who are entitled to receive subscription rights to purchase the
shares.
(xvii) A brief description of the circumstances under which
supplemental eligible account holders will receive subscription rights
to purchase the shares.
(xviii) A brief description of how voting members may participate in
the conversion.
(xix) A brief description of how directors, officers, and employees
will participate in the conversion.
(xx) A brief description of the proposed plan of conversion.
(xxi) The par value (if any) and approximate number of shares that
will be issued and sold in the conversion.
(3) Other requirements.
(i) The mutual holding company may not solicit proxies, provide
financial statements, describe the benefits of conversion, or estimate
the value of the shares upon conversion in the letter, notice, or press
release.
(ii) If the mutual holding company responds to inquiries about the
conversion, it may address only the matters listed in paragraph (c)(2)
of this section.
(d) Amending a plan of conversion. The mutual holding company may
amend its plan of conversion before it solicits proxies. After the
mutual holding company solicits proxies, it may amend the plan of
conversion only if the Board concurs.
Sec. 239.55 Filing requirements.
(a) Applications under this subpart. Any filing with the Board
required under this subpart must be filed in accordance with Sec.
238.14 of this chapter. The Board will review any filing made under this
subpart in accordance with Sec. 238.14 of this chapter.
(b) Requirements. (1) The application for conversion must include
all of the following information.
(i) A plan of conversion meeting the requirements of Sec.
239.54(b).
(ii) Pricing materials meeting the requirements paragraph (g)(2) of
this section.
(iii) Proxy soliciting materials under Sec. 239.57(d), including:
(A) A preliminary proxy statement with signed financial statements;
(B) A form of proxy meeting the requirements of Sec. 239.57(b); and
(C) Any additional proxy soliciting materials, including press
releases, personal solicitation instructions,
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radio or television scripts that the mutual holding company plans to use
or furnish to the members, and a legal opinion indicating that any
marketing materials comply with all applicable securities laws.
(iv) An offering circular described in Sec. 239.58(a).
(v) The documents and information required by Form AC. The mutual
holding company may obtain Form AC from the appropriate Reserve Bank and
the Board's Web site (http://www.federalreserve.gov).
(vi) Where indicated, written consents, signed and dated, of any
accountant, attorney, investment banker, appraiser, or other
professional who prepared, reviewed, passed upon, or certified any
statement, report, or valuation for use. See Form AC, instruction B(7).
(vii) The business plan, submitted as a separately bound,
confidential exhibit. See paragraph (c) of this section.
(viii) Any additional information the Board requests.
(2) The Board will not accept for filing, and will return, any
application for conversion that is improperly executed, materially
deficient, substantially incomplete, or that provides for unreasonable
conversion expenses.
(c) Filing an application for conversion. (1) The mutual holding
company must file the application for conversion on Form AC with the
appropriate Reserve Bank.
(2) Upon receipt of an application under this subpart, the Reserve
Bank will promptly furnish notice and a copy of the application to the
primary federal supervisor of any subsidiary savings association. The
primary supervisor will have 30 calendar days from the date of the
letter giving notice in which to submit its views and recommendations to
the Board.
(d) Confidential treatment of portions of an application for
conversion. (1) The Board makes all filings under this subpart available
to the public, but may keep portions of the application for conversion
confidential under paragraph (d)(2) of this section.
(2) The mutual holding company may request the Board keep portions
of the application confidential. To do so, the mutual holding company
must separately bind and clearly designate as ``confidential'' any
portion of the application for conversion that the mutual holding
company deems confidential. The mutual holding company must provide a
written statement specifying the grounds supporting the request for
confidentiality. The Board will not treat as confidential the portion of
the application describing how the mutual holding company plans to meet
the Community Reinvestment Act (CRA) objectives. The CRA portion of the
application may not incorporate by reference information contained in
the confidential portion of the application.
(3) The Board will determine whether confidential information must
be made available to the public under 5 U.S.C. 552 and part 261 of this
chapter. The Board will advise the mutual holding company before it
makes information the mutual holding company designated as
``confidential'' available to the public.
(e) Amending an application for conversion. To amend an application
for conversion, the mutual holding company must:
(1) File an amendment with an appropriate facing sheet;
(2) Number each amendment consecutively;
(3) Respond to all issues raised by the Board; and
(4) Demonstrate that the amendment conforms to all applicable
regulations.
(f) Notice of filing of application and comment process--(1) Public
notice of an application for conversion. (i) The mutual holding company
must publish a public notice of the application for conversion in
accordance with the procedures in Sec. 238.14 of this chapter. The
mutual holding company must simultaneously prominently post the notice
in its home office and in all of the branch offices of its subsidiary
savings associations.
(ii) Promptly after publication, the mutual holding company must
file a copy of any public notice and an affidavit of publication from
each publisher with the appropriate Reserve Bank.
(iii) If the Board does not accept the application for conversion
under Sec. 239.55(g) and requires the mutual holding company to file a
new application,
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the mutual holding company must publish and post a new notice and allow
an additional 30 days for comment.
(2) Public comments. Commenters may submit comments on the
application in accordance with the procedures in Sec. 238.14 of this
chapter. A commenter must file any comments with the appropriate Reserve
Bank.
(g) Board review of the application for conversion--(1) Board action
on a conversion application. The Board may approve an application for
conversion only if:
(i) The conversion complies with this subpart;
(ii) The mutual holding company will meet all applicable regulatory
capital requirements after the conversion; and
(iii) The conversion will not result in a taxable reorganization
under the Internal Revenue Code of 1986, as amended.
(2) Board review of appraisal. The Board will review the appraisal
required by paragraph (b)(1)(ii) of this section in determining whether
to approve the application. The Board will review the appraisal under
the following requirements.
(i) Independent persons experienced and expert in corporate
appraisal, and acceptable to the Board, must prepare the appraisal
report.
(ii) An affiliate of the appraiser may serve as an underwriter or
selling agent, if the mutual holding company ensures that the appraiser
is separate from the underwriter or selling agent affiliate and the
underwriter or selling agent affiliate does not make recommendations or
affect the appraisal.
(iii) The appraiser may not receive any fee in connection with the
conversion other than for appraisal services.
(iv) The appraisal report must include a complete and detailed
description of the elements of the appraisal, a justification for the
appraisal methodology, and sufficient support for the conclusions.
(v) If the appraisal is based on a capitalization of the pro forma
income, it must indicate the basis for determining the income to be
derived from the sale of shares, and demonstrate that the earnings
multiple used is appropriate, including future earnings growth
assumptions.
(vi) If the appraisal is based on a comparison of the shares with
outstanding shares of existing stock associations, the existing stock
associations must be reasonably comparable in size, market area,
competitive conditions, risk profile, profit history, and expected
future earnings.
(vii) The Board may decline to process the application for
conversion and deem it materially deficient or substantially incomplete
if the initial appraisal report is materially deficient or substantially
incomplete.
(viii) The mutual holding company may not represent or imply that
the Board has approved the appraisal.
(3) Board review of compliance record. The Board will review the
compliance record of the subsidiary savings association under the
regulations applicable to the savings association and the business plan
to determine how the conversion will affect the convenience and needs of
its communities.
(i) Based on this review, the Board may approve the application,
deny the application, or approve the application on the condition that
the resulting stock holding company will improve the CRA performance or
will address the particular credit or lending needs of the communities
that it will serve.
(ii) The Board may deny the application if the business plan does
not demonstrate that the proposed use of conversion proceeds will help
the resulting stock holding company to meet the credit and lending needs
of the communities that the resulting stock holding company will serve.
(4) The Board may request that the mutual holding company amend the
application if further explanation is necessary, material is missing, or
material must be corrected.
(5) The Board will deny the application if the application does not
meet the requirements of this subpart, unless the Board waives the
requirement under Sec. 239.50(c).
(h) Judicial review. (1) Any person aggrieved by the Board's final
action on the application for conversion may ask the court of appeals of
the United States for the circuit in which the principal office or
residence of such person is located, or the U.S. Court of Appeals for
the District of Columbia
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Circuit, to review the action under 12 U.S.C. 1467a(j), which provisions
shall apply in all respects as if such final action were an order,
subject to paragraph (h)(2) of this section.
(2) To obtain court review of the action, the aggrieved person must
file a written petition requesting that the court modify, terminate, or
set aside the final Board action. The aggrieved person must file the
petition with the court within the later of 30 days after the Board
publishes notice of its final action in the Federal Register or 30 days
after the mutual holding company mails the proxy statement to its
members under Sec. 239.56(c).
Sec. 239.56 Vote by members.
(a) Mutual member approval of the plan of conversion. (1) After the
Board approves the plan of conversion, the mutual holding company must
submit the plan of conversion to its members for approval. The mutual
holding company must obtain this approval at a meeting of its members.
(2) The members must approve the plan of conversion by a majority of
the total outstanding votes.
(3) The members may vote in person or by proxy.
(4) The mutual holding company may notify eligible account holders
or supplemental eligible account holders who are not voting members of
the proposed conversion. The mutual holding company may include only the
information in Sec. 239.54(c) in the notice.
(b) Eligibility to vote for the plan of conversion. The mutual
holding company determines members' eligibility to vote by setting a
voting record date. The mutual holding company must set a voting record
date that is not more than 60 days nor less than 20 days before the
meeting.
(c) Notifying members of the meeting. The mutual holding company
must notify the members of the meeting to consider the conversion by
sending the members a proxy statement.
(2) The mutual holding company must notify its members 20 to 45 days
before the meeting.
(3) The mutual holding company must also notify each beneficial
holder of an account at any subsidiary savings association held in a
fiduciary capacity:
(i) If the subsidiary savings association is a federal association
and the name of the beneficial holder is disclosed on the records of the
subsidiary savings association; or
(ii) If the subsidiary savings association is a state-chartered
association and the beneficial holder possesses voting rights under
state law.
(d) Submissions to the Board after the members' meeting. (1)
Promptly after the members' meeting, the mutual holding company must
file all of the following information with the appropriate Reserve Bank:
(i) A certified copy of each adopted resolution on the conversion.
(ii) The total votes eligible to be cast.
(iii) The total votes represented in person or by proxy.
(iv) The total votes cast in favor of and against each matter.
(v) The percentage of votes necessary to approve each matter.
(vi) An opinion of counsel that the mutual holding company conducted
the members' meeting in compliance with all applicable state or federal
laws and regulations.
(2) Promptly after completion of the conversion, the mutual holding
company must submit to the appropriate Reserve Bank an opinion of
counsel that the mutual holding company has complied with all laws
applicable to the conversion.
Sec. 239.57 Proxy solicitation.
(a) Applicability of proxy solicitation provisions. (1) The mutual
holding company must comply with these proxy solicitation provisions
when the mutual holding company provides proxy solicitation material to
members for the meeting to vote on the plan of conversion.
(2) Members of the mutual holding company must comply with these
proxy solicitation provisions when they provide proxy solicitation
materials to members for the meeting to vote on the conversion, pursuant
to paragraph (f) of this section except where:
(i) The member solicits 50 people or fewer and does not solicit
proxies on
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behalf of the mutual holding company; or
(ii) The member solicits proxies through newspaper advertisements
after the board of directors adopts the plan of conversion. Any
newspaper advertisements may include only the following information:
(A) The name of the mutual holding company;
(B) The reason for the advertisement;
(C) The proposal or proposals to be voted upon;
(D) Where a member may obtain a copy of the proxy solicitation
material; and
(E) A request for the members of the mutual holding company to vote
at the meeting.
(b) Form of proxy. The form of proxy must include all of the
following:
(1) A statement in bold face type stating that management is
soliciting the proxy.
(2) Blank spaces where the member must date and sign the proxy.
(3) Clear and impartial identification of each matter or group of
related matters that members will vote upon. It must include any
proposed charitable contribution as an item to be voted on separately.
(4) The phrase ``Revocable Proxy'' in bold face type (at least 18
point).
(5) A description of any charter or state law requirement that
restricts or conditions votes by proxy.
(6) An acknowledgment that the member received a proxy statement
before he or she signed the form of proxy.
(7) The date, time, and the place of the meeting, when available.
(8) A way for the member to specify by ballot whether he or she
approves or disapproves of each matter that members will vote upon.
(9) A statement that management will vote the proxy in accordance
with the member's specifications.
(10) A statement in bold face type indicating how management will
vote the proxy if the member does not specify a choice for a matter.
(c) Permissible use of proxies. (1) The mutual holding company may
not use previously executed proxies for the plan of conversion vote. If
members consider the plan of conversion at an annual meeting, the mutual
holding company may vote proxies obtained through other proxy
solicitations only on matters not related to the plan of conversion.
(2) The mutual holding company may vote a proxy obtained under this
subpart on matters that are incidental to the conduct of the meeting.
The mutual holding company or its management may not vote a proxy
obtained under this subpart at any meeting other than the meeting (or
any adjournment of the meeting) to vote on the plan of conversion.
(d) Proxy statement requirements--(1) Content requirements. The
mutual holding company must prepare the proxy statement in compliance
with this subpart and Form PS. The mutual holding company may obtain
Form PS from the appropriate Reserve Bank and the Board's Web site
(http://www.federalreserve.gov).
(2) Other requirements. (i) The Board will review the proxy
solicitation material in its review of the application for conversion.
(ii) The mutual holding company must provide a written proxy
statement to the members before or at the same time the mutual holding
company provides any other soliciting material. The mutual holding
company must mail proxy solicitation material to the members no later
than ten days after the Board approves the conversion.
(e) Filing revised proxy materials. (1) The mutual holding company
must file revised proxy materials as an amendment to the application for
conversion.
(2) To revise the proxy solicitation materials, the mutual holding
company must file:
(i) Revised proxy materials as required by Form PS;
(ii) Revised form of proxy, if applicable; and
(iii) Any additional proxy solicitation material subject to
paragraph (d) of this section.
(3) The mutual holding company must clearly indicate changes from
the prior filing.
(4) The mutual holding company must file a definitive copy of all
proxy solicitation material, in the form in which the mutual holding
company furnishes the material to the members.
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The mutual holding company must file no later than the date that it
sends or gives the proxy solicitation material to the members. The
mutual holding company must indicate the date that it plans to release
the materials.
(5) Unless the Board requests the mutual holding company to do so,
the mutual holding company does not have to file copies of replies to
inquiries from the members or copies of communications that merely
request members to sign and return proxy forms.
(f) Mailing proxy solicitation material. (1) The mutual holding
company must mail the member's proxy solicitation material if:
(i) The board of directors adopted a plan of conversion;
(ii) A member requests in writing that the mutual holding company
mail the proxy solicitation material; and
(iii) The member agrees to defray reasonable expenses of the mutual
holding company.
(2) As soon as practicable after the mutual holding company receives
a request under paragraph (f)(1) of this section, the mutual holding
company must mail or otherwise furnish the following information to the
member:
(i) The approximate number of members that the mutual holding
company solicited or will solicit, or the approximate number of members
of any group of account holders that the member designates; and
(ii) The estimated cost of mailing the proxy solicitation material
for the member.
(3) The mutual holding company must mail proxy solicitation material
to the designated members promptly after the member furnishes the
materials, envelopes (or other containers), and postage (or payment for
postage) to the mutual holding company.
(4) The mutual holding company is not responsible for the content of
a member's proxy solicitation material.
(5) A member may furnish other members its own proxy solicitation
material, subject to the rules in this section.
(g) Prohibited solicitations. (1) False or misleading statements.
(i) No one may use proxy solicitation material for the members' meeting
if the material contains any statement which, considering the time and
the circumstances of the statement:
(A) Is false or misleading with respect to any material fact;
(B) Omits any material fact that is necessary to make the statements
not false or misleading; or
(C) Omits any material fact that is necessary to correct a statement
in an earlier communication that has become false or misleading.
(ii) No one may represent or imply that the Board determined that
the proxy solicitation material is accurate, complete, not false or not
misleading, or passed upon the merits of or approved any proposal.
(2) Other prohibited solicitations. No person may solicit:
(i) An undated or post-dated proxy;
(ii) A proxy that states it will be dated after the date it is
signed by a member;
(iii) A proxy that is not revocable at will by the member; or
(iv) A proxy that is part of another document or instrument.
(3) If a solicitation violates this section, the Board may require
remedial measures, including:
(i) Correction of the violation by a retraction and a new
solicitation;
(ii) Rescheduling the members' meeting; or
(iii) Any other actions necessary to ensure a fair vote.
(4) The Board may also bring an enforcement action against the
violator for violations of this section.
(h) Re-soliciting proxies. If the mutual holding company amends its
application for conversion, the Board may require it to re-solicit
proxies for the members' meeting as a condition of approval of the
amendment.
Sec. 239.58 Offering circular.
(a) Filing requirements. (1) The mutual holding company must prepare
and file the offering circular with the appropriate Reserve Bank in
compliance with this subpart and Form OC. The mutual holding company may
obtain Form OC from the Reserve Bank and the Board's Web site (http://
www.federalreserve.gov).
(2) The mutual holding company must condition the stock offering
upon
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member approval of the plan of conversion.
(3) The Board will review the Form OC and may comment on the
included disclosures and financial statements.
(4) The mutual holding company must file a revised offering
circular, final offering circular, and any post-effective amendment to
the final offering circular.
(5) The Board will not approve the adequacy or accuracy of the
offering circular or the disclosures.
(b) Distribution of the offering circular. (1) The mutual holding
company may distribute a preliminary offering circular at the same time
as or after the mutual holding company mails the proxy statement to its
members.
(2) The mutual holding company must distribute the offering circular
in accordance with this subpart and with all applicable securities laws.
(3) The mutual holding company must distribute the offering circular
to persons listed in the plan of conversion no later than ten days after
the Board approves the conversion.
(c) Post-effective amendments to the offering circular. (1) The
mutual holding company must file a post-effective amendment to the
offering circular with the Board when a material event or change of
circumstance occurs.
(2) After the Securities and Exchange Commission declares the post-
effective amendment effective, the mutual holding company must
immediately deliver the amendment to each person who subscribed for or
ordered shares in the offering.
(3) The post-effective amendment must indicate that each person may
increase, decrease, or rescind their subscription or order.
(4) The post-effective offering period must remain open no less than
10 days nor more than 20 days, unless the Board approves a longer
rescission period.
Sec. 239.59 Offers and sales of stock.
(a) Purchase priorities. The mutual holding company must offer to
sell the conversion shares in the following order:
(1) Eligible account holders.
(2) Tax-qualified employee stock ownership plans.
(3) Supplemental eligible account holders.
(4) Other voting members who have subscription rights.
(5) The community, the community and the general public, or the
general public.
(b) Offering conversion shares. (1) The mutual holding company may
offer to sell the conversion shares if the Board approves the
conversion, subject to compliance with requirements of the Securities
and Exchange Commission.
(2) The offer may commence at the same time as the proxy
solicitation of the members begins.
(c) Pricing conversion shares. (1) The conversion shares must be
sold at a uniform price per share and at a total price that is equal to
the estimated pro forma market value of the shares after conversion.
(2) The maximum price must be no more than 15 percent above the
midpoint of the estimated price range in the offering circular.
(3) The minimum price must be no more than 15 percent below the
midpoint of the estimated price range in the offering circular.
(4) If the Board permits, the maximum price of conversion shares
sold may be increased. The maximum price, as adjusted, must be no more
than 15 percent above the maximum price computed under paragraph (c)(2)
of this section.
(5) The maximum price must be between $5 and $50 per share.
(6) The mutual holding company must include the estimated price in
any preliminary offering circular.
(d) Selling conversion shares. (1) The mutual holding company must
distribute order forms to all eligible account holders, supplemental
eligible account holders, and other voting members to enable them to
subscribe for the conversion shares they are permitted under the plan of
conversion. The mutual holding company may either send the order forms
with the offering circular or after it distributes the offering
circular.
(2) The mutual holding company may sell the conversion shares in a
community offering, a public offering, or both. The mutual holding
company may
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begin the community offering, the public offering, or both at any time
during the subscription offering or upon conclusion of the subscription
offering.
(3) The mutual holding company may pay underwriting commissions
(including underwriting discounts). The Board may object to the payment
of unreasonable commissions. The mutual holding company may reimburse an
underwriter for accountable expenses in a subscription offering if the
public offering is limited. If no public offering occurs, the mutual
holding company may pay an underwriter a consulting fee. The Board may
object to the payment of unreasonable consulting fees.
(4) If the mutual holding company conducts the community offering,
the public offering, or both at the same time as the subscription
offering, it must fill all subscription orders first.
(5) The mutual holding company must prepare the order form in
compliance with this subpart and Form OF. The mutual holding company may
obtain Form OF from the Reserve Bank and from the Board's Web site
(www.federalreserve.gov).
(e) Prohibited sales practices. (1) In connection with offers,
sales, or purchases of conversion shares under this subpart, the mutual
holding company and its directors, officers, agents, or employees may
not:
(i) Employ any device, scheme, or artifice to defraud;
(ii) Obtain money or property by means of any untrue statement of a
material fact or any omission of a material fact necessary to make the
statements, in light of the circumstances under which they were made,
not misleading; or
(iii) Engage in any act, transaction, practice, or course of
business that operates or would operate as a fraud or deceit upon a
purchaser or seller.
(2) During the conversion, no person may:
(i) Transfer, or enter into any agreement or understanding to
transfer, the legal or beneficial ownership of subscription rights for
the conversion shares or the underlying securities to the account of
another;
(ii) Make any offer, or any announcement of an offer, to purchase
any of the conversion shares from anyone but the mutual holding company;
or
(iii) Knowingly acquire more than the maximum purchase allowable
under the plan of conversion.
(3) The restrictions in paragraphs (e)(2)(i) and (e)(2)(ii) of this
section do not apply to offers for more than 10 percent of any class of
conversion shares by:
(i) An underwriter or a selling group, acting on behalf of the
mutual holding company or resulting stock holding company, that makes
the offer with a view toward public resale; or
(ii) One or more of the tax-qualified employee stock ownership plans
so long as the plan or plans do not beneficially own more than 25
percent of any class of the equity securities in the aggregate.
(4) Any person that violates the restrictions in paragraphs
(e)(2)(i) and (e)(2)(ii) of this section may face prosecution or other
legal action.
(f) Payment for conversion shares. (1) A subscriber may purchase
conversion shares with cash, by a withdrawal from a savings account, or
a withdrawal from a certificate of deposit. If a subscriber purchases
conversion shares by a withdrawal from a certificate of deposit, the
mutual holding company or its subsidiary savings association may not
assess a penalty for the withdrawal.
(2) The mutual holding company may not extend credit to any person
to purchase the conversion shares.
(g) Interest on payments for conversion shares. (1) The mutual
holding company or its subsidiary savings association must pay interest
from the date it receives a payment for conversion shares until the date
it completes or terminates the conversion. The mutual holding company or
its subsidiary savings association must pay interest at no less than the
passbook rate for amounts paid in cash, check, or money order.
(2) If a subscriber withdraws money from a savings account to
purchase conversion shares, the mutual holding
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company or its subsidiary savings association must pay interest on the
payment until the mutual holding company completes or terminates the
conversion as if the withdrawn amount remained in the account.
(3) If a depositor fails to maintain the applicable minimum balance
requirement because he or she withdraws money from a certificate of
deposit to purchase conversion shares, the mutual holding company or its
subsidiary savings association may cancel the certificate and pay
interest at no less than the passbook rate on any remaining balance.
(h) Subscription rights for each eligible account holder and each
supplemental eligible account holder. (1) The mutual holding company
must give each eligible account holder subscription rights to purchase
conversion shares in an amount equal to the greater of:
(i) The maximum purchase limitation established for the community
offering or the public offering under paragraph (p) of this section;
(ii) One-tenth of one percent of the total stock offering; or
(iii) Fifteen times the following number: The total number of
conversion shares that the mutual holding company will issue, multiplied
by the following fraction: the numerator is the total qualifying deposit
of the eligible account holder, and the denominator is the total
qualifying deposits of all eligible account holders. The mutual holding
company must round down the product of this multiplied fraction to the
next whole number.
(2) The mutual holding company must give subscription rights to
purchase shares to each supplemental eligible account holder in the same
amount as described in paragraph (h)(1) of this section, except that the
mutual holding company must compute the fraction described in paragraph
(h)(1)(iii) of this section as follows: the numerator is the total
qualifying deposit of the supplemental eligible account holder, and the
denominator is the total qualifying deposits of all supplemental
eligible account holders.
(i) Officers, directors, and their associates as eligible account
holders. The officers, directors, and their associates of the mutual
holding company and subsidiary savings association may be eligible
account holders. However, if an officer, director, or his or her
associate receives subscription rights based on increased deposits in
the year before the eligibility record date, the mutual holding company
must subordinate subscription rights for these deposits to subscription
rights exercised by other eligible account holders.
(j) Other voting members eligible to purchase conversion shares. (1)
The mutual holding company must give rights to purchase the conversion
shares in the conversion to voting members who are neither eligible
account holders nor supplemental eligible account holders. The mutual
holding company must allocate rights to each voting member that are
equal to the greater of:
(i) The maximum purchase limitation established for the community
offering and the public offering under paragraph (p) of this section; or
(ii) One-tenth of one percent of the total stock offering.
(2) The mutual holding company must subordinate the voting members'
rights to the rights of eligible account holders, tax-qualified employee
stock ownership plans, and supplemental eligible account holders.
(k) Purchase limitations for officers, directors, and their
associates. (1) When the mutual holding company converts, the officers,
directors, and their associates of the mutual holding company and
subsidiary savings association may not purchase, in the aggregate, more
than the following percentage of the total stock offering:
------------------------------------------------------------------------
Officer and
director
Institution size purchases
(percent)
------------------------------------------------------------------------
$50,000,000 or less..................................... 35
$50,000,001-100,000,000................................. 34
$100,000,001-150,000,000................................ 33
$150,000,001-200,000,000................................ 32
$200,000,001-250,000,000................................ 31
$250,000,001-300,000,000................................ 30
$300,000,001-350,000,000................................ 29
$350,000,001-400,000,000................................ 28
$400,000,001-450,000,000................................ 27
$450,000,001-500,000,000................................ 26
Over $500,000,000....................................... 25
------------------------------------------------------------------------
(2) The purchase limitations in this section do not apply to shares
held in tax-qualified employee stock benefit plans that are attributable
to the officers, directors, and their associates.
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(l) Allocating conversion shares in the event of oversubscription.
(1) If the conversion shares are oversubscribed by the eligible account
holders, the mutual holding company must allocate shares among the
eligible account holders so that each, to the extent possible, may
purchase 100 shares.
(2) If the conversion shares are oversubscribed by the supplemental
eligible account holders, the mutual holding company must allocate
shares among the supplemental eligible account holders so that each, to
the extent possible, may purchase 100 shares.
(3) If a person is an eligible account holder and a supplemental
eligible account holder, the mutual holding company must include the
eligible account holder's allocation in determining the number of
conversion shares that the mutual holding company may allocate to the
person as a supplemental eligible account holder.
(4) For conversion shares that the mutual holding company does not
allocate under paragraphs (l)(1) and (l)(2) of this section, the mutual
holding company must allocate the shares among the eligible or
supplemental eligible account holders equitably, based on the amounts of
qualifying deposits. The mutual holding company must describe this
method of allocation in its plan of conversion.
(5) If shares remain after the mutual holding company has allocated
shares as provided in paragraphs (l)(1) and (l)(2) of this section, and
if the voting members oversubscribe, the mutual holding company must
allocate the conversion shares among those members equitably. The mutual
holding company must describe the method of allocation in its plan of
conversion.
(m) Employee stock ownership plan purchase of conversion shares. (1)
The tax-qualified employee stock ownership plan of the mutual holding
company may purchase up to 10 percent of the total offering of the
conversion shares.
(2) If the Board approves a revised stock valuation range as
described in paragraph (c)(5) of this section, and the final conversion
stock valuation range exceeds the former maximum stock offering range,
the mutual holding company may allocate conversion shares to the tax-
qualified employee stock ownership plan, up to the 10 percent limit in
paragraph (m)(1) of this section.
(3) If the tax-qualified employee stock ownership plan is not able
to or chooses not to purchase stock in the offering, it may, with prior
Board approval and appropriate disclosure in the offering circular,
purchase stock in the open market, or purchase authorized but unissued
conversion shares.
(4) The mutual holding company may include stock contributed to a
charitable organization in the conversion in the calculation of the
total offering of conversion shares under paragraphs (m)(1) and (m)(2)
of this section, unless the Board objects on supervisory grounds.
(n) Purchase limitations. (1) The mutual holding company may limit
the number of shares that any person, group of associated persons, or
persons otherwise acting in concert, may subscribe to up to five percent
of the total stock sold.
(2) If the mutual holding company sets a limit of five percent under
paragraph (n)(1) of this section, it may modify that limit with Board
approval to provide that any person, group of associated persons, or
persons otherwise acting in concert subscribing for five percent, may
purchase between five and ten percent as long as the aggregate amount
that the subscribers purchase does not exceed 10 percent of the total
stock offering.
(3) The mutual holding company may require persons exercising
subscription rights to purchase a minimum number of conversion shares.
The minimum number of shares must equal the lesser of the number of
shares obtained by a $500 subscription or 25 shares.
(4) In setting purchase limitations under this section, the mutual
holding company may not aggregate conversion shares attributed to a
person in the tax-qualified employee stock ownership plan with shares
purchased directly by, or otherwise attributable to, that person.
(o) Purchase preference for persons in the local community. (1) In
the subscription offering, subject to the purchase priorities set forth
in paragraph (a) of this section, the mutual holding company may give a
purchase preference to
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eligible account holders, supplemental eligible account holders, and
voting members residing in the local community.
(2) In the community offering, the mutual holding company must give
a purchase preference to natural persons residing in the local
community.
(p) Conditions on community offerings and public offerings. (1) If
the mutual holding company offers conversion shares in a community
offering, a public offering, or both, it must offer and sell the stock
to achieve a widespread distribution of the stock.
(2) If the mutual holding company offers shares in a community
offering, a public offering, or both, it must first fill orders for the
stock up to a maximum of two percent of the conversion stock on a basis
that will promote a widespread distribution of stock. The mutual holding
company must allocate any remaining shares on an equal number of shares
per order basis until it fills all orders.
Sec. 239.60 Completion of the offering.
(a) Deadline for completing the sale of stock. The mutual holding
company must complete all sales of the stock within 45 calendar days
after the last day of the subscription period, unless the offering is
extended under paragraph (b) of this section.
(b) Offering period extension. (1) The mutual holding company must
request, in writing, an extension of any offering period.
(2) The Board may grant extensions of time to sell the shares. The
Board will not grant any single extension of more than 90 days.
(3) If the Board grants the request for an extension of time, the
mutual holding company must provide a post-effective amendment to the
offering circular under Sec. 239.58(c) to each person who subscribed
for or ordered stock. The amendment must indicate that the Board
extended the offering period and that each person who subscribed for or
ordered stock may increase, decrease, or rescind their subscription or
order within the time remaining in the extension period.
Sec. 239.61 Completion of the conversion.
(a) Completion of the conversion. (1) In the plan of conversion, the
mutual holding company must set a date by which the conversion must be
completed. This date must not be more than 24 months from the date that
the members approve the plan of conversion. The date, once set, may not
be extended by the mutual holding company or by the Board. The mutual
holding company must terminate the conversion if it is not completed by
that date.
(2) The conversion is complete on the date that the mutual holding
company accepts the offers for stock of the resulting stock holding
company.
(b) Termination of the conversion. (1) The members may terminate the
conversion by failing to approve the conversion at the members' meeting.
(2) The mutual holding company may terminate the conversion before
the members' meeting.
(3) The mutual holding company may terminate the conversion after
the members' meeting only if the Board concurs.
(c) Voting rights for stockholders following conversion. The
resulting stock holding company must provide the stockholders with
exclusive voting rights.
(d) Rights of savings account holders. The resulting stock holding
company must provide a liquidation account for each eligible and
supplemental eligible account holder under Sec. 239.62(a)(1)-(3).
Sec. 239.62 Liquidation accounts.
(a) Liquidation account. (1) A liquidation account represents the
potential interest of eligible account holders and supplemental eligible
account holders in the mutual holding company's net worth at the time of
conversion. The resulting stock holding company must maintain a sub-
account to reflect the interest of each account holder.
(2) Before the resulting stock holding company may provide a
liquidation distribution to common stockholders, the resulting stock
holding company must give a liquidation distribution to those eligible
account holders and supplemental eligible account holders who hold
savings accounts from the time of conversion until liquidation.
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(3) The resulting stock holding company may not record the
liquidation account in the financial statements. The resulting stock
holding company must disclose the liquidation account in the footnotes
to the financial statements.
(4) The initial balance of the liquidation account is the net worth
in the statement of financial condition included in the final offering
circular.
(b) Liquidation sub-accounts. (1)(i) The resulting stock holding
company determines the initial sub-account balance for a savings account
held by an eligible account holder by multiplying the initial balance of
the liquidation account by the following fraction: The numerator is the
qualifying deposit in the savings account on the eligibility record
date. The denominator is total qualifying deposits of all eligible
account holders on that date.
(ii) The resulting stock holding company determines the initial sub-
account balance for a savings account held by a supplemental eligible
account holder by multiplying the initial balance of the liquidation
account by the following fraction: The numerator is the qualifying
deposit in the savings account on the supplemental eligibility record
date. The denominator is total qualifying deposits of all supplemental
eligible account holders on that date.
(iii) If an account holder holds a savings account on the
eligibility record date and a separate savings account on the
supplemental eligibility record date, the resulting stock holding
company must compute separate sub-accounts for the qualifying deposits
in the savings account on each record date.
(2) The resulting stock holding company may not increase the initial
sub-account balances. The resulting stock holding company must decrease
the initial balance under Sec. 239.62(d) as depositors reduce or close
their accounts.
(c) Retention of voting rights based on liquidation sub-accounts.
Eligible account holders or supplemental eligible account holders do not
retain any voting rights based on their liquidation sub-accounts.
(d) Adjusting liquidation sub-accounts. (1)(i) The resulting stock
holding company must reduce the balance of an eligible account holder's
or supplemental eligible account holder's sub-account if the deposit
balance in the account holder's savings account at the close of business
on any annual closing date, which for purposes of this section is the
fiscal year end, after the relevant eligibility record dates is less
than:
(A) The deposit balance in the account holder's savings account at
the close of business on any other annual closing date after the
relevant eligibility record date; or
(B) The qualifying deposits in the account holder's savings account
on the relevant eligibility record date.
(ii) The reduction must be proportionate to the reduction in the
deposit balance.
(2) If the resulting stock holding company reduces the balance of a
liquidation sub-account, the resulting stock holding company may not
subsequently increase it if the deposit balance increases.
(3) The resulting stock holding company is not required to adjust
the liquidation account and sub-account balances at each annual closing
date if it maintains sufficient records to make the computations if a
liquidation subsequently occurs.
(4) The resulting stock holding company must maintain the
liquidation sub-account for each account holder as long as the account
holder maintains an account with the same social security number or tax
identification number, as applicable.
(5) If there is a complete liquidation, the resulting stock holding
company must provide each account holder with a liquidation distribution
in the amount of the sub-account balance.
(e) Liquidation defined. (1) For purposes of this subpart, a
liquidation is a sale of the assets and settlement of the liabilities
with the intent to cease operations and close. Upon liquidation, the
resulting stock holding company must return the charter to the
governmental agency that issued it. The government agency must cancel
the charter.
(2) A merger, consolidation, or similar combination or transaction
with another depository institution, is not a liquidation. If the
resulting stock holding company is involved in such a
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transaction, the surviving institution must assume the liquidation
account.
(f) Effect of liquidation on net worth. The liquidation account does
not affect the net worth.
Sec. 239.63 Post-conversion.
(a) Management stock benefit plans. (1) During the 12 months after
the conversion, the resulting stock holding company may implement a
stock option plan (Option Plan), an employee stock ownership plan or
other tax-qualified employee stock benefit plan (collectively, ESOP),
and a management recognition plan (MRP), provided the resulting stock
holding company meets all of the following requirements.
(i) The resulting stock holding company discloses the plans in the
proxy statement and offering circular and indicates in the offering
circular that there will be a separate shareholder vote on the Option
Plan and the MRP at least six months after the conversion. No
shareholder vote is required to implement the ESOP. The ESOP must be
tax-qualified.
(ii) The Option Plan does not exceed more than ten percent of the
number of shares that the resulting stock holding company issued in the
conversion.
(iii)(A) The ESOP and MRP do not exceed, in the aggregate, more than
ten percent of the number of shares that the resulting stock holding
company issued in the conversion. If the resulting stock holding company
has tangible capital of ten percent or more following the conversion,
the Board may permit the ESOP and MRP to represent, in the aggregate, up
to 12 percent of the number of shares issued in the conversion; and
(B) The MRP does not exceed more than three percent of the number of
shares that the resulting stock holding company issued in the
conversion. If the resulting stock holding company has tangible capital
of ten percent or more after the conversion, the Board may permit the
MRP to represent up to four percent of the number of shares that the
resulting stock holding company issued in the conversion.
(iv) No individual receives more than 25 percent of the shares under
any plan.
(v) The directors who are not the officers do not receive more than
five percent of the shares of the MRP or Option Plan individually, or 30
percent of any such plan in the aggregate.
(vi) The shareholders approve each of the Option Plan and the MRP by
a majority of the total votes eligible to be cast at a duly called
meeting before the resulting stock holding company establishes or
implements the plan. The resulting stock holding company may not hold
this meeting until six months after the conversion.
(vii) When the resulting stock holding company distributes proxies
or related material to shareholders in connection with the vote on a
plan, the resulting stock holding company states that the plan complies
with Board regulations and that the Board does not endorse or approve
the plan in any way. The resulting stock holding company may not make
any written or oral representations to the contrary.
(viii) The resulting stock holding company does not grant stock
options at less than the market price at the time of grant.
(ix) The resulting stock holding company does not fund the Option
Plan or the MRP at the time of the conversion.
(x) The plan does not begin to vest earlier than one year after
shareholders approve the plan, and does not vest at a rate exceeding 20
percent per year.
(xi) The plan permits accelerated vesting only for disability or
death, or if the resulting stock holding company undergoes a change of
control.
(xii) The plan provides that the executive officers or directors
must exercise or forfeit their options in the event the institution
becomes critically undercapitalized under the applicable regulatory
capital requirements, is subject to Board enforcement action, or
receives a capital directive under Sec. 263.83 of this chapter.
(xiii) The resulting stock holding company files a copy of the
proposed Option Plan or MRP with the Board and certifies to the Board
that the plan approved by the shareholders is the same plan that the
resulting stock holding company filed with, and disclosed in, the proxy
materials distributed to shareholders in connection with the vote on the
plan.
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(xiv) The resulting stock holding company files the plan and the
certification with the Board within five calendar days after the
shareholders approve the plan.
(2) The resulting stock holding company may provide dividend
equivalent rights or dividend adjustment rights to allow for stock
splits or other adjustments to the stock in the ESOP, MRP, and Option
Plan.
(3) The restrictions in paragraph (a)(1) of this section do not
apply to plans implemented more than 12 months after the conversion,
provided that materials pertaining to any shareholder vote regarding
such plans are not distributed within the 12 months after the
conversion. If a plan adopted in conformity with paragraph (a)(1) of
this section is amended more than 12 months following the conversion,
the shareholders must ratify any material deviations to the requirements
in paragraph (a)(1) of this section.
(b) Restrictions on the sale of conversion shares by directors,
officers, and their associates. (1) Directors and officers who purchase
conversion shares may not sell the shares for one year after the date of
purchase, except that in the event of the death of the officer or
director, the successor in interest may sell the shares.
(2) The resulting stock holding company must include notice of the
restriction described in paragraph (b)(1) of this section on each
certificate of stock that a director or officer purchases during the
conversion or receives in connection with a stock dividend, stock split,
or otherwise with respect to such restricted shares.
(3) The resulting stock holding company must instruct the stock
transfer agent about the transfer restrictions in this section.
(4) For three years after the resulting stock holding company
converts, the officers, directors, and their associates may purchase
stock of the resulting stock holding company only from a broker or
dealer registered with the Securities and Exchange Commission. However,
the officers, directors, and their associates may engage in a negotiated
transaction involving more than one percent of the outstanding stock,
and may purchase stock through any of the management or employee stock
benefit plans.
(c) Repurchase of conversion shares. (1) The resulting stock holding
company may not repurchase its shares in the first year after the
conversion except:
(i) In extraordinary circumstances, the resulting stock holding
company may make open market repurchases of up to five percent of the
outstanding stock in the first year after the conversion if the
resulting stock holding company files a notice under paragraph (d)(1) of
this section and the Board does not disapprove the repurchase. The Board
will not approve such repurchases unless the repurchase meets the
standards in paragraph (d)(3) of this section, and the repurchase is
consistent with paragraph (c)(3) of this section.
(ii) The resulting stock holding company may repurchase qualifying
shares of a director or conduct a Board approved repurchase pursuant to
an offer made to all shareholders of the stock holding company.
(iii) Repurchases to fund management recognition plans that have
been ratified by shareholders do not count toward the repurchase
limitations in this section. Repurchases in the first year to fund such
plans require prior written notification to the Board.
(iv) Purchases to fund tax qualified employee stock benefit plans do
not count toward the repurchase limitations in this section.
(2) After the first year, the resulting stock holding company may
repurchase the shares, subject to all other applicable regulatory and
supervisory restrictions and paragraph (c)(3) of this section.
(3) All stock repurchases are subject to the following restrictions.
(i) The resulting stock holding company may not repurchase the
shares if the repurchase will reduce its applicable capital levels below
the amount required for the liquidation account under Sec. 239.62(a).
The resulting stock holding company must comply with the capital
distribution requirements of this subpart.
(ii) The restrictions on share repurchases apply to a charitable
organization under Sec. 239.64(b). The resulting stock holding company
must aggregate
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purchases of shares by the charitable organization with the repurchases.
(d) Board review of repurchase of conversion shares. (1) To
repurchase stock in the first year following conversion, other than
repurchases under paragraphs (c)(1)(iii) or (c)(1)(iv) of this section,
the resulting stock holding company must file a written notice with the
appropriate Reserve Bank. The resulting stock holding company must
provide the following information:
(i) The proposed repurchase program;
(ii) The effect of the repurchases on the regulatory capital and
other capital levels; and
(iii) The purpose of the repurchases and, if applicable, an
explanation of the extraordinary circumstances necessitating the
repurchases.
(2) The resulting stock holding company must file the notice with
the appropriate Reserve Bank at least thirty days before the resulting
stock holding company begins the repurchase program. The Board may
extend its review of the notice for an additional sixty days.
(3) The resulting stock holding company may not repurchase the
shares if the Board objects to the repurchase program. The Board will
not object to the repurchase program if:
(i) The repurchase program will not adversely affect the financial
condition of the resulting savings association;
(ii) The resulting stock holding company submits sufficient
information to evaluate the proposed repurchases;
(iii) The resulting stock holding company demonstrate extraordinary
circumstances and a compelling and valid business purpose for the share
repurchases; and
(iv) The repurchase program would not be contrary to other
applicable regulations.
(e) Declaring and paying dividends following conversion. The
resulting stock holding company may declare or pay a dividend on its
shares after it converts if:
(1) The dividend will not reduce the regulatory capital below the
amount required for the liquidation account under Sec. 239.62(a);
(2) The resulting stock holding company complies with all applicable
regulatory capital requirements after it declares or pays dividends;
(3) The resulting stock holding company complies with the capital
distribution requirements under this subpart; and
(4) The resulting stock holding company does not return any capital,
other than ordinary dividends, to purchasers during the term of the
business plan submitted with the conversion.
(f) Eligibility to acquire shares after conversion. (1) For three
years after the resulting stock holding company converts, no person may,
directly or indirectly, acquire or offer to acquire the beneficial
ownership of more than ten percent of any class of the equity securities
without the Board's prior written approval. If a person violates this
prohibition, the resulting stock holding company may not permit the
person to vote shares in excess of ten percent, and may not count the
shares in excess of ten percent in any shareholder vote.
(2) A person acquires beneficial ownership of more than ten percent
of a class of shares when he or she holds any combination of the stock
or revocable or irrevocable proxies under circumstances that give rise
to a conclusive control determination or rebuttable control
determination under Sec. Sec. 238.21(a) and (d) of this chapter. The
Board will presume that a person has acquired shares if the acquiror
entered into a binding written agreement for the transfer of shares. For
purposes of this section, an offer is made when it is communicated. An
offer does not include non-binding expressions of understanding or
letters of intent regarding the terms of a potential acquisition.
(3) Notwithstanding the restrictions in this section:
(i) Paragraphs (f)(1) and (f)(2) of this section do not apply to any
offer with a view toward public resale made exclusively to the resulting
stock holding company, to the underwriters, or to a selling group acting
on behalf of the resulting savings association.
(ii) Unless the Board objects in writing, any person may offer or
announce an offer to acquire up to one percent of any class of shares.
In computing the one percent limit, the person must include all of his
or her acquisitions of
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the same class of shares during the prior 12 months.
(iii) A corporation whose ownership is, or will be, substantially
the same as the ownership may acquire or offer to acquire more than ten
percent of the common stock, if it makes the offer or acquisition more
than one year after the resulting stock holding company converts.
(iv) One or more of the tax-qualified employee stock benefit plans
may acquire the shares, if the plan or plans do not beneficially own
more than 25 percent of any class of shares of the resulting savings
association in the aggregate.
(v) An acquiror does not have to file a separate application to
obtain Board approval under paragraph (f)(1) of this section, if the
acquiror files an application under part 238 of this chapter that
specifically addresses the criteria listed under paragraph (f)(4) of
this section and the resulting stock holding company does not oppose the
proposed acquisition.
(4) The Board may deny an application under paragraph (f)(1) of this
section if the proposed acquisition:
(i) Is contrary to the purposes of this subpart;
(ii) Is manipulative or deceptive;
(iii) Subverts the fairness of the conversion;
(iv) Is likely to injure the resulting stock holding company;
(v) Is inconsistent with the plan to meet the credit and lending
needs of the proposed market area;
(vi) Otherwise violates laws or regulations; or
(vii) Does not prudently deploy the conversion proceeds.
(g) Additional requirements that apply following conversion. After
conversion, the resulting stock holding company must:
(1) Promptly register the shares under the Securities Exchange Act
of 1934 (15 U.S.C. 78a-78jj, as amended). The resulting stock holding
company may not deregister the shares for three years.
(2) Encourage and assist a market maker to establish and to maintain
a market for the shares. A market maker for a security is a dealer who:
(i) Regularly publishes bona fide competitive bid and offer
quotations for the security in a recognized inter-dealer quotation
system;
(ii) Furnishes bona fide competitive bid and offer quotations for
the security on request; or
(iii) May effect transactions for the security in reasonable
quantities at quoted prices with other brokers or dealers.
(3) Use the best efforts to list the shares on a national or
regional securities exchange or on the National Association of
Securities Dealers Automated Quotation system.
(4) File all post-conversion reports that the Board requires.
Sec. 239.64 Contributions to charitable organizations.
(a) Forming a charitable organization as part of a conversion. When
a mutual holding company converts to the stock form, it may form a
charitable organization. Its contributions to the charitable
organization are governed by the requirements of paragraphs (b) through
(f) of this section.
(b) Donating conversion shares or conversion proceeds to a
charitable organization. Some of the conversion shares or proceeds may
be contributed to a charitable organization if:
(1) The plan of conversion provides for the proposed contribution;
(2) The members approve the proposed contribution; and
(3) The IRS either has approved, or approves within two years after
formation, the charitable organization as a tax-exempt charitable
organization under the Internal Revenue Code.
(c) Member approval of charitable contributions. At the meeting to
consider conversion of the mutual holding company, the members must
separately approve by at least a majority of the total eligible votes, a
contribution of conversion shares or proceeds. If the mutual holding
company has a subsidiary holding company with minority shareholders, or
if the subsidiary savings association has minority shareholders, and the
mutual holding company is adding a charitable contribution as part of a
second step stock conversion, it must also have the minority
shareholders separately approve the
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charitable contribution by a majority of their total eligible votes.
(d) Charitable organization contribution limits. A reasonable amount
of conversion shares or proceeds may be contributed to a charitable
organization, if the contribution will not exceed limits for charitable
deductions under the Internal Revenue Code and the Board does not object
on supervisory grounds. If the mutual holding company or resulting stock
holding company is well-capitalized pursuant to Sec. 238.62 of this
chapter, the Board generally will not object if it contributes an
aggregate amount of eight percent or less of the conversion shares or
proceeds.
(e) Charitable organization requirements. The charitable
organization's charter (or trust agreement) and gift instrument must
provide that:
(1) The charitable organization's primary purpose is to serve and
make grants in the local community;
(2) As long as the charitable organization controls shares, it must
vote those shares in the same ratio as all other shares voted on each
proposal considered by the shareholders;
(3) For at least five years after its organization, one seat on the
charitable organization's board of directors (or board of trustees) is
reserved for an independent director (or trustee) from the local
community. This director may not be the officer, director, or employee,
or the affiliate's officer, director, or employee, and should have
experience with local community charitable organizations and grant
making; and
(4) For at least five years after its organization, one seat on the
charitable organization's board of directors (or board of trustees) is
reserved for a director from the board of directors or the board of
directors of an acquiror or resulting institution in the event of a
merger or acquisition of the organization.
(5) The Board may examine the charitable organization at the
charitable organization's expense;
(6) The charitable organization must comply with all supervisory
directives that the Board imposes;
(7) The charitable organization must annually provide the Board with
a copy of the annual report that the charitable organization submitted
to the IRS;
(8) The charitable organization must operate according to written
policies adopted by its board of directors (or board of trustees),
including a conflict of interest policy; and
(9) The charitable organization may not engage in self-dealing, and
must comply with all laws necessary to maintain its tax-exempt status
under the Internal Revenue Code.
(f) Conflicts of interest involving the directors of the mutual
holding company or resulting stock holding company. (1) An individual
who is the director, officer, or employee, or a person who has the power
to direct the management or policies, or otherwise owes a fiduciary duty
to the mutual holding company or resulting stock holding company and who
will serve as an officer, director, or employee of the charitable
organization, is subject to the following obligations:
(i) The individual must not advance their own personal or business
interests, or those of others with whom the individual has a personal or
business relationship, at the expense of the mutual holding company or
resulting stock holding company;
(ii) If the individual has an interest in a matter or transaction
before the board of directors, the individual must:
(A) Disclose to the board all material nonprivileged information
relevant to the board's decision on the matter or transaction, including
the existence, nature and extent of the individual's interests, and the
facts known to the individual as to the matter or transaction under
consideration;
(B) Refrain from participating in the board's discussion of the
matter or transaction; and
(C) Recuse themselves from voting on the matter or transaction (if
the individual is a director). See Form AC, which provides further
information or operating plans and conflict of interest plans. The
mutual holding company may obtain Form AC from the appropriate Reserve
Bank and the Board's Web site at http://www.federalreserve.gov.
(2) Before the board of directors may adopt a plan of conversion
that includes a charitable organization, the
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mutual holding company must identify the directors that will serve on
the charitable organization's board. These directors may not participate
in the board's discussions concerning contributions to the charitable
organization, and may not vote on the matter.
(3) The stock certificates of shares contributed to the charitable
organization or that the charitable organization otherwise acquires must
bear the following legend: ``The board of directors must consider the
shares that this stock certificate represents as voted in the same ratio
as all other shares voted on each proposal considered by the
shareholders, as long as the shares are controlled by the charitable
organization.''
(4) As long as the charitable organization controls shares, the
resulting stock holding company must consider those shares as voted in
the same ratio as all of the shares voted on each proposal considered by
the shareholders.
(5) After the stock offering is complete, the resulting stock
holding company must submit an executed copy of the following documents
to the appropriate Reserve Bank: the charitable organization's charter
and bylaws (or trust agreement), operating plan (within six months after
the stock offering), conflict of interest policy, and the gift
instrument for the contributions of either stock or cash to the
charitable organization.
Sec. 239.65 Voluntary supervisory conversions.
(a) Voluntary supervisory conversion. (1) The mutual holding company
must comply with this section and Sec. 239.66 to engage in a voluntary
supervisory conversion. This subpart applies to all voluntary
supervisory conversions under sections 10(o)(7) and 10(p) of the Home
Owners' Loan Act (12 U.S.C. 1467a(o) and (p)).
(2) Sections 239.50 through 239.64 also apply to a voluntary
supervisory conversion, unless a requirement is clearly inapplicable.
(b) Conducting a voluntary supervisory conversion. In conducting a
voluntary supervisory conversion, the mutual holding company may:
(1) Sell its shares to the public;
(2) Convert into stock form by merging into a state-chartered
corporation; or
(3) Sell its shares directly to an acquiror, who may be an
individual, company, depository institution, or depository institution
holding company.
(c) Member rights in a voluntary supervisory conversion. Members of
the mutual holding company do not have the right to approve or
participate in a voluntary supervisory conversion, and will not have any
legal or beneficial ownership interests in the converted association,
unless the Board provides otherwise. The members may have interests in a
liquidation account, if one is established.
(d) Eligibility for a voluntary supervisory conversion. A mutual
holding company may be eligible to engage in a voluntary supervisory
conversion if:
(1) Either the mutual holding company or its subsidiary savings
association is significantly undercapitalized under applicable
regulatory capital requirements (or the mutual holding company or its
subsidiary savings association is undercapitalized under applicable
regulatory capital requirements and a standard conversion that would
make it adequately capitalized is not feasible) and will be a viable
entity following the conversion;
(2) Severe financial conditions threaten stability of the mutual
holding company, and a conversion is likely to improve its financial
condition.
(e) A mutual holding company or its subsidiary savings association
will be a viable entity following the conversion if it satisfies all of
the following:
(1) It will be adequately capitalized as a result of the conversion;
(2) It, the proposed conversion, and its acquiror(s) comply with
applicable supervisory policies;
(3) The transaction is in the best interest of the mutual holding
company and its subsidiary savings associations, and the best interest
of the Deposit Insurance Fund and the public; and
(4) The transaction will not injure or be detrimental to the mutual
holding company and its subsidiary savings associations, the Deposit
Insurance Fund, or the public interest.
[[Page 180]]
(f) Plan of voluntary supervisory conversion. A majority of the
board of directors of the mutual holding company must approve a plan of
voluntary supervisory conversion. The mutual holding company must
include all of the following information in the plan of voluntary
supervisory conversion.
(1) The name and address of the mutual holding company.
(2) The name, address, date and place of birth, and social security
number or tax identification number, as applicable, of each proposed
purchaser of conversion shares and a description of that purchaser's
relationship to the mutual holding company.
(3) The title, per-unit par value, number, and per-unit and
aggregate offering price of shares that the mutual holding company will
issue.
(4) The number and percentage of shares that each investor will
purchase.
(5) The aggregate number and percentage of shares that each
director, officer, and any affiliates or associates of the director or
officer will purchase.
(6) A description of any liquidation account.
(7) Certified copies of all resolutions of the board of directors
relating to the conversion.
(g) Voluntary supervisory conversion application. The mutual holding
company must include all of the following information and documents in a
voluntary supervisory conversion application to the Board under this
subpart:
(1) Eligibility. (i) Evidence establishing that the mutual holding
company meets the eligibility requirements under paragraph (d) of this
section.
(ii) An opinion of qualified, independent counsel or an independent,
certified public accountant regarding the tax consequences of the
conversion, or an IRS ruling indicating that the transaction qualifies
as a tax-free reorganization.
(2) Plan of conversion. A plan of voluntary supervisory conversion
that complies with paragraph (e) of this section.
(3) Business plan. A business plan that complies with Sec.
239.53(b), when required by the Board.
(4) Financial data. (i) The most recent audited financial statements
and Thrift Financial Report. The mutual holding company must explain how
its current capital levels or the capital levels of its subsidiary
savings associations make it eligible to engage in a voluntary
supervisory conversion under paragraph (d) of this section.
(ii) A description of the estimated conversion expenses.
(iii) Evidence supporting the value of any non-cash asset
contributions. Appraisals must be acceptable to the Board and the non-
cash asset must meet all other Board policy guidelines.
(iv) Pro forma financial statements that reflect the effects of the
transaction. The mutual holding company must identify the tangible,
core, and risk-based capital levels and show the adjustments necessary
to compute the capital levels. The mutual holding company must prepare
the pro forma statements in conformance with Board regulations and
policy.
(5) Proposed documents. (i) The proposed charter and bylaws.
(ii) The proposed stock certificate form.
(6) Agreements. (i) A copy of any agreements between the mutual
holding company and proposed purchasers.
(ii) A copy and description of all existing and proposed employment
contracts. The mutual holding company must describe the term, salary,
and severance provisions of the contract, the identity and background of
the officer or employee to be employed, and the amount of any conversion
shares to be purchased by the officer or employee or his or her
affiliates or associates.
(7) Related applications. (i) All filings required under the
securities offering rules of subpart E of this part.
(ii) Any required Holding Company Act application or Control Act
notice under part 238 of this chapter.
(iii) A subordinated debt application, if applicable.
(iv) Applications for permission to organize a stock savings and
loan holding company and for approval of a merger.
(v) A statement describing any other applications required under
federal or state banking laws for all transactions
[[Page 181]]
related to the conversion, copies of all dispositive documents issued by
regulatory authorities relating to the applications, and, if requested
by the Board, copies of the applications and related documents.
(8) Waiver request. A description of any of the features of the
application that do not conform to the requirements of this subpart,
including any request for waiver of any of these requirements.
(h) Offers and sales of stock. If the mutual holding company
converts under this subpart, the conversion shares must be offered and
sold in compliance with Sec. 239.59.
(i) Post-conversion acquisition of shares. For three years after the
completion of a voluntary supervisory conversion, neither the resulting
stock holding company nor the principal shareholder(s) may acquire
shares from minority shareholders without the Board's prior approval.
Sec. 239.66 Board review of the voluntary supervisory
conversion application.
(a) Board review of a voluntary supervisory conversion application.
The Board will generally approve the application to engage in a
voluntary supervisory conversion unless it determines:
(1) The mutual holding company does not meet the eligibility
requirements for a voluntary supervisory conversion under Sec. Sec.
239.65(d) or because the proceeds from the sale of the conversion stock,
less the expenses of the conversion, would be insufficient to satisfy
any applicable viability requirement;
(2) The transaction is detrimental to or would cause potential
injury to the mutual holding company, its subsidiary savings
association, or the Deposit Insurance Fund or is contrary to the public
interest;
(3) The mutual holding company or the acquiror, or the controlling
parties or directors and officers of the mutual holding company or the
acquiror, have engaged in unsafe or unsound practices in connection with
the voluntary supervisory conversion; or
(4) The mutual holding company fails to justify an employment
contract incidental to the conversion, or the employment contract will
be an unsafe or unsound practice or represent a sale of control. In a
voluntary supervisory conversion, the Board generally will not approve
employment contracts of more than one year for the existing management.
(b) Conditions the Board may impose on an approval. (1) The Board
will condition approval of a voluntary supervisory conversion
application on all of the following.
(i) The conversion stock sale must be complete within three months
after the Board approves the application. The Board may grant an
extension for good cause.
(ii) The mutual holding company and the resulting stock holding
company must comply with all filing requirements of subpart E of this
part.
(iii) The mutual holding company must submit an opinion of
independent legal counsel indicating that the sale of the shares
complies with all applicable state securities law requirements.
(iv) The mutual holding company and the resulting stock holding
company must comply with all applicable laws, rules, and regulations.
(v) The mutual holding company and the resulting stock holding
company must satisfy any other requirements or conditions the Board may
impose.
(2) The Board may condition approval of a voluntary supervisory
conversion application on either of the following:
(i) The mutual holding company and the resulting stock holding
company must satisfy any conditions and restrictions the Board imposes
to prevent unsafe or unsound practices, to protect the Deposit Insurance
Fund and the public interest, and to prevent potential injury or
detriment to the mutual holding company before and after the conversion.
The Board may impose these conditions and restrictions on the mutual
holding company and the resulting stock holding company (before and
after the conversion), the acquiror, controlling parties, or directors
and officers of the mutual holding company or the acquiror; or
(ii) The mutual holding company or the resulting stock holding
company must infuse a larger amount of capital, if necessary, for safety
and soundness reasons.
[[Page 182]]
Sec. Appendix A to Part 239--Mutual Holding Company Model Charter
FEDERAL MUTUAL HOLDING COMPANY CHARTER
Section 1: Corporate title. The name of the mutual holding company
is ----(the ``Mutual Holding Company'').
Section 2: Duration. The duration of the Mutual Holding Company is
perpetual.
Section 3: Purpose and powers. The purpose of the Mutual Holding
Company is to pursue any or all of the lawful objectives of a federal
mutual savings and loan holding company chartered under section 10(o) of
the Home Owners' Loan Act, 12 U.S.C. 1467a(o), and to exercise all of
the express, implied, and incidental powers conferred thereby and all
acts amendatory thereof and supplemental thereto, subject to the
Constitution and the laws of the United States as they are now in
effect, or as they may hereafter be amended, and subject to all lawful
and applicable rules, regulations, and orders of the Federal Reserve
Board (``Board'').
Section 4: Capital. The Mutual Holding Company shall have no capital
stock.
Section 5: Members. [The content of this section 5 shall be
identical to the content of the parallel section in the charter of the
reorganizing association, with the following exceptions: (A) Any
provisions conferring membership rights upon borrowers of the
reorganizing association shall be eliminated and replaced with
provisions grandfathering those rights in accordance with 12 CFR 239.5;
and (B) appropriate changes shall be made to indicate that membership
rights in the mutual holding company derive from deposit accounts in
and, to the extent of any grandfather provisions, borrowings from the
resulting association. Set forth below is an example of how section 5
should appear in the charter of a mutual holding company formed by a
reorganizing association whose charter conforms to the model charter
prescribed for federal mutual savings associations for calendar year
1989. Additional changes to this section 5 may be required whenever a
mutual holding company reorganization involves an acquiree association,
or a mutual holding company makes a post-reorganization acquisition of a
mutual savings association, so as to preserve the membership rights of
the members of the acquired association consistent with 12 CFR 239.5.]
All holders of the savings, demand, or other authorized accounts of
----[insert the name of the resulting association] (the ``Association'')
are members of the Mutual Holding Company. With respect to all questions
requiring action by the members of the Mutual Holding Company, each
holder of an account in the Association shall be permitted to cast one
vote for each $100, or fraction thereof, of the withdrawal value of the
member's account. In addition, borrowers from the Association as of ----
[insert the date of the reorganization or any earlier date as of which
new borrowings ceased to result in membership rights] shall be entitled
to one vote for the period of time during which such borrowings are in
existence. [The foregoing sentence should be included only if the
charter of the reorganizing association confers voting rights on any
borrowers.] No member, however, shall cast more than one thousand votes.
All accounts shall be nonassessable.
Section 6. Directors. The Mutual Holding Company shall be under the
direction of a board of directors. The authorized number of directors
shall not be fewer than five nor more than fifteen, as fixed in the
Mutual Holding Company's bylaws, except that the number of directors may
be decreased to a number less than five or increased to a number greater
than fifteen with the prior approval of the Board.
Section 7: Capital, surplus, and distribution of earnings. [The
content of this section 7 shall be identical to the content of the
parallel section in the charter of the reorganizing association, except
for changes made to indicate that distribution rights in the mutual
holding company derive from deposit accounts in the resulting
association, any changes required to provide that the Board shall be the
approving authority in instances where the charter requires regulatory
approval of distributions, and any other changes necessary to
accommodate the mutual holding company format. Set forth below is an
example of how section 7 should appear in the charter of a mutual
holding company formed by a reorganizing association whose charter
conforms to the model charter prescribed for federal mutual savings
associations for calendar year 1989. Additional changes to this section
7 may be required whenever a mutual holding company reorganization
involves an acquiree association, or a mutual holding company makes a
post-reorganization acquisition of a mutual savings association, so as
to preserve the membership rights of the members of the acquired
association consistent with 12 CFR 239.5].
The Mutual Holding Company shall distribute net earnings to account
holders of the Association on such basis and in accordance with such
terms and conditions as may from time to time be authorized by the
Board, provided that the Mutual Holding Company may establish minimum
account balance requirements for account holders to be eligible for
distributions of earnings.
All holders of accounts of the Association shall be entitled to
equal distribution of the assets of the Mutual Holding Company, pro rata
to the value of their accounts in the Association, in the event of
voluntary or involuntary liquidation, dissolution, or winding up of the
Mutual Holding Company.
[[Page 183]]
Section 8. Amendment. Adoption of any preapproved charter amendment
shall be effective after such preapproved amendment has been approved by
the members at a legal meeting. Any other amendment, addition, change,
or repeal of this charter must be approved by the Board prior to
approval by the members at a legal meeting and shall be effective upon
filing with the Board in accordance with regulatory procedures.
Attest:________________________________________________________________
Secretary of the Association
By:____________________________________________________________________
President or Chief Executive Officer of the Association
By:____________________________________________________________________
Secretary of the Board of Governors of the Federal Reserve System
Effective Date:________________________________________________________
Sec. Appendix B to Part 239--Subsidiary Holding Company of a Mutual
Holding Company Model Charter
FEDERAL MHC SUBSIDIARY HOLDING COMPANY CHARTER
Section 1. Corporate title. The full corporate title of the mutual
holding company (``MHC'') subsidiary holding company is XXX.
Section 2. Domicile. The domicile of the MHC subsidiary holding
company shall be in the city of --, in the State of --.
Section 3. Duration. The duration of the MHC subsidiary holding
company is perpetual.
Section 4. Purpose and powers. The purpose of the MHC subsidiary
holding company is to pursue any or all of the lawful objectives of a
federal mutual holding company chartered under section 10(o) of the Home
Owners' Loan Act, 12 U.S.C. 1467a(o), and to exercise all of the
express, implied, and incidental powers conferred thereby and by all
acts amendatory thereof and supplemental thereto, subject to the
Constitution and laws of the United States as they are now in effect, or
as they may hereafter be amended, and subject to all lawful and
applicable rules, regulations, and orders of the Board of Governors of
the Federal Reserve System (``Board'').
Section 5. Capital stock. The total number of shares of all classes
of the capital stock that the MHC subsidiary holding company has the
authority to issue is --, all of which shall be common stock of par [or
if no par is specified then shares shall have a stated] value of -- per
share. The shares may be issued from time to time as authorized by the
board of directors without the approval of its shareholders, except as
otherwise provided in this section 5 or to the extent that such approval
is required by governing law, rule, or regulation. The consideration for
the issuance of the shares shall be paid in full before their issuance
and shall not be less than the par [or stated] value. Neither promissory
notes nor future services shall constitute payment or part payment for
the issuance of shares of the MHC subsidiary holding company. The
consideration for the shares shall be cash, tangible or intangible
property (to the extent direct investment in such property would be
permitted to the MHC subsidiary holding company), labor, or services
actually performed for the MHC subsidiary holding company, or any
combination of the foregoing. In the absence of actual fraud in the
transaction, the value of such property, labor, or services, as
determined by the board of directors of the MHC subsidiary holding
company, shall be conclusive. Upon payment of such consideration, such
shares shall be deemed to be fully paid and nonassessable. In the case
of a stock dividend, that part of the retained earnings of the MHC
subsidiary holding company that is transferred to common stock or paid-
in capital accounts upon the issuance of shares as a stock dividend
shall be deemed to be the consideration for their issuance.
Except for shares issued in the initial organization of the MHC
subsidiary holding company, no shares of capital stock (including shares
issuable upon conversion, exchange, or exercise of other securities)
shall be issued, directly or indirectly, to officers, directors, or
controlling persons (except for shares issued to the parent mutual
holding company) of the MHC subsidiary holding company other than as
part of a general public offering or as qualifying shares to a director,
unless the issuance or the plan under which they would be issued has
been approved by a majority of the total votes eligible to be cast at a
legal meeting.
The holders of the common stock shall exclusively possess all voting
power. Each holder of shares of common stock shall be entitled to one
vote for each share held by such holder, except as to the cumulation of
votes for the election of directors, unless the charter provides that
there shall be no such cumulative voting. Subject to any provision for a
liquidation account, in the event of any liquidation, dissolution, or
winding up of the MHC subsidiary holding company, the holders of the
common stock shall be entitled, after payment or provision for payment
of all debts and liabilities of the MHC subsidiary holding company, to
receive the remaining assets of the MHC subsidiary holding company
available for distribution, in cash or in kind. Each share of common
stock shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
Section 6. Preemptive rights. Holders of the capital stock of the
MHC subsidiary holding company shall not be entitled to preemptive
rights with respect to any shares of
[[Page 184]]
the MHC subsidiary holding company which may be issued.
Section 7. Directors. The MHC subsidiary holding company shall be
under the direction of a board of directors. The authorized number of
directors, as stated in the MHC subsidiary holding company's bylaws,
shall not be fewer than five nor more than fifteen except when a greater
or lesser number is approved by the Board, or his or her delegate.
Section 8. Amendment of charter. Except as provided in Section 5, no
amendment, addition, alteration, change or repeal of this charter shall
be made, unless such is proposed by the board of directors of the MHC
subsidiary holding company, approved by the shareholders by a majority
of the votes eligible to be cast at a legal meeting, unless a higher
vote is otherwise required, and approved or preapproved by the Board.
Attest:________________________________________________________________
Secretary of the Subsidiary Holding Company
By:____________________________________________________________________
President or Chief Executive Officer of the Subsidiary Holding Company
By:____________________________________________________________________
Secretary of the Board of Governors of the Federal Reserve System
Effective Date:________________________________________________________
Sec. Appendix C to Part 239--Mutual Holding Company Model Bylaws
MODEL BYLAWS FOR MUTUAL HOLDING COMPANIES
The term ``trustees'' may be substituted for the term ``directors.''
1. Annual meeting of members. The annual meeting of the members of
the mutual holding company for the election of directors and for the
transaction of any other business of the mutual holding company shall be
held, as designated by the board of directors, at a location within the
state that constitutes the principal place of business of the mutual
holding company, or at any other convenient place the board of directors
may designate, at (insert date and time within 150 days after the end of
the mutual holding company's fiscal year, if not a legal holiday, or if
a legal holiday then on the next succeeding day not a legal holiday). At
each annual meeting, the officers shall make a full report of the
financial condition of the mutual holding company and of its progress
for the preceding year and shall outline a program for the succeeding
year.
2. Special meetings of members. Special meetings of the members of
the mutual holding company may be called at any time by the president or
the board of directors and shall be called by the president, a vice
president, or the secretary upon the written request of members of
record, holding in the aggregate at least one-tenth of the voting
capital of the mutual holding company. Such written request shall state
the purpose of the meeting and shall be delivered at the principal place
of business of the mutual holding company addressed to the president.
For purposes of this section, ``voting capital'' means FDIC-insured
deposits as of the voting record date. Annual and special meetings shall
be conducted in accordance with the most current edition of Robert's
Rules of Order or any other set of written procedures agreed to by the
board of directors.
3. Notice of meeting of members. Notice of each meeting shall be
either published once a week for the two successive calendar weeks (in
each instance on any day of the week) immediately prior to the week in
which such meeting shall convene, in a newspaper printed in the English
language and of general circulation in the city or county in which the
principal place of business of the mutual holding company is located, or
mailed postage prepaid at least (insert number no less than 15) days and
not more than (insert number not more than 45) days prior to the date on
which such meeting shall convene, to each of its members of record at
the last address appearing on the books of the mutual holding company.
Such notice shall state the name of the mutual holding company, the
place of the meeting, the date and time when it shall convene, and the
matters to be considered. A similar notice shall be posted in a
conspicuous place in each of the offices of the mutual holding company
during the 14 days immediately preceding the date on which such meeting
shall convene. If any member, in person or by authorized attorney, shall
waive in writing notice of any meeting of members, notice thereof need
not be given to such member. When any meeting is adjourned for 30 days
or more, notice of the adjournment and reconvening of the meeting shall
be given as in the case of the original meeting.
4. Fixing of record date. For the purpose of determining members
entitled to notice of or to vote at any meeting of members or any
adjournment thereof, or in order to make a determination of members for
any other proper purpose, the board of directors shall fix in advance a
record date for any such determination of members. Such date shall be
not more than 60 days nor fewer than 10 days prior to the date on which
the action, requiring such determination of members, is to be taken. The
member entitled to participate in any such action shall be the member of
record on the books of the mutual holding company on such record date.
The number of votes which each member shall be entitled to cast at any
meeting of the members shall be determined from the books of the mutual
holding company as of such record date. Any member of such record date
who ceases to be a member prior to such meeting shall not be entitled to
vote at that meeting. The same
[[Page 185]]
determination shall apply to any adjourned meeting.
5. Member quorum. Any number of members present and voting,
represented in person or by proxy, at a regular or special meeting of
the members shall constitute a quorum. A majority of all votes cast at
any meeting of the members shall determine any question, unless
otherwise required by regulation. Directors, however, are elected by a
plurality of the votes cast at an election of directors. At any
adjourned meeting any business may be transacted which might have been
transacted at the meeting as originally called. Members present at a
duly constituted meeting may continue to transact business until
adjournment.
6. Voting by proxy. Voting at any annual or special meeting of the
members may be by proxy pursuant to the rules and regulations of the
Board of Governors of the Federal Reserve System (Board), provided, that
no proxies shall be voted at any meeting unless such proxies shall have
been placed on file with the secretary of the mutual holding company,
for verification, prior to the convening of such meeting. Proxies may be
given telephonically or electronically as long as the holder uses a
procedure for verifying the identity of the member. All proxies with a
term greater than eleven months or solicited at the expense of the
mutual holding company must run to the board of directors as a whole, or
to a committee appointed by a majority of such board. Accounts held by
an administrator, executor, guardian, conservator or receiver may be
voted in person or by proxy by such person. Accounts held by a trustee
may be voted by such trustee either in person or by proxy, in accordance
with the terms of the trust agreement, but no trustee shall be entitled
to vote accounts without a transfer of such accounts into the trustee
name. Accounts held in trust in an IRA or Keogh Account, however, may be
voted by the mutual holding company if no other instructions are
received. Joint accounts shall be entitled to no more than 1000 votes,
and any owner may cast all the votes unless the mutual holding company
has otherwise been notified in writing.
7. Communication between members. Communication between members
shall be subject to any applicable rules or regulations of the Board. No
member, however, shall have the right to inspect or copy any portion of
any books or records of a mutual holding company containing: (i) a list
of depositors in or borrowers from such mutual holding company; (ii)
their addresses; (iii) individual deposit or loan balances or records;
or (iv) any data from which such information could reasonably be
constructed.
8. Number of directors, membership. The number of directors shall be
----[not fewer than five nor more than fifteen], except where authorized
by the Board. Each director shall be a member of the mutual holding
company. Directors shall be elected for periods of one to three years
and until their successors are elected and qualified, but if a staggered
board is chosen, provision shall be made for the election of
approximately one-third or one-half of the board each year, as
appropriate.
9. Meetings of the board. The board of directors shall meet
regularly without notice at the principal place of business of the
mutual holding company at least once each month at an hour and date
fixed by resolution of the board, provided that the place of meeting may
be changed by the directors. Special meetings of the board may be held
at any place specified in a notice of such meeting and shall be called
by the secretary upon the written request of the chairman or of three
directors. All special meetings shall be held upon at least 24 hours
written notice to each director unless notice is waived in writing
before or after such meeting. Such notice shall state the place, date,
time, and purposes of such meeting. A majority of the authorized
directors shall constitute a quorum for the transaction of business. The
act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board. Action may be taken without a
meeting if unanimous written consent is obtained for such action. The
board may also permit telephonic participation at meetings. The meetings
shall be under the direction of a chairman, appointed annually by the
board, or in the absence of the chairman, the meetings shall be under
the direction of the president.
10. Officers, employees, and agents. Annually at the meeting of the
board of directors of the mutual holding company following the annual
meeting of the members of the mutual holding company, the board shall
elect a president, one or more vice presidents, a secretary, and a
treasurer or comptroller: Provided, that the offices of president and
secretary may not be held by the same person and a vice president may
also be the treasurer or comptroller. The board may appoint such
additional officers, employees, and agents as it may from time to time
determine. The term of office of all officers shall be one year or until
their respective successors are elected and qualified. Any officer may
be removed at any time by the board with or without cause, but such
removal, other than for cause, shall be without prejudice to the
contractual rights, if any, of the person so removed. In the absence of
designation from time to time of powers and duties by the board, the
officers shall have such powers and duties as generally pertain to their
respective offices. Any indemnification by the mutual holding company of
the mutual holding company's personnel is subject
[[Page 186]]
to any applicable rules or regulations of the Board.
11. Vacancies, resignation or removal of directors. Members of the
mutual holding company shall elect directors by ballot: Provided, that
in the event of a vacancy on the board between meetings of members, the
board of directors may, by their affirmative vote, fill such vacancy,
even if the remaining directors constitute less than a quorum. A
director elected to fill a vacancy shall be elected to serve only until
the next election of directors by the members. Any director may resign
at any time by sending a written notice of such resignation to the
mutual holding company delivered to the secretary. Unless otherwise
specified therein such resignation shall take effect upon receipt by the
secretary. More than three consecutive absences from regular meetings of
the board, unless excused by resolution of the board, shall
automatically constitute a resignation, effective when such resignation
is accepted by the board. At a meeting of members called expressly for
that purpose, directors or the entire board may be removed, only with
cause, by a vote of the holders of a majority of the shares then
entitled to vote at an election of directors.
12. Powers of the board. The board of directors shall have the
power: (a) By resolution, to appoint from among its members and remove
an executive committee, which committee shall have and may exercise the
powers of the board between the meetings of the board, but no such
committee shall have the authority of the board to amend the charter or
bylaws, adopt a plan of merger, consolidation, dissolution, or provide
for the disposition of all or substantially all the property and assets
of the mutual holding company. Such committee shall not operate to
relieve the board, or any member thereof, of any responsibility imposed
by law; (b) To appoint and remove by resolution the members of such
other committees as may be deemed necessary and prescribe the duties
thereof; (c) To fix the compensation of directors, officers, and
employees; and to remove any officer or employee at any time with or
without cause; (d) To limit payments on capital which may be accepted;
and (e) To exercise any and all of the powers of the mutual holding
company not expressly reserved by the charter to the members.
13. Execution of instruments, generally. All documents and
instruments or writings of any nature shall be signed, executed,
verified, acknowledged, and delivered by such officers, agents, or
employees of the mutual holding company or any one of them and in such
manner as from time to time may be determined by resolution of the
board. All notes, drafts, acceptances, checks, endorsements, and all
evidences of indebtedness of the mutual holding company whatsoever shall
be signed by such officer or officers or such agent or agents of the
mutual holding company and in such manner as the board may from time to
time determine. Endorsements for deposit to the credit of the mutual
holding company in any of its duly authorized depositories shall be made
in such manner as the board may from time to time determine. Proxies to
vote with respect to shares or accounts of other mutual holding
companies or stock of other corporations owned by, or standing in the
name of, the mutual holding company may be executed and delivered from
time to time on behalf of the mutual holding company by the president or
a vice president and the secretary or an assistant secretary of the
mutual holding company or by any other persons so authorized by the
board.
14. Nominating committee. The chairman, at least 30 days prior to
the date of each annual meeting, shall appoint a nominating committee of
three individuals who are members of the mutual holding company. Such
committee shall make nominations for directors in writing and deliver to
the secretary such written nominations at least 15 days prior to the
date of the annual meeting, which nominations shall then be posted in a
prominent place in the principal place of business for the 15-day period
prior to the date of the annual meeting, except in the case of a nominee
substituted as a result of death or other incapacity. Provided such
committee is appointed and makes such nominations, no nominations for
directors except those made by the nominating committee shall be voted
upon at the annual meeting unless other nominations by members are made
in writing and delivered to the secretary of the mutual holding company
at least 10 days prior to the date of the annual meeting, which
nominations shall then be posted in a prominent place in the principal
place of business for the 10-day period prior to the date of the annual
meeting, except in the case of a nominee substituted as a result of
death or other incapacity. Ballots bearing the names of all individuals
nominated by the nominating committee and by other members prior to the
annual meeting shall be provided for use by the members at the annual
meeting. If at any time the chairman shall fail to appoint such
nominating committee, or the nominating committee shall fail or refuse
to act at least 15 days prior to the annual meeting, nominations for
directors may be made at the annual meeting by any member and shall be
voted upon.
15. New business. Any new business to be taken up at the annual
meeting, including any proposal to increase or decrease the number of
directors of the mutual holding company, shall be stated in writing and
filed with the secretary of the mutual holding company at least 30 days
before the date of the annual meeting, and all business so stated,
proposed, and filed shall be considered at
[[Page 187]]
the annual meeting; but no other proposal shall be acted upon at the
annual meeting. Any member may make any other proposal at the annual
meeting and the same may be discussed and considered; but unless stated
in writing and filed with the secretary 30 days before the meeting, such
proposal shall be laid over for action at an adjourned, special, or
regular meeting of the members taking place at least 30 days thereafter.
This provision shall not prevent the consideration and approval or
disapproval at the annual meeting of the reports of officers and
committees, but in connection with such reports no new business shall be
acted upon at such annual meeting unless stated and filed as herein
provided.
16. Seal. The seal shall be two concentric circles between which
shall be the name of the mutual holding company. The year of
incorporation, the word ``Incorporated'' or an emblem may appear in the
center.
17. Amendment. Adoption of any bylaw amendment pursuant to Sec.
239.15 of the Board's regulations, as long as consistent with applicable
law, rules and regulations, and which adequately addresses the subject
and purpose of the stated by law section, shall be effective after (i)
approval of the amendment by a majority vote of the authorized board, or
by a vote of the members of the mutual holding company at a legal
meeting; and (ii) receipt of any applicable regulatory approval. When a
mutual holding company fails to meet its quorum requirement solely due
to vacancies on the board, the bylaws may be amended by an affirmative
vote of a majority of the sitting board.
18. Age limitations. [Bylaws on age limitations must comply with all
Federal laws, such as the Age Discrimination in Employment Act and the
Employee Retirement Income Security Act.]
(a) Directors. No individual ---- years of age shall be eligible for
election, reelection, appointment, or reappointment to the board of the
mutual holding company. No director shall serve as such beyond the
annual meeting of the mutual holding company immediately following the
director becoming ----(fill in age used above), except that a director
serving on ----(fill in bylaw adoption date) may complete the term as
director. This age limitation does not apply to an advisory director.
(b) Officers. No individual ---- years of age shall be eligible for
election, reelection, appointment, or reappointment as an officer of the
mutual holding company. No officer shall serve beyond the annual meeting
of the mutual holding company immediately following the officer becoming
----(fill in age used above), except that an officer serving on ----
(fill in bylaw adoption date) may complete the term. However, an officer
shall, at the option of the board, retire at age ---- if the officer has
served in an executive or high policy-making post for at least two years
immediately prior to retirement and is immediately entitled to
nonforfeitable annual retirement benefits of at least ----.
Sec. Appendix D to Part 239--Subsidiary Holding Company of a Mutual
Holding Company Model Bylaws
MHC Subsidiary Holding Company Bylaws
Article I--Home Office
The home office of the Subsidiary Holding Company shall be at ------
---------- [set forth the full address] in the County of --------------
-- , in the State of ---------------- .
Article II--Shareholders
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Subsidiary Holding
Company or at such other convenient place as the board of directors may
determine.
Section 2. Annual Meeting. A meeting of the shareholders of the
Subsidiary Holding Company for the election of directors and for the
transaction of any other business of the Subsidiary Holding Company
shall be held annually within 150 days after the end of the Subsidiary
Holding Company's fiscal year on the ----of ---- if not a legal holiday,
and if a legal holiday, then on the next day following which is not a
legal holiday, at ----, or at such other date and time within such 150-
day period as the board of directors may determine.
Section 3. Special Meetings. Special meetings of the shareholders
for any purpose or purposes, unless otherwise prescribed by the
regulations of the Board of Governors of the Federal Reserve System
(``Board''), may be called at any time by the chairman of the board, the
president, or a majority of the board of directors, and shall be called
by the chairman of the board, the president, or the secretary upon the
written request of the holders of not less than one-tenth of all of the
outstanding capital stock of the Subsidiary Holding Company entitled to
vote at the meeting. Such written request shall state the purpose or
purposes of the meeting and shall be delivered to the home office of the
Subsidiary Holding Company addressed to the chairman of the board, the
president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules
of Order unless otherwise prescribed by regulations of the Board or
these bylaws or the board of directors adopts another written procedure
for the conduct of meetings. The board of directors shall designate,
when present, either the chairman of
[[Page 188]]
the board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place,
day, and hour of the meeting and the purpose(s) for which the meeting is
called shall be delivered not fewer than 20 nor more than 50 days before
the date of the meeting, either personally or by mail, by or at the
direction of the chairman of the board, the president, or the secretary,
or the directors calling the meeting, to each shareholder of record
entitled to vote at such meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the mail, addressed to the shareholder
at the address as it appears on the stock transfer books or records of
the Subsidiary Holding Company as of the record date prescribed in
section 6 of this article II with postage prepaid. When any
shareholders' meeting, either annual or special, is adjourned for 30
days or more, notice of the adjourned meeting shall be given as in the
case of an original meeting. It shall not be necessary to give any
notice of the time and place of any meeting adjourned for less than 30
days or of the business to be transacted at the meeting, other than an
announcement at the meeting at which such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment, or shareholders entitled to receive
payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the board of directors shall
fix in advance a date as the record date for any such determination of
shareholders. Such date in any case shall be not more than 60 days and,
in case of a meeting of shareholders, not fewer than 10 days prior to
the date on which the particular action, requiring such determination of
shareholders, is to be taken. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any
adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer
books for shares of the Subsidiary Holding Company shall make a complete
list of the shareholders of record entitled to vote at such meeting, or
any adjournment thereof, arranged in alphabetical order, with the
address and the number of shares held by each. This list of shareholders
shall be kept on file at the home office of the Subsidiary Holding
Company and shall be subject to inspection by any shareholder of record
or the shareholder's agent at any time during usual business hours for a
period of 20 days prior to such meeting. Such list shall also be
produced and kept open at the time and place of the meeting and shall be
subject to inspection by any shareholder of record or any shareholder's
agent during the entire time of the meeting. The original stock transfer
book shall constitute prima facie evidence of the shareholders entitled
to examine such list or transfer books or to vote at any meeting of
shareholders. In lieu of making the shareholder list available for
inspection by shareholders as provided in the preceding paragraph, the
board of directors may elect to follow the procedures prescribed in
Sec. 239.26(d) of the Board's regulations as now or hereafter in
effect.
Section 8. Quorum. A majority of the outstanding shares of the
Subsidiary Holding Company entitled to vote, represented in person or by
proxy, shall constitute a quorum at a meeting of shareholders. If less
than a majority of the outstanding shares is represented at a meeting, a
majority of the shares so represented may adjourn the meeting from time
to time without further notice. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally notified.
The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of
enough shareholders to constitute less than a quorum. If a quorum is
present, the affirmative vote of the majority of the shares represented
at the meeting and entitled to vote on the subject matter shall be the
act of the shareholders, unless the vote of a greater number of
shareholders voting together or voting by classes is required by law or
the charter. Directors, however, are elected by a plurality of the votes
cast at an election of directors.
Section 9. Proxies. At all meetings of shareholders, a shareholder
may vote by proxy executed in writing by the shareholder or by his or
her duly authorized attorney in fact. Proxies may be given
telephonically or electronically as long as the holder uses a procedure
for verifying the identity of the shareholder. Proxies solicited on
behalf of the management shall be voted as directed by the shareholder
or, in the absence of such direction, as determined by a majority of the
board of directors. No proxy shall be valid more than eleven months from
the date of its execution except for a proxy coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons.
When ownership stands in the name of two or more persons, in the absence
of written directions to the Subsidiary Holding Company to the contrary,
at any meeting of the shareholders of the Subsidiary Holding Company any
one or more of such shareholders may cast, in person or by proxy, all
votes to which such ownership is entitled. In the event an attempt is
made to cast conflicting votes, in person or
[[Page 189]]
by proxy, by the several persons in whose names shares of stock stand,
the vote or votes to which those persons are entitled shall be cast as
directed by a majority of those holding such and present in person or by
proxy at such meeting, but no votes shall be cast for such stock if a
majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in
the name of another corporation may be voted by any officer, agent, or
proxy as the bylaws of such corporation may prescribe, or, in the
absence of such provision, as the board of directors of such corporation
may determine. Shares held by an administrator, executor, guardian, or
conservator may be voted by him or her, either in person or by proxy,
without a transfer of such shares into his or her name. Shares standing
in the name of a trustee may be voted by him or her, either in person or
by proxy, but no trustee shall be entitled to vote shares held by him or
her without a transfer of such shares into his or her name. Shares held
in trust in an IRA or Keogh Account, however, may by voted by the
Subsidiary Holding Company if no other instructions are received. Shares
standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such
receiver without the transfer into his or her name if authority to do so
is contained in an appropriate order of the court or other public
authority by which such receiver was appointed. A shareholder whose
shares are pledged shall be entitled to vote such shares until the
shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so
transferred. Neither treasury shares of its own stock held by the
Subsidiary Holding Company nor shares held by another corporation, if a
majority of the shares entitled to vote for the election of directors of
such other corporation are held by the Subsidiary Holding Company, shall
be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting. [If
charter authorizes cumulative voting, the following Section 12 shall
apply, otherwise renumber Sections 13-16 as Sections 12-15.]
Section 12. Cumulative Voting. Every shareholder entitled to vote at
an election for directors shall have the right to vote, in person or by
proxy, the number of shares owned by the shareholder for as many persons
as there are directors to be elected and for whose election the
shareholder has a right to vote, or to cumulate the votes by giving one
candidate as many votes as the number of such directors to be elected
multiplied by the number of shares shall equal or by distributing such
votes on the same principle among any number of candidates.
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any individual other
than nominees for office as inspectors of election to act at such
meeting or any adjournment. The number of inspectors shall be either one
or three. Any such appointment shall not be altered at the meeting. If
inspectors of election are not so appointed, the chairman of the board
or the president may, or on the request of not fewer than 10 percent of
the votes represented at the meeting shall, make such appointment at the
meeting. If appointed at the meeting, the majority of the votes present
shall determine whether one or three inspectors are to be appointed. In
case any individual appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting or at the meeting by the chairman of
the board or the president. Unless otherwise prescribed by regulations
of the Board, the duties of such inspectors shall include: determining
the number of shares and the voting power of each share, the shares
represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies; receiving votes, ballots,
or consents; hearing and determining all challenges and questions in any
way arising in connection with the rights to vote; counting and
tabulating all votes or consents; determining the result; and such acts
as may be proper to conduct the election or vote with fairness to all
shareholders.
Section 14. Nominating Committee. The board of directors shall act
as a nominating committee for selecting the management nominees for
election as directors. Except in the case of a nominee substituted as a
result of the death or other incapacity of a management nominee, the
nominating committee shall deliver written nominations to the secretary
at least 20 days prior to the date of the annual meeting. Upon delivery,
such nominations shall be posted in a conspicuous place in each office
of the Subsidiary Holding Company. No nominations for directors except
those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by shareholders are made in writing and
delivered to the secretary of the Subsidiary Holding Company at least
five days prior to the date of the annual meeting. Upon delivery, such
nominations shall be posted in a conspicuous place in each office of the
Subsidiary Holding Company. Ballots bearing the names of all persons
nominated by the nominating committee and by shareholders shall be
provided for use at the annual meeting. However, if the nominating
committee shall fail or refuse to act at least 20 days prior to the
annual meeting, nominations for directors may be made at the annual
meeting by any
[[Page 190]]
shareholder entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the
annual meeting shall be stated in writing and filed with the secretary
of the Subsidiary Holding Company at least five days before the date of
the annual meeting, and all business so stated, proposed, and filed
shall be considered at the annual meeting; but no other proposal shall
be acted upon at the annual meeting. Any shareholder may make any other
proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the secretary at
least five days before the meeting, such proposal shall be laid over for
action at an adjourned, special, or annual meeting of the shareholders
taking place 30 days or more thereafter. This provision shall not
prevent the consideration and approval or disapproval at the annual
meeting of reports of officers, directors, and committees; but in
connection with such reports, no new business shall be acted upon at
such annual meeting unless stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required to
be taken at a meeting of the shareholders, or any other action which may
be taken at a meeting of shareholders, may be taken without a meeting if
consent in writing, setting forth the action so taken, shall be given by
all of the shareholders entitled to vote with respect to the subject
matter.
Article III--Board of Directors
Section 1. General Powers. The business and affairs of the
Subsidiary Holding Company shall be under the direction of its board of
directors. The board of directors shall annually elect a chairman of the
board and a president from among its members and shall designate, when
present, either the chairman of the board or the president to preside at
its meetings.
Section 2. Number and Term. The board of directors shall consist of
---- [not fewer than five nor more than fifteen] members, and shall be
divided into three classes as nearly equal in number as possible. The
members of each class shall be elected for a term of three years and
until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this bylaw following
the annual meeting of shareholders. The board of directors may provide,
by resolution, the time and place, for the holding of additional regular
meetings without other notice than such resolution. Directors may
participate in a meeting by means of a conference telephone or similar
communications device through which all individuals participating can
hear each other at the same time. Participation by such means shall
constitute presence in person for all purposes.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the
Subsidiary Holding Company unless the Subsidiary Holding Company is a
wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of
directors may be called by or at the request of the chairman of the
board, the president, or one-third of the directors. The persons
authorized to call special meetings of the board of directors may fix
any place, within the Subsidiary Holding Company's normal lending
territory, as the place for holding any special meeting of the board of
directors called by such persons. Members of the board of directors may
participate in special meetings by means of conference telephone or
similar communications equipment by which all persons participating in
the meeting can hear each other. Such participation shall constitute
presence in person for all purposes.
Section 6. Notice. Written notice of any special meeting shall be
given to each director at least 24 hours prior thereto when delivered
personally or by telegram or at least five days prior thereto when
delivered by mail at the address at which the director is most likely to
be reached. Such notice shall be deemed to be delivered when deposited
in the mail so addressed, with postage prepaid if mailed, when delivered
to the telegraph company if sent by telegram, or when the Subsidiary
Holding Company receives notice of delivery if electronically
transmitted. Any director may waive notice of any meeting by a writing
filed with the secretary. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a
director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called
or convened. Neither the business to be transacted at, nor the purpose
of, any meeting of the board of directors need be specified in the
notice of waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by
section 2 of this article III shall constitute a quorum for the
transaction of business at any meeting of the board of directors; but if
less than such majority is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time. Notice of
any adjourned meeting shall be given in the same manner as prescribed by
section 5 of this article III.
Section 8. Manner of Acting. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the
act of the board of directors, unless a greater
[[Page 191]]
number is prescribed by regulation of the Board or by these bylaws.
Section 9. Action Without a Meeting. Any action required or
permitted to be taken by the board of directors at a meeting may be
taken without a meeting if a consent in writing, setting forth the
action so taken, shall be signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by
sending a written notice of such resignation to the home office of the
Subsidiary Holding Company addressed to the chairman of the board or the
president. Unless otherwise specified, such resignation shall take
effect upon receipt by the chairman of the board or the president. More
than three consecutive absences from regular meetings of the board of
directors, unless excused by resolution of the board of directors, shall
automatically constitute a resignation, effective when such resignation
is accepted by the board of directors.
Section 11. Vacancies. Any vacancy occurring on the board of
directors may be filled by the affirmative vote of a majority of the
remaining directors although less than a quorum of the board of
directors. A director elected to fill a vacancy shall be elected to
serve only until the next election of directors by the shareholders. Any
directorship to be filled by reason of an increase in the number of
directors may be filled by election by the board of directors for a term
of office continuing only until the next election of directors by the
shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the board of directors, a
reasonable fixed sum, and reasonable expenses of attendance, if any, may
be allowed for attendance at each regular or special meeting of the
board of directors. Members of either standing or special committees may
be allowed such compensation for attendance at committee meetings as the
board of directors may determine.
Section 13. Presumption of Assent. A director of the Subsidiary
Holding Company who is present at a meeting of the board of directors at
which action on any Subsidiary Holding Company matter is taken shall be
presumed to have assented to the action taken unless his or her dissent
or abstention shall be entered in the minutes of the meeting or unless
he or she shall file a written dissent to such action with the
individual acting as the secretary of the meeting before the adjournment
thereof or shall forward such dissent by registered mail to the
secretary of the Subsidiary Holding Company within five days after the
date a copy of the minutes of the meeting is received. Such right to
dissent shall not apply to a director who voted in favor of such action.
Section 14. Removal of Directors. At a meeting of shareholders
called expressly for that purpose, any director may be removed only for
cause by a vote of the holders of a majority of the shares then entitled
to vote at an election of directors. If less than the entire board is to
be removed, no one of the directors may be removed if the votes cast
against the removal would be sufficient to elect a director if then
cumulatively voted at an election of the class of directors of which
such director is a part. [If cumulative voting has been deleted, the
preceding sentence should be deleted.] Whenever the holders of the
shares of any class are entitled to elect one or more directors by the
provisions of the charter or supplemental sections thereto, the
provisions of this section shall apply, in respect to the removal of a
director or directors so elected, to the vote of the holders of the
outstanding shares of that class and not to the vote of the outstanding
shares as a whole.
Article IV--Executive and Other Committees
Section 1. Appointment. The board of directors, by resolution
adopted by a majority of the full board, may designate the chief
executive officer and two or more of the other directors to constitute
an executive committee. The designation of any committee pursuant to
this Article IV and the delegation of authority shall not operate to
relieve the board of directors, or any director, of any responsibility
imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the
authority of the board of directors except to the extent, if any, that
such authority shall be limited by the resolution appointing the
executive committee; and except also that the executive committee shall
not have the authority of the board of directors with reference to: the
declaration of dividends; the amendment of the charter or bylaws of the
Subsidiary Holding Company, or recommending to the shareholders a plan
of merger, consolidation, or conversion; the sale, lease, or other
disposition of all or substantially all of the property and assets of
the Subsidiary Holding Company otherwise than in the usual and regular
course of its business; a voluntary dissolution of the Subsidiary
Holding Company; a revocation of any of the foregoing; or the approval
of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of section 8 of this
article IV, each member of the executive committee shall hold office
until the next regular annual meeting of the board of directors
following his or her designation and until a successor is designated as
a member of the executive committee.
[[Page 192]]
Section 4. Meetings. Regular meetings of the executive committee may
be held without notice at such times and places as the executive
committee may fix from time to time by resolution. Special meetings of
the executive committee may be called by any member thereof upon not
less than one day's notice stating the place, date, and hour of the
meeting, which notice may be written or oral. Any member of the
executive committee may waive notice of any meeting and no notice of any
meeting need be given to any member thereof who attends in person. The
notice of a meeting of the executive committee need not state the
business proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive
committee shall constitute a quorum for the transaction of business at
any meeting thereof, and action of the executive committee must be
authorized by the affirmative vote of a majority of the members present
at a meeting at which a quorum is present.
Section 6. Action Without a Meeting. Any action required or
permitted to be taken by the executive committee at a meeting may be
taken without a meeting if a consent in writing, setting forth the
action so taken, shall be signed by all of the members of the executive
committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of
directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution
adopted by a majority of the full board of directors. Any member of the
executive committee may resign from the executive committee at any time
by giving written notice to the president or secretary of the Subsidiary
Holding Company. Unless otherwise specified, such resignation shall take
effect upon its receipt; the acceptance of such resignation shall not be
necessary to make it effective. No notice of any meeting need be given
to any member thereof who attends in person. The notice of a meeting of
the executive committee need not state the business proposed to be
transacted at the meeting.
Section 9. Procedure. The executive committee shall elect a
presiding officer from its members and may fix its own rules of
procedure, which shall not be inconsistent with these bylaws. It shall
keep regular minutes of its proceedings and report the same to the board
of directors for its information at the meeting held next after the
proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by
resolution establish an audit, loan, or other committee composed of
directors as they may determine to be necessary or appropriate for the
conduct of the business of the Subsidiary Holding Company and may
prescribe the duties, constitution, and procedures thereof.
Article V--Officers
Section 1. Positions. The officers of the Subsidiary Holding Company
shall be a president, one or more vice presidents, a secretary, and a
treasurer or comptroller, each of whom shall be elected by the board of
directors. The board of directors may also designate the chairman of the
board as an officer. The offices of the secretary and treasurer or
comptroller may be held by the same individual and a vice president may
also be either the secretary or the treasurer or comptroller. The board
of directors may designate one or more vice presidents as executive vice
president or senior vice president. The board of directors may also
elect or authorize the appointment of such other officers as the
business of the Subsidiary Holding Company may require. The officers
shall have such authority and perform such duties as the board of
directors may from time to time authorize or determine. In the absence
of action by the board of directors, the officers shall have such powers
and duties as generally pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the
Subsidiary Holding Company shall be elected annually at the first
meeting of the board of directors held after each annual meeting of the
shareholders. If the election of officers is not held at such meeting,
such election shall be held as soon thereafter as possible. Each officer
shall hold office until a successor has been duly elected and qualified
or until the officer's death, resignation, or removal in the manner
hereinafter provided. Election or appointment of an officer, employee,
or agent shall not of itself create contractual rights. The board of
directors may authorize the Subsidiary Holding Company to enter into an
employment contract with any officer in accordance with regulations of
the Board; but no such contract shall impair the right of the board of
directors to remove any officer at any time in accordance with section 3
of this article V.
Section 3. Removal. Any officer may be removed by the board of
directors whenever in its judgment the best interests of the Subsidiary
Holding Company will be served thereby, but such removal, other than for
cause, shall be without prejudice to the contractual rights, if any, of
the officer so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by
the board of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors.
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Article VI--Contracts, Loans, Checks, and Deposits
Section 1. Contracts. To the extent permitted by regulations of the
Board, and except as otherwise prescribed by these bylaws with respect
to certificates for shares, the board of directors may authorize any
officer, employee, or agent of the Subsidiary Holding Company to enter
into any contract or execute and deliver any instrument in the name of
and on behalf of the Subsidiary Holding Company. Such authority may be
general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
Subsidiary Holding Company and no evidence of indebtedness shall be
issued in its name unless authorized by the board of directors. Such
authority may be general or confined to specific instances.
Section 3. Checks; Drafts. etc. All checks, drafts, or other orders
for the payment of money, notes, or other evidences of indebtedness
issued in the name of the Subsidiary Holding Company shall be signed by
one or more officers, employees or agents of the Subsidiary Holding
Company in such manner as shall from time to time be determined by the
board of directors.
Section 4. Deposits. All funds of the Subsidiary Holding Company not
otherwise employed shall be deposited from time to time to the credit of
the Subsidiary Holding Company in any duly authorized depositories as
the board of directors may select.
Article VII--Certificates for Shares and Their Transfer
Section 1. Certificates for Shares. Certificates representing shares
of capital stock of the Subsidiary Holding Company shall be in such form
as shall be determined by the board of directors and approved by the
Board. Such certificates shall be signed by the chief executive officer
or by any other officer of the Subsidiary Holding Company authorized by
the board of directors, attested by the secretary or an assistant
secretary, and sealed with the corporate seal or a facsimile thereof.
The signatures of such officers upon a certificate may be facsimiles if
the certificate is manually signed on behalf of a transfer agent or a
registrar other than the Subsidiary Holding Company itself or one of its
employees. Each certificate for shares of capital stock shall be
consecutively numbered or otherwise identified. The name and address of
the person to whom the shares are issued, with the number of shares and
date of issue, shall be entered on the stock transfer books of the
Subsidiary Holding Company. All certificates surrendered to the
Subsidiary Holding Company for transfer shall be canceled and no new
certificate shall be issued until the former certificate for a like
number of shares has been surrendered and canceled, except that in the
case of a lost or destroyed certificate, a new certificate may be issued
upon such terms and indemnity to the Subsidiary Holding Company as the
board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock
of the Subsidiary Holding Company shall be made only on its stock
transfer books. Authority for such transfer shall be given only by the
holder of record or by his or her legal representative, who shall
furnish proper evidence of such authority, or by his or her attorney
authorized by a duly executed power of attorney and filed with the
Subsidiary Holding Company. Such transfer shall be made only on
surrender for cancellation of the certificate for such shares. The
person in whose name shares of capital stock stand on the books of the
Subsidiary Holding Company shall be deemed by the Subsidiary Holding
Company to be the owner for all purposes.
Article VIII--Fiscal Year
The fiscal year of the Subsidiary Holding Company shall end on the
----------------of----------------each year. The appointment of
accountants shall be subject to annual ratification by the shareholders.
Article IX--Dividends
Subject to the terms of the Subsidiary Holding Company's charter and
the regulations and orders of the Board, the board of directors may,
from time to time, declare, and the Subsidiary Holding Company may pay,
dividends on its outstanding shares of capital stock.
Article X--Corporate Seal
The board of directors shall provide a Subsidiary Holding Company
seal, which shall be two concentric circles between which shall be the
name of the Subsidiary Holding Company. The year of incorporation or an
emblem may appear in the center.
Article XI--Amendments
These bylaws may be amended in a manner consistent with regulations
of the Board and shall be effective after: (i) approval of the amendment
by a majority vote of the authorized board of directors, or by a
majority vote of the votes cast by the shareholders of the Subsidiary
Holding Company at any legal meeting, and (ii) receipt of any applicable
regulatory approval. When a Subsidiary Holding Company fails to meet its
quorum requirements, solely due to vacancies on the board, then the
affirmative vote of a majority of the sitting board will be required to
amend the bylaws.
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PART 240_RETAIL FOREIGN EXCHANGE TRANSACTIONS
(REGULATION NN)--Table of Contents
Sec.
240.1 Authority, purpose, and scope.
240.2 Definitions.
240.3 Prohibited transactions.
240.4 Notification.
240.5 Application and closing out of offsetting long and short
positions.
240.6 Disclosure.
240.7 Recordkeeping.
240.8 Capital requirements.
240.9 Margin requirements.
240.10 Required reporting to customers.
240.11 Unlawful representations.
240.12 Authorization to trade.
240.13 Trading and operational standards.
240.14 Supervision.
240.15 Notice of transfers.
240.16 Customer dispute resolution.
240.17 Reservation of authority.
Authority: 7 U.S.C. 2(c)(2)(E), 12 U.S.C. 248, 321-338, 1813(q),
1818, 1844(b), 3106a, 3108.
Source: 78 FR 21027, Apr. 9, 2013, unless otherwise noted.
Sec. 240.1 Authority, purpose and scope.
(a) Authority. This part is issued by the Board of Governors of the
Federal Reserve System (the Board) under the authority of section
2(c)(2)(E) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(E)), sections
9 and 11 of the Federal Reserve Act (12 U.S.C. 321-338 and 248), section
5(b) of the Bank Holding Company Act of 1956 (12 U.S.C. 1844(b)),
sections 9 and 13a of the International Banking Act of 1978 (12 U.S.C.
3106a and 3108), and sections 3(q) and 8 of the Federal Deposit
Insurance Act (12 U.S.C. 1813(q) and 1818).
(b) Purpose. This part establishes rules applicable to retail
foreign exchange transactions engaged in by banking institutions on or
after May 13, 2013.
(c) Scope. Except as provided in paragraph (d) of this section, this
part applies to banking institutions, as defined in section 240.2(b) of
this part, and any branches or offices of those institutions wherever
located. This part applies to subsidiaries of banking institutions
organized under the laws of the United States or any U.S. state that are
not subject to the jurisdiction of another federal regulatory agency
authorized to prescribe rules or regulations under section 2(c)(2)(E) of
the Commodity Exchange Act (7 U.S.C. (2)(c)(2)(E)).
(d) International applicability. Sections 240.3 and 240.5 through
240.16 do not apply to retail foreign exchange transactions between a
foreign branch or office of a banking institution and a non-U.S.
customer. With respect to those transactions, the foreign branch or
office remains subject to any disclosure, recordkeeping, capital,
margin, reporting, business conduct, documentation, and other
requirements of applicable foreign law.
Sec. 240.2 Definitions.
For purposes of this part, the following terms have the same meaning
as in the Commodity Exchange Act (7 U.S.C. 1 et seq.): ``affiliated
person of a futures commission merchant''; ``associated person'';
``contract of sale''; ``commodity''; ``futures commission merchant'';
``future delivery''; ``option''; ``security''; and ``security futures
product.''
(a) Affiliate has the same meaning as in section 2(k) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(k)).
(b) Banking institution means:
(1) A state member bank (as defined in 12 CFR 208.2);
(2) An uninsured state-licensed U.S. branch or agency of a foreign
bank;
(3) A financial holding company (as defined in section 2 of the Bank
Holding Company Act of 1956; 12 U.S.C. 1841);
(4) A bank holding company (as defined in section 2 of the Bank
Holding Company Act of 1956; 12 U.S.C. 1841);
(5) A savings and loan holding company (as defined in section 10 of
the Home Owners Loan Act; 12 U.S.C. 1467a)
(6) A corporation operating under the fifth undesignated paragraph
of section 25 of the Federal Reserve Act (12 U.S.C. 603), commonly known
as ``an agreement corporation;'' and
(7) A corporation organized under section 25A of the Federal Reserve
Act (12 U.S.C. 611 et seq.), commonly known as an ``Edge Act
corporation.''
(c) Commodity Exchange Act means the Commodity Exchange Act (7
U.S.C. 1 et seq.).
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(d) Eligible contract participant has the same meaning as in the
Commodity Exchange Act (7 U.S.C. 1 et seq., as implemented in 17 CFR
1.3(m).
(e) Forex means foreign exchange.
(f) Identified banking product has the same meaning as in section
401(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C.
27(b)).
(g) Institution-affiliated party or IAP has the same meaning as in
12 U.S.C. 1813(u)(1), (2), or (3).
(h) Introducing broker means any person who solicits or accepts
orders from a retail forex customer in connection with retail forex
transactions.
(i) Related person, when used in reference to a retail forex
counterparty, means:
(1) Any general partner, officer, director, or owner of ten percent
or more of the capital stock of the retail forex counterparty;
(2) An associated person or employee of the retail forex
counterparty, if the retail forex counterparty is not an insured
depository institution;
(3) An IAP, if the retail forex counterparty is an insured
depository institution; and
(4) Any relative or spouse of any of the foregoing persons, or any
relative of such spouse, who shares the same home as any of the
foregoing persons.
(j) Retail foreign exchange dealer means any person other than a
retail forex customer that is, or that offers to be, the counterparty to
a retail forex transaction, except for a person described in item (aa),
(bb), (cc)(AA), (dd), or (ff) of section 2(c)(2)(B)(i)(II) of the
Commodity Exchange Act (7 U.S.C. 2(c)(2)(B)(i)(II)).
(k) Retail forex account means the account of a retail forex
customer, established with a banking institution, in which retail forex
transactions with the banking institution as counterparty are
undertaken, or the account of a retail forex customer that is
established in order to enter into such transactions.
(l) Retail forex account agreement means the contractual agreement
between a banking institution and a retail forex customer that contains
the terms governing the customer's retail forex account with the banking
institution.
(m) Retail forex business means engaging in one or more retail forex
transactions with the intent to derive income from those transactions,
either directly or indirectly.
(n) Retail forex counterparty includes, as appropriate:
(1) A banking institution;
(2) A retail foreign exchange dealer;
(3) A futures commission merchant;
(4) An affiliated person of a futures commission merchant; and
(5) A broker or dealer registered under section 15(b) (except
paragraph (11) thereof) or 15C of the Securities Exchange Act of 1934
(15 U.S.C. 78o(b), 78o-5) or a U.S. financial institution other than a
banking institution, provided the counterparty is subject to a rule or
regulation of a Federal regulatory agency covering retail forex
transactions.
(o) Retail forex customer means a customer that is not an eligible
contract participant, acting on his, her, or its own behalf and engaging
in retail forex transactions.
(p) Retail forex proprietary account means a retail forex account
carried on the books of a banking institution for one of the following
persons; a retail forex account of which 10 percent or more is owned by
one of the following persons; or a retail forex account of which an
aggregate of 10 percent or more of which is owned by more than one of
the following persons:
(1) The banking institution;
(2) An officer, director or owner of ten percent or more of the
capital stock of the banking institution; or
(3) An employee of the banking institution, whose duties include:
(i) The management of the banking institution's business;
(ii) The handling of the banking institution's retail forex
transactions;
(iii) The keeping of records, including without limitation the
software used to make or maintain those records, pertaining to the
banking institution's retail forex transactions; or
(iv) The signing or co-signing of checks or drafts on behalf of the
banking institution;
(4) A spouse or minor dependent living in the same household as of
any of the foregoing persons; or
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(5) An affiliate of the banking institution;
(q) Retail forex transaction means an agreement, contract, or
transaction in foreign currency, other than an identified banking
product or a part of an identified banking product, that is offered or
entered into by a banking institution with a person that is not an
eligible contract participant and that is:
(1) A contract of sale of a commodity for future delivery or an
option on such a contract; or
(2) An option, other than an option executed or traded on a national
securities exchange registered pursuant to section 6(a) of the
Securities Exchange Act of 1934 (15 U.S.C. 78f(a)); or
(3) Offered or entered into on a leveraged or margined basis, or
financed by a banking institution, its affiliate, or any person acting
in concert with the banking institution or its affiliate on a similar
basis, other than:
(i) A security that is not a security futures product as defined in
section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)); or
(ii) A contract of sale that--
(A) Results in actual delivery within two days; or
(B) Creates an enforceable obligation to deliver between a seller
and buyer that have the ability to deliver and accept delivery,
respectively, in connection with their line of business; or
(iii) An agreement, contract, or transaction that the Board
determines is not functionally or economically similar to an agreement,
contract, or transaction described in paragraph (p)(1) or (p)(2) of this
section.
Sec. 240.3 Prohibited transactions.
(a) Fraudulent conduct prohibited. No banking institution or its
related persons may, directly or indirectly, in or in connection with
any retail forex transaction:
(1) Cheat or defraud or attempt to cheat or defraud any person;
(2) Knowingly make or cause to be made to any person any false
report or statement or cause to be entered for any person any false
record; or
(3) Knowingly deceive or attempt to deceive any person by any means
whatsoever.
(b) Acting as counterparty and exercising discretion prohibited. A
banking institution that has authority to cause retail forex
transactions to be effected for a retail forex customer without the
retail forex customer's specific authorization may not (and an affiliate
of such an institution may not) act as the counterparty for any retail
forex transaction with that retail forex customer.
Sec. 240.4 Notification.
(a) Notification required. Before commencing a retail forex
business, a banking institution shall provide the Board with prior
written notice in compliance with this section. The notice will become
effective 60 days after a complete notice is received by the Board,
provided the Board does not request additional information or object in
writing. In the event the Board requests additional information, the
notice will become effective 60 days after all information requested by
the Board is received by the Board unless the Board objects in writing.
(b) Notification requirements. A banking institution shall provide
the following in its written notification:
(1) Information concerning customer due diligence, including without
limitation credit evaluations, customer appropriateness, and ``know your
customer'' documentation;
(2) The haircuts to be applied to noncash margin as provided in
240.9(b)(2);
(3) Information concerning new product approvals;
(4) Information on addressing conflicts of interest; and
(5) A resolution by the banking institution's Board of Directors
that the banking institution has established and implemented written
policies, procedures, and risk measurement and management systems and
controls for the purpose of ensuring that it conducts retail forex
transactions in a safe and sound manner and in compliance with this
part.
(c) Treatment of existing retail forex businesses. A banking
institution that is engaged in a retail forex business on the effective
date of this part may continue to do so, until and unless the Board
objects in writing, so long as the
[[Page 197]]
institution submits the information required to be submitted under
paragraphs (b)(1) through (5) of this section within 30 days of the
effective date of this part, subject to an extension of time by the
Board, and such additional information as requested by the Board
thereafter.
(d) Compliance with the Commodity Exchange Act. A banking
institution that is engaged in a retail forex business on the effective
date of this part and complies with paragraph (c) of this section shall
be deemed to be acting pursuant to a rule or regulation described in
section 2(c)(2)(E)(ii)(I) of the Commodity Exchange Act (7 U.S.C.
2(c)(2)(E)(ii)(I)).
Sec. 240.5 Application and closing out of offsetting long
and short positions.
(a) Application of purchases and sales. Any banking institution
that--
(1) Engages in a retail forex transaction involving the purchase of
any currency for the account of any retail forex customer when the
account of such retail forex customer at the time of such purchase has
an open retail forex transaction for the sale of the same currency;
(2) Engages in a retail forex transaction involving the sale of any
currency for the account of any retail forex customer when the account
of such retail forex customer at the time of such sale has an open
retail forex transaction for the purchase of the same currency;
(3) Purchases a put or call option involving foreign currency for
the account of any retail forex customer when the account of such retail
forex customer at the time of such purchase has a short put or call
option position with the same underlying currency, strike price, and
expiration date as that purchased; or
(4) Sells a put or call option involving foreign currency for the
account of any retail forex customer when the account of such retail
forex customer at the time of such sale has a long put or call option
position with the same underlying currency, strike price, and expiration
date as that sold shall:
(i) Immediately apply such purchase or sale against such previously
held opposite transaction with the same customer; and
(ii) Promptly furnish such retail forex customer with a statement
showing the financial result of the transactions involved and the name
of any introducing broker to the account.
(b) Close-out against oldest open position. In all instances in
which the short or long position in a customer's retail forex account
immediately prior to an offsetting purchase or sale is greater than the
quantity purchased or sold, the banking institution shall apply such
offsetting purchase or sale to the oldest portion of the previously held
short or long position.
(c) Transactions to be applied as directed by customer.
Notwithstanding paragraphs (a) and (b) of this section, the offsetting
transaction shall be applied as directed by a retail forex customer's
specific instructions. These instructions may not be made by the banking
institution or a related person.
Sec. 240.6 Disclosure.
(a) Risk disclosure statement required. No banking institution may
open or maintain an account for a retail forex customer for the purpose
of engaging in retail forex transactions unless the banking institution
has furnished the retail forex customer with a separate written
disclosure statement containing only the language set forth in paragraph
(d) of this section and the disclosures required by paragraphs (e), (f),
and (g) of this section.
(b) Acknowledgement of risk disclosure statement required. The
banking institution must receive from the retail forex customer a
written acknowledgement signed and dated by the customer that the
customer received and understood the written disclosure statement
required by paragraph (a) of this section.
(c) Placement of risk disclosure statement. The disclosure statement
may be attached to other documents as the initial page(s) of such
documents and as the only material on such page(s).
(d) Content of risk disclosure statement. The language set forth in
the written disclosure statement required by paragraph (a) of this
section shall be as follows:
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Risk Disclosure Statement
Retail forex transactions generally involve the leveraged trading of
contracts denominated in foreign currency with a banking institution as
your counterparty. Because of the leverage and the other risks disclosed
here, you can rapidly lose all of the funds or property you give the
banking institution as margin for such trading and you may lose more
than you pledge as margin. You should be aware of and carefully consider
the following points before determining whether such trading is
appropriate for you.
(1) Trading foreign currencies is a not on a regulated market or
exchange--your banking institution is your trading counterparty and has
conflicting interests. The retail forex transaction you are entering
into is not conducted on an interbank market, nor is it conducted on a
futures exchange subject to regulation by the Commodity Futures Trading
Commission. The foreign currency trades you transact are trades with
your banking institution as the counterparty. When you sell, the banking
institution is the buyer. When you buy, the banking institution is the
seller. As a result, when you lose money trading, your banking
institution is making money on such trades, in addition to any fees,
commissions, or spreads the banking institution may charge.
(2) Any electronic trading platform that you may use for retail
foreign currency transactions with your banking institution is not a
regulated exchange. It is an electronic connection for accessing your
banking institution. The terms of availability of such a platform are
governed only by your contract with your banking institution. Any
trading platform that you may use to enter into off-exchange foreign
currency transactions is only connected to your banking institution. You
are accessing that trading platform only to transact with your banking
institution. You are not trading with any other entities or customers of
the banking institution by accessing such platform. The availability and
operation of any such platform, including the consequences of the
unavailability of the trading platform for any reason, is governed only
by the terms of your account agreement with the banking institution.
(3) You may be able to offset or liquidate any trading positions
only through your banking institution because the transactions are not
made on an exchange, and your banking institution may set its own
prices. Your ability to close your transactions or offset positions is
limited to what your banking institution will offer to you, as there is
no other market for these transactions. Your banking institution may
offer any prices it wishes. Your banking institution may establish its
prices by offering spreads from third party prices, but it is under no
obligation to do so or to continue to do so. Your banking institution
may offer different prices to different customers at any point in time
on its own terms. The terms of your account agreement alone govern the
obligations your banking institution has to you to offer prices and
offer offset or liquidating transactions in your account and make any
payments to you. The prices offered by your banking institution may or
may not reflect prices available elsewhere at any exchange, interbank,
or other market for foreign currency.
(4) Paid solicitors may have undisclosed conflicts. The banking
institution may compensate introducing brokers for introducing your
account in ways that are not disclosed to you. Such paid solicitors are
not required to have, and may not have, any special expertise in
trading, and may have conflicts of interest based on the method by which
they are compensated. You should thoroughly investigate the manner in
which all such solicitors are compensated and be very cautious in
granting any person or entity authority to trade on your behalf. You
should always consider obtaining dated written confirmation of any
information you are relying on from your banking institution in making
any trading or account decisions.
(5) Retail forex transactions are not insured by the Federal Deposit
Insurance Corporation.
(6) Retail forex transactions are not a deposit in, or guaranteed
by, a banking institution.
(7) Retail forex transactions are subject to investment risks,
including possible loss of all amounts invested.
Finally, you should thoroughly investigate any statements by any
banking institution that minimize the importance of, or contradict, any
of the terms of this risk disclosure. Such statements may indicate sales
fraud.
This brief statement cannot, of course, disclose all the risks and
other aspects of trading off-exchange foreign currency with a banking
institution. I hereby acknowledge that I have received and understood
this risk disclosure statement.
________________________________________________________________________
Date
________________________________________________________________________
Signature of Customer
(e)(1) Disclosure of profitable accounts ratio. Immediately
following the language set forth in paragraph (d) of this section, the
statement required by paragraph (a) of this section shall include, for
each of the most recent four calendar quarters during which the banking
institution maintained retail forex customer accounts:
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(i) The total number of retail forex customer accounts maintained by
the banking institution over which the banking institution does not
exercise investment discretion;
(ii) The percentage of such accounts that were profitable for retail
forex customer accounts during the quarter; and
(iii) The percentage of such accounts that were not profitable for
retail forex customer accounts during the quarter.
(2) Statement of profitable trades. (i) The banking institution's
statement of profitable trades shall include the following legend: Past
performance is not necessarily indicative of future results.
(ii) Each banking institution shall provide, upon request, to any
retail forex customer or prospective retail forex customer the total
number of retail forex accounts maintained by the banking institution
for which the banking institution does not exercise investment
discretion, the percentage of such accounts that were profitable, and
the percentage of such accounts that were not profitable for each
calendar quarter during the most recent five-year period during which
the banking institution maintained such accounts.
(f) Disclosure of fees and other charges. Immediately following the
language required by paragraph (e) of this section, the statement
required by paragraph (a) of this section shall include:
(1) The amount of any fee, charge, spread, or commission that the
banking institution may impose on the retail forex customer in
connection with a retail forex account or retail forex transaction;
(2) An explanation of how the banking institution will determine the
amount of such fees, charges, spreads, or commissions; and
(3) The circumstances under which the banking institution may impose
such fees, charges, spreads, or commissions.
(g) Set-off. Immediately following the language required by
paragraph (f) of this section, the statement required by paragraph (a)
of this section shall include:
(1) A statement as to whether the banking institution will or will
not retain the right to set off obligations of the retail forex customer
arising from the customer's retail forex transactions, including margin
calls and losses, against the customer's other assets held by the
banking institution;
(2) If the banking institution states that it reserves its right to
set off obligations of the retail forex customer arising from the
customer's retail forex transactions against the customer's other
assets, the banking institution must receive from the retail forex
customer a written acknowledgement signed and dated by the customer that
the customer received and understood the written disclosure required by
paragraph (g)(1) of this section.
(h) Future disclosure requirements. If, with regard to a retail
forex customer, the banking institution changes any fee, charge, or
commission required to be disclosed under paragraph (f) of this section,
then the banking institution shall mail or deliver to the retail forex
customer a notice of the changes at least 15 days prior to the effective
date of the change.
(i) Form of disclosure requirements. The disclosures required by
this section shall be clear and conspicuous and designed to call
attention to the nature and significance of the information provided.
(j) Other disclosure requirements unaffected. This section does not
relieve a banking institution from any other disclosure obligation it
may have under applicable law.
Sec. 240.7 Recordkeeping.
(a) General rule. A banking institution engaging in retail forex
transactions shall keep full, complete and systematic records, together
with all pertinent data and memoranda, of all transactions relating to
its retail forex business, including:
(1) Retail forex account records. For each retail forex account:
(i) The name and address of the person for whom such retail forex
account is carried or introduced and the principal occupation or
business of the person;
(ii) The name of any other person guaranteeing the account or
exercising trading control with respect to the account;
[[Page 200]]
(iii) The establishment or termination of the account;
(iv) A means to identify the person who has solicited and is
responsible for the account or assign account numbers in such a manner
as to identify that person;
(v) The funds in the account, net of any commissions and fees;
(vi) The account's net profits and losses on open trades;
(vii) The funds in the account plus or minus the net profits and
losses on open trades, adjusted for the net option value in the case of
open options positions;
(viii) Financial ledger records that show separately for each retail
forex customer all charges against and credits to such retail forex
customer's account, including but not limited to retail forex customer
funds deposited, withdrawn, or transferred, and charges or credits
resulting from losses or gains on closed transactions; and
(ix) A list of all retail forex transactions executed for the
account, with the details specified in paragraph (a)(2) of this section.
(2) Retail forex transaction records. For each retail forex
transaction:
(i) The date and time the banking institution received the order;
(ii) The price at which the banking institution placed the order,
or, in the case of an option, the premium that the retail forex customer
paid;
(iii) The customer account identification information;
(iv) The currency pair;
(v) The size or quantity of the order;
(vi) Whether the order was a buy or sell order;
(vii) The type of order, if the order was not a market order;
(viii) The size and price at which the order is executed, or in the
case of an option, the amount of the premium paid for each option
purchased, or the amount credited for each option sold;
(ix) For options, whether the option is a put or call, expiration
date, quantity, underlying contract for future delivery or underlying
physical, strike price, and details of the purchase price of the option,
including premium, mark-up, commission, and fees;
(x) For futures, the delivery date; and
(xi) If the order was made on a trading platform:
(A) The price quoted on the trading platform when the order was
placed, or, in the case of an option, the premium quoted;
(B) The date and time the order was transmitted to the trading
platform; and
(C) The date and time the order was executed.
(3) Price changes on a trading platform. If a trading platform is
used, daily logs showing each price change on the platform, the time of
the change to the nearest second, and the trading volume at that time
and price.
(4) Methods or algorithms. Any method or algorithm used to determine
the bid or asked price for any retail forex transaction or the prices at
which customers orders are executed, including, but not limited to, any
mark-ups, fees, commissions or other items which affect the
profitability or risk of loss of a retail forex customer's transaction.
(5) Daily records which show for each business day complete details
of:
(i) All retail forex transactions that are futures transactions
executed on that day, including the date, price, quantity, market,
currency pair, delivery date, and the person for whom such transaction
was made;
(ii) All retail forex transactions that are option transactions
executed on that day, including the date, whether the transaction
involved a put or call, the expiration date, quantity, currency pair,
delivery date, strike price, details of the purchase price of the
option, including premium, mark-up, commission and fees, and the person
for whom the transaction was made; and
(iii) All other retail forex transactions executed on that day for
such account, including the date, price, quantity, currency and the
person for whom such transaction was made.
(6) Other records. Written acknowledgements of receipt of the risk
disclosure statement required by Sec. 240.6(b), offset instructions
pursuant to Sec. 240.5(c), records required under paragraphs (b)
through (f) of this section, trading cards, signature cards, street
books, journals, ledgers, payment records, copies of statements of
purchase, and all other records, data and
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memoranda that have been prepared in the course of the banking
institution's retail forex business.
(b) Ratio of profitable accounts. (1) With respect to its active
retail forex customer accounts over which it did not exercise investment
discretion and that are not retail forex proprietary accounts open for
any period of time during the quarter, a banking institution shall
prepare and maintain on a quarterly basis (calendar quarter):
(i) A calculation of the percentage of such accounts that were
profitable;
(ii) A calculation of the percentage of such accounts that were not
profitable; and
(iii) Data supporting the calculations described in paragraphs
(b)(1)(i) and (b)(1)(ii) of this section.
(2) In calculating whether a retail forex account was profitable or
not profitable during the quarter, the banking institution shall compute
the realized and unrealized gains or losses on all retail forex
transactions carried in the retail forex account at any time during the
quarter, and subtract all fees, commissions, and any other charges
posted to the retail forex account during the quarter, and add any
interest income and other income or rebates credited to the retail forex
account during the quarter. All deposits and withdrawals of funds made
by the retail forex customer during the quarter must be excluded from
the computation of whether the retail forex account was profitable or
not profitable during the quarter. Computations that result in a zero or
negative number shall be considered a retail forex account that was not
profitable. Computations that result in a positive number shall be
considered a retail forex account that was profitable.
(3) A retail forex account shall be considered ``active'' for
purposes of paragraph (b)(1) of this section if and only if, for the
relevant calendar quarter, a retail forex transaction was executed in
that account or the retail forex account contained an open position
resulting from a retail forex transaction.
(c) Records related to possible violations of law. A banking
institution engaging in retail forex transactions shall make a record of
all communications received by the banking institution or its related
persons concerning facts giving rise to possible violations of law
related to the banking institution's retail forex business. The record
shall contain: the name of the complainant, if provided; the date of the
communication; the relevant agreement, contract, or transaction; the
substance of the communication; and the name of the person who received
the communication and the final disposition of the matter.
(d) Records for noncash margin. A banking institution shall maintain
a record of all noncash margin collected pursuant to Sec. 240.9. The
record shall show separately for each retail forex customer:
(1) A description of the securities or property received;
(2) The name and address of such retail forex customer;
(3) The dates when the securities or property were received;
(4) The identity of the depositories or other places where such
securities or property are segregated or held, if applicable;
(5) The dates on which the banking institution placed or removed
such securities or property into or from such depositories; and
(6) The dates of return of such securities or property to such
retail forex customer, or other disposition thereof, together with the
facts and circumstances of such other disposition.
(e) Order tickets. (1) Except as provided in paragraph (e)(2) of
this section, immediately upon the receipt of a retail forex transaction
order, a banking institution shall prepare an order ticket for the order
(whether unfulfilled, executed or canceled). The order ticket shall
include:
(i) Account identification (account or customer name with which the
retail forex transaction was effected);
(ii) Order number;
(iii) Type of order (market order, limit order, or subject to
special instructions);
(iv) Date and time, to the nearest minute, the retail forex
transaction order was received (as evidenced by timestamp or other
timing device);
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(v) Time, to the nearest minute, the retail forex transaction order
was executed; and
(vi) Price at which the retail forex transaction was executed.
(2) Post-execution allocation of bunched orders. Specific
identifiers for retail forex accounts included in bunched orders need
not be recorded at time of order placement or upon report of execution
as required under paragraph (e)(1) of this section if the following
requirements are met:
(i) The banking institution placing and directing the allocation of
an order eligible for post-execution allocation has been granted written
investment discretion with regard to participating customer accounts and
makes the following information available to customers upon request:
(A) The general nature of the post-execution allocation methodology
the banking institution will use;
(B) Whether the banking institution has any interest in accounts
which may be included with customer accounts in bunched orders eligible
for post-execution allocation; and
(C) Summary or composite data sufficient for that customer to
compare the customer's results with those of other comparable customers
and, if applicable, any account in which the banking institution has an
interest.
(ii) Post-execution allocations are made as soon as practicable
after the entire transaction is executed;
(iii) Post-execution allocations are fair and equitable, with no
account or group of accounts receiving consistently favorable or
unfavorable treatment; and
(iv) The post-execution allocation methodology is sufficiently
objective and specific to permit the Board to verify fairness of the
allocations using that methodology.
(f) Record of monthly statements and confirmations. A banking
institution shall retain a copy of each monthly statement and
confirmation required by Sec. 240.10.
(g) Form of record and manner of maintenance. The records required
by this section must clearly and accurately reflect the information
required and provide an adequate basis for the audit of the information.
A banking institution must create and maintain audio recordings of oral
orders and oral offset instructions. Record maintenance may include the
use of automated or electronic records provided that the records are
easily retrievable, and readily available for inspection.
(h) Length of maintenance. A banking institution shall keep each
record required by this section for at least five years from the date
the record is created.
Sec. 240.8 Capital requirements.
(a) Capital required for a state member bank. A banking institution
defined in section 240.2(b)(1) offering or entering into retail forex
transactions must be well-capitalized as defined in section 208.43 of
Regulation H (12 CFR 208.43).
(b) Capital required for an uninsured state-licensed branch of a
foreign bank. A banking institution defined in Sec. 240.2(b)(2)
offering or entering into retail forex transactions must be well-
capitalized under the capital rules made applicable to it pursuant to
Sec. 225.2(r)(3) of Regulation Y (12 CFR 225.2(r)(3)).
(c) Capital required for financial holding companies and bank
holding companies. A banking institution defined in Sec. 240.2(b)(3) or
(4) offering or entering into retail forex transactions must be well-
capitalized as defined in Sec. 225.2(r) of Regulation Y (12 CFR
225.2(r)).
(d) Capital required for savings and loan holding companies. A
banking institution defined in Sec. 240.2(b)(5) offering or entering
into retail forex transactions must be well-capitalized as defined in
Sec. 238.2(s) of Regulation LL (12 CFR 238.2(s)).
(e) Capital required for an agreement corporation or Edge Act
corporation. A banking institution defined in Sec. 240.2(b)(6) or (7)
offering or entering into retail forex transactions must maintain
capital in compliance with the capital adequacy guidelines that are made
applicable to an Edge corporation engaged in banking pursuant to Sec.
211.12 (c)(2) of Regulation K (12 CFR 211.12(c)(2)).
Sec. 240.9 Margin requirements
(a) Margin required. A banking institution engaging, or offering to
engage,
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in retail forex transactions must collect from each retail forex
customer an amount of margin not less than:
(1) Two percent of the notional value of the retail forex
transaction for major currency pairs and 5 percent of the notional value
of the retail forex transaction for all other currency pairs;
(2) For short options, 2 percent for major currency pairs and 5
percent for all other currency pairs of the notional value of the retail
forex transaction, plus the premium received by the retail forex
customer; or
(3) For long options, the full premium charged and received by the
banking institution.
(b)(1) Form of margin. Margin collected under paragraph (a) of this
section or pledged by a retail forex customer for retail forex
transactions in excess of the requirements of paragraph (a) of this
section must be in the form of cash or the following financial
instruments:
(i) Obligations of the United States and obligations fully
guaranteed as to principal and interest by the United States;
(ii) General obligations of any State or of any political
subdivision thereof;
(iii) General obligations issued or guaranteed by any enterprise, as
defined in 12 U.S.C. 4502(10);
(iv) Certificates of deposit issued by an insured depository
institution, as defined in section 3(c)(2) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(c)(2));
(v) Commercial paper;
(vi) Corporate notes or bonds;
(vii) General obligations of a sovereign nation;
(viii) Interests in money market mutual funds; and
(ix) Such other financial instruments as the Board deems
appropriate.
(2) Haircuts. A banking institution shall establish written policies
and procedures that include:
(i) Haircuts for noncash margin collected under this section; and
(ii) Annual evaluation, and, if appropriate, modification of the
haircuts.
(c) Major currencies. (1) for the purposes of paragraphs (a)(1) and
(a)(2) of this section, major currency means:
(i) United States Dollar (USD)
(ii) Canadian Dollar (CAD)
(iii) Euro (EUR)
(iv) United Kingdom Pound (GBP)
(v) Japanese Yen (JPY)
(vi) Swiss Franc (CHF)
(vii) New Zealand Dollar (NZD)
(viii) Australian Dollar (AUD)
(ix) Swedish Kronor (SEK)
(x) Danish Kroner (DKK)
(xi) Norwegian Krone (NOK), and
(xii) Any other currency as determined by the Board.
(d) Margin calls; liquidation of position. For each retail forex
customer, at least once per day, a banking institution shall:
(1) Mark the value of the retail forex customer's open retail forex
positions to market;
(2) Mark the value of the margin collected under this section from
the retail forex customer to market;
(3) Determine whether, based on the marks in paragraphs (d)(1) and
(d)(2) of this section, the banking institution has collected margin
from the retail forex customer sufficient to satisfy the requirements of
this section; and
(4) If, pursuant to paragraph (d)(3) of this section, the banking
institution determines that it has not collected margin from the retail
forex customer sufficient to satisfy the requirements of this section
then, within a reasonable period of time, the banking institution shall
either:
(i) Collect margin from the retail forex customer sufficient to
satisfy the requirements of this section; or
(ii) Liquidate the retail forex customer's retail forex
transactions.
Sec. 240.10 Required reporting to customers.
(a) Monthly statements. Each banking institution must promptly
furnish to each retail forex customer, as of the close of the last
business day of each month or as of any regular monthly date selected,
except for accounts in which there are neither open positions at the end
of the statement period nor any changes to the account balance since the
prior statement period, but in any event not less frequently than once
every three months, a statement that clearly shows:
(1) For each retail forex customer:
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(i) The open retail forex transactions with prices at which
acquired;
(ii) The net unrealized profits or losses in all open retail forex
transactions marked to the market;
(iii) Any money, securities or other property held as margin for
retail forex transactions; and
(iv) A detailed accounting of all financial charges and credits to
the retail forex customer's retail forex accounts during the monthly
reporting period, including: money, securities, or property received
from or disbursed to such customer; realized profits and losses; and
fees, charges, and commissions.
(2) For each retail forex customer engaging in retail forex
transactions that are options:
(i) All such options purchased, sold, exercised, or expired during
the monthly reporting period, identified by underlying retail forex
transaction or underlying currency, strike price, transaction date, and
expiration date;
(ii) The open option positions carried for such customer and arising
as of the end of the monthly reporting period, identified by underlying
retail forex transaction or underlying currency, strike price,
transaction date, and expiration date;
(iii) All such option positions marked to the market and the amount
each position is in the money, if any;
(iv) Any money, securities or other property held as margin for
retail forex transactions; and
(v) A detailed accounting of all financial charges and credits to
the retail forex customer's retail forex accounts during the monthly
reporting period, including: money, securities, or property received
from or disbursed to such customer; realized profits and losses;
premiums and mark-ups; and fees, charges, and commissions.
(b) Confirmation statement. Each banking institution must, not later
than the next business day after any retail forex transaction, send:
(1) To each retail forex customer, a written confirmation of each
retail forex transaction caused to be executed by it for the customer,
including offsetting transactions executed during the same business day
and the rollover of an open retail forex transaction to the next
business day;
(2) To each retail forex customer engaging in forex option
transactions, a written confirmation of each forex option transaction,
containing at least the following information:
(i) The retail forex customer's account identification number;
(ii) A separate listing of the actual amount of the premium, as well
as each mark-up thereon, if applicable, and all other commissions,
costs, fees and other charges incurred in connection with the forex
option transaction;
(iii) The strike price;
(iv) The underlying retail forex transaction or underlying currency;
(v) The final exercise date of the forex option purchased or sold;
and
(vi) The date the forex option transaction was executed.
(3) To each retail forex customer engaging in forex option
transactions, upon the expiration or exercise of any option, a written
confirmation statement thereof, which statement shall include the date
of such occurrence, a description of the option involved, and, in the
case of exercise, the details of the retail forex or physical currency
position which resulted therefrom including, if applicable, the final
trading date of the retail forex transaction underlying the option.
(c) Notwithstanding the provisions of paragraphs (b)(1) through (3)
of this section, a retail forex transaction that is caused to be
executed for a pooled investment vehicle that engages in retail forex
transactions need be confirmed only to the operator of such pooled
investment vehicle.
(d) Controlled accounts. With respect to any account controlled by
any person other than the retail forex customer for whom such account is
carried, each banking institution shall promptly furnish in writing to
such other person the information required by paragraphs (a) and (b) of
this section.
(e) Introduced accounts. Each statement provided pursuant to the
provisions of this section must, if applicable, show that the account
for which the banking institution was introduced by an introducing
broker and the name of the introducing broker.
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Sec. 240.11 Unlawful representations.
(a) No implication or representation of limiting losses. No banking
institution engaged in retail foreign exchange transactions or its
related persons may imply or represent that it will, with respect to any
retail customer forex account, for or on behalf of any person:
(1) Guarantee such person or account against loss;
(2) Limit the loss of such person or account; or
(3) Not call for or attempt to collect margin as established for
retail forex customers.
(b) No implication of representation of engaging in prohibited acts.
No banking institution or its related persons may in any way imply or
represent that it will engage in any of the acts or practices described
in paragraph (a) of this section.
(c) No Federal government endorsement. No banking institution or its
related persons may represent or imply in any manner whatsoever that any
retail forex transaction or retail forex product has been sponsored,
recommended, or approved by the Board, the Federal government, or any
agency thereof.
(d) Assuming or sharing of liability from bank error. This section
shall not be construed to prevent a banking institution from assuming or
sharing in the losses resulting from the banking institution's error or
mishandling of a retail forex transaction.
(e) Certain guaranties unaffected. This section shall not affect any
guarantee entered into prior to the effective date of this part, but
this section shall apply to any extension, modification or renewal
thereof entered into after such date.
Sec. 240.12 Authorization to trade.
(a) Specific authorization required. No banking institution may
directly or indirectly effect a retail forex transaction for the account
of any retail forex customer unless, before the transaction occurs, the
retail forex customer specifically authorized the banking institution to
effect the retail forex transaction.
(b) A retail forex transaction is ``specifically authorized'' for
purposes of this section if the retail forex customer specifies:
(1) The precise retail forex transaction to be effected;
(2) The exact amount of the foreign currency to be purchased or
sold; and
(3) In the case of an option, the identity of the foreign currency
or contract that underlies the option.
Sec. 240.13 Trading and operational standards.
(a) Internal rules, procedures, and controls required. A banking
institution engaging in retail forex transactions shall establish and
implement internal rules, procedures, and controls designed, at a
minimum, to:
(1) Ensure, to the extent reasonable, that each order received from
a retail forex customer that is executable at or near the price that the
banking institution has quoted to the customer is entered for execution
before any order in any retail forex transaction for:
(i) A proprietary account;
(ii) An account in which a related person has an interest, or any
account for which such a related person may originate orders without the
prior specific consent of the account owner, if the related person has
gained knowledge of the retail forex customer's order prior to the
transmission of an order for a proprietary account;
(iii) An account in which a related person has an interest, if the
related person has gained knowledge of the retail forex customer's order
prior to the transmission of an order for a proprietary account; or
(iv) An account in which a related person may originate orders
without the prior specific consent of the account owner, if the related
person has gained knowledge of the retail forex customer's order prior
to the transmission of an order for a proprietary account;
(2) Prevent banking institution related persons from placing orders,
directly or indirectly, with another person in a manner designed to
circumvent the provisions of paragraph (a)(1) of this section; and
(3) Fairly and objectively establish settlement prices for retail
forex transactions.
(b) Disclosure of retail forex transactions. No banking institution
engaging in retail forex transactions may
[[Page 206]]
disclose that an order of another person is being held by the banking
institution, unless the disclosure is necessary to the effective
execution of such order or the disclosure is made at the request of the
Board.
(c) Handling of retail forex accounts of related persons of retail
forex counterparties. No banking institution engaging in retail forex
transactions shall knowingly handle the retail forex account of any
related person of another retail forex counterparty unless the banking
institution:
(1) Receives written authorization from a person designated by such
other retail forex counterparty with responsibility for the surveillance
over such account;
(2) Prepares immediately upon receipt of an order for the account a
written record of the order, including the account identification and
order number, and records thereon to the nearest minute, by time-stamp
or other timing device, the date and time the order is received; and
(3) Transmits on a regular basis to the other retail forex
counterparty copies of all statements for the account and of all written
records prepared upon the receipt of orders for the account pursuant to
paragraph (c)(2) of this section.
(d) Related person of banking institution establishing account at
another retail forex counterparty. No related person of a banking
institution working in the banking institution's retail forex business
may have an account, directly or indirectly, with another retail forex
counterparty unless the other retail forex counterparty:
(1) Receives written authorization to open and maintain the account
from a person designated by the banking institution of which it is a
related person with responsibility for the surveillance over the account
pursuant to paragraph (a)(2) of this section;
(2) Prepares immediately upon receipt of an order for the account a
written record of the order, including the account identification and
order number, and records thereon to the nearest minute, by time-stamp
or other timing device, the date and time the order is received; and
(3) Transmits on a regular basis to the banking institution copies
of all statements for the account and of all written records prepared by
the other retail forex counterparty upon receipt of orders for such
account pursuant to paragraph (d)(2) of this section.
(e) Prohibited trading practices. No banking institution engaging in
retail forex transactions may:
(1) Enter into a retail forex transaction, to be executed pursuant
to a market or limit order at a price that is not at or near the price
at which other retail forex customers, during that same time period,
have executed retail forex transactions with the banking institution;
(2) Adjust or alter prices for a retail forex transaction after the
transaction has been confirmed to the retail forex customer;
(3) Provide a retail forex customer a new bid price for a retail
forex transaction that is higher than its previous bid without providing
a new asked price that is also higher than its previous asked price by a
similar amount;
(4) Provide a retail forex customer a new bid price for a retail
forex transaction that is lower than its previous bid without providing
a new asked price that is also lower than its previous asked price by a
similar amount; or
(5) Establish a new position for a retail forex customer (except one
that offsets an existing position for that retail forex customer) where
the banking institution holds outstanding orders of other retail forex
customers for the same currency pair at a comparable price.
Sec. 240.14 Supervision.
(a) Supervision by the banking institution. A banking institution
engaging in retail forex transactions shall diligently supervise the
handling by its officers, employees, and agents (or persons occupying a
similar status or performing a similar function) of all retail forex
accounts carried, operated, or advised by the banking institution and
all activities of its officers, employees, and agents (or persons
occupying a similar status or performing a similar function) relating to
its retail forex business.
[[Page 207]]
(b) Supervision by officers, employees, or agents. An officer,
employee, or agent of a banking institution must diligently supervise
his or her subordinates' handling of all retail forex accounts at the
banking institution and all the subordinates' activities relating to the
banking institution's retail forex business.
Sec. 240.15 Notice of transfers.
(a) Prior notice generally required. Except as provided in paragraph
(b) of this section, a banking institution must provide a retail forex
customer with 30 days' prior notice of any assignment of any position or
transfer of any account of the retail forex customer. The notice must
include a statement that the retail forex customer is not required to
accept the proposed assignment or transfer and may direct the banking
institution to liquidate the positions of the retail forex customer or
transfer the account to a retail forex counterparty of the retail forex
customer's selection.
(b) Exceptions. The requirements of paragraph (a) of this section
shall not apply to transfers:
(1) Requested by the retail forex customer;
(2) Made by the Federal Deposit Insurance Corporation as receiver or
conservator under the Federal Deposit Insurance Act or other law; or
(3) Otherwise authorized by applicable law.
(c) Obligations of transferee banking institution. A banking
institution to which retail forex accounts or positions are assigned or
transferred under paragraph (a) of this section must provide to the
affected retail forex customers the risk disclosure statements and forms
of acknowledgment required by this part and receive the required signed
acknowledgments within sixty days of such assignments or transfers. This
requirement shall not apply if the banking institution has clear written
evidence that the retail forex customer has received and acknowledged
receipt of the required disclosure statements.
Sec. 240.16 Customer dispute resolution.
(a) No banking institution shall enter into any agreement or
understanding with a retail forex customer in which the customer agrees,
prior to the time a claim or grievance arises, to submit any claim or
grievance regarding any retail forex transaction or disclosure to any
settlement procedure.
(b) Election of forum. (1) Within 10 business days after the receipt
of notice from the retail forex customer that the customer intends to
submit a claim to arbitration, the banking institution shall provide the
customer with a list of persons qualified in dispute resolution.
(2) The customer must, within 45 days after receipt of such list,
notify the banking institution of the person selected. The customer's
failure to provide such notice shall give the banking institution the
right to select a person from the list.
(c) Enforceability. A dispute settlement procedure may require
parties using the procedure to agree, under applicable state law,
submission agreement, or otherwise, to be bound by an award rendered in
the procedure if the agreement to submit the claim or grievance to the
procedure was made after the claim or grievance arose. Any award so
rendered by the procedure will be enforceable in accordance with
applicable law.
(d) Time limits for submission of claims. The dispute settlement
procedure used by the parties may not include any unreasonably short
limitation period foreclosing submission of a customer's claims or
grievances or counterclaims.
(e) Counterclaims. A procedure for the settlement of a retail forex
customer's claims or grievances against a banking institution or
employee thereof may permit the submission of a counterclaim in the
procedure by a person against whom a claim or grievance is brought if
the counterclaim:
(1) Arises out of the transaction or occurrence that is the subject
of the retail forex customer's claim or grievance; and
(2) Does not require for adjudication the presence of essential
witnesses, parties, or third persons over which the settlement process
lacks jurisdiction.
(f) Cross-border transactions. This section shall not apply to
transactions within the scope of sections 202, 302, and 305 of the
Federal Arbitration Act (9 U.S.C. 202, 302, and 305).
[[Page 208]]
Sec. 240.17 Reservation of authority.
The Board may modify the disclosure, recordkeeping, capital and
margin, reporting, business conduct, documentation, or other standards
or requirements under this part for a specific retail forex transaction
or a class of retail forex transactions if the Board determines that the
modification is consistent with safety and soundness and the protection
of retail forex customers.
PART 241_SECURITIES HOLDING COMPANIES
(REGULATION OO)--Table of Contents
Sec.
241.1 Authority and purpose.
241.2 Definitions.
241.3 Registration as a supervised securities holding company.
Authority: 12 U.S.C. 1850a.
Source: 77 FR 32884, June 5, 2012, unless otherwise noted.
Sec. 241.1 Authority and purpose.
(a) Authority. This part is issued by the Board pursuant to section
618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12
U.S.C. 1850a).
(b) Purpose. This part establishes the procedures by which a
securities holding company may elect to register to be supervised by the
Board.
Sec. 241.2 Definitions.
Except as defined below, terms used in this part have the same
meaning given them in 12 CFR 225.2.
(a) Securities holding company. (1) A securities holding company
means--
(i) Any company that directly or indirectly owns or controls, is
controlled by, or is under common control with, one or more brokers or
dealers registered with the Securities and Exchange Commission; and
(ii) Is required by a foreign regulator or provision of foreign law
to be subject to comprehensive consolidated supervision.
(2) A securities holding company does not include a company that
is--
(i) A nonbank financial company supervised by the Board pursuant to
title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(12 U.S.C. 5301 et seq.);
(ii) An insured bank (other than an institution described in
subparagraphs (D), (F), or (H) of section 2(c)(2) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1841(c)(2))) or a savings association;
(iii) An affiliate of an insured bank (other than an institution
described in subparagraphs (D), (F), or (H) of section 2(c)(2) of the
Bank Holding Company Act of 1956 (12 U.S.C. 1841(c)(2))) or an affiliate
of a savings association;
(iv) A foreign bank, foreign company, or company that is described
in section 8(a) of the International Banking Act of 1978 (12 U.S.C.
3106(a));
(v) A foreign bank that controls, directly or indirectly, a
corporation chartered under section 25A of the Federal Reserve Act (12
U.S.C. 611 et seq.); or
(vi) Currently subject to comprehensive consolidated supervision by
a foreign regulator.
(b) Supervised securities holding company means a securities holding
company that is supervised by the Board pursuant to this part.
Sec. 241.3 Registration as a supervised securities holding company.
(a) Registration--(1) Filing requirement. A securities holding
company may elect to register to become a supervised securities holding
company by filing the appropriate form with the responsible Reserve
Bank. The responsible Reserve Bank is determined by the Director of
Banking Supervision and Regulation at the Board, or the Director's
delegee.
(2) Request for additional information. The Board may, at any time,
request additional information that it believes is necessary to complete
the registration.
(3) Complete filing. A registration by a securities holding company
is considered to be filed on the date that all information required on
the appropriate form is received.
(b) Effective date of registration--(1) In general. A registration
filed by a securities holding company under paragraph (a) of this
section is effective on the 45th calendar day after the date that a
[[Page 209]]
complete filing is received by the responsible Reserve Bank.
(2) Earlier notification that a registration is effective. The Board
may notify a securities holding company that its registration to become
a supervised securities holding company is effective prior to the 45th
calendar day after the date that a complete filing is received by the
responsible Reserve Bank. Such a notification must be in writing.
(3) Supervision and regulation of securities holding companies. (i)
Upon an effective registration and except as otherwise provided by order
of the Board, a supervised securities holding company shall be treated,
and shall be subject to supervision and regulation by the Board, as if
it were a bank holding company, or as otherwise appropriate to protect
the safety and soundness of the supervised securities holding company
and address the risks posed by such company to financial stability.
(ii) The provisions of section 4 of the Bank Holding Company Act of
1956 (12 U.S.C. 1841 et seq.) do not apply to a supervised securities
holding company.
PART 242_DEFINITIONS RELATING TO TITLE I OF THE DODD-FRANK ACT
(REGULATION PP)--Table of Contents
Sec.
242.1 Authority and purpose.
242.2 Definitions.
242.3 Nonbank companies ``predominantly engaged'' in financial
activities.
242.4 Significant nonbank financial companies and significant bank
holding companies.
Appendix A to Part 242--Financial Activities for Purposes of Title I of
the Dodd-Frank Act
Authority: 12 U.S.C. 5311.
Source: 78 FR 20776, Apr. 5, 2013, unless otherwise noted..
Sec. 242.1 Authority and purpose.
(a) Authority. This part is issued by the Board pursuant to sections
102(a)(7) and (b) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) (12 U.S.C. 5311(a)(7) and (b)).
(b) Purpose. (1) This part establishes the criteria for determining
if a company is ``predominantly engaged in financial activities'' as
required under section 102(b) of the Dodd-Frank Act (12 U.S.C. 5311(b))
for purposes of Title I of the Dodd-Frank Act.
(2) This part defines the terms ``significant nonbank financial
company'' and ``significant bank holding company'' as provided in
section 102(a)(6) of the Dodd-Frank Act for purposes of--
(i) Section 113 of the Dodd-Frank Act (12 U.S.C. 5323) relating to
the designation of nonbank financial companies by the Financial
Stability Oversight Council (Council) for supervision by the Board; and
(ii) Section 165(d)(2) of the Dodd-Frank Act (12 U.S.C. 5365(d)(2))
relating to the credit exposure reports required to be filed by--
(A) A nonbank financial company supervised by the Board; and
(B) A bank holding company or foreign bank subject to the Bank
Holding Company Act (BHC Act) (12 U.S.C. 1841 et seq.) that has $50
billion or more in total consolidated assets.
Sec. 242.2 Definitions.
For purposes of this part, the following definitions shall apply:
Applicable accounting standards.--The term ``applicable accounting
standards'' with respect to a company means:
(1) U.S. generally accepted accounting principles (GAAP), if the
company uses GAAP in the ordinary course of its business in preparing
its consolidated financial statements;
(2) International Financial Reporting Standards (IFRS), if the
company uses IFRS in the ordinary course of its business in preparing
its consolidated financial statements, or
(3) Such other accounting standards that the Council, with respect
to the definition of a nonbank financial company for purposes of Title I
of the Dodd-Frank Act (other than with respect to the definition of a
significant nonbank financial company), or the Board, with respect to
the definition of a significant nonbank financial company, determines
are appropriate on a case-by-case basis.
Foreign nonbank financial company.--The term ``foreign nonbank
financial company'' means a company (other than a company that is, or is
treated in
[[Page 210]]
the United States, as a bank holding company) that is--
(1) Incorporated or organized in a country other than the United
States; and
(2) Predominantly engaged in (including through a branch in the
United States) financial activities as defined in Sec. 242.3 of this
part.
Nonbank financial company.--The term ``nonbank financial company''
means a U.S. nonbank financial company and a foreign nonbank financial
company.
Nonbank financial company supervised by the Board.--The term
``nonbank financial company supervised by the Board'' means a nonbank
financial company or other company that the Council has determined under
section 113 of the Dodd-Frank Act (12 U.S.C. 5323) should be supervised
by the Board and for which such determination is still in effect.
State.--The term ``State'' includes any State, commonwealth,
territory, or possession of the United States, the District of Columbia,
the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, American Samoa, Guam, and the United States Virgin
Islands.
U.S. nonbank financial company.--The term ``U.S. nonbank financial
company'' means a company that--
(1) Is incorporated or organized under the laws of the United States
or any State;
(2) Is predominantly engaged in financial activities as defined in
Sec. 242.3 of this part; and
(3) Is not--
(i) A bank holding company;
(ii) A Farm Credit System institution chartered and subject to the
provisions of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);
(iii) A national securities exchange (or parent thereof), clearing
agency (or parent thereof, unless the parent is a bank holding company),
security-based swap execution facility, or security-based swap data
repository that, in each case, is registered with the Securities and
Exchange Commission as such; or
(iv) A board of trade designated as a contract market (or parent
thereof), a derivatives clearing organization (or parent thereof, unless
the parent is a bank holding company), a swap execution facility, or a
swap data repository that, in each case, is registered with the
Commodity Futures Trading Commission as such.
Sec. 242.3 Nonbank companies ``predominantly engaged''
in financial activities.
(a) In general. A company is ``predominantly engaged in financial
activities'' for purposes of this section if--
(1) The consolidated annual gross financial revenues of the company
in either of its two most recently completed fiscal years represent 85
percent or more of the company's consolidated annual gross revenues (as
determined in accordance with applicable accounting standards) in that
fiscal year;
(2) The consolidated total financial assets of the company as of the
end of either of its two most recently completed fiscal years represent
85 percent or more of the company's consolidated total assets (as
determined in accordance with applicable accounting standards) as of the
end of that fiscal year; or
(3) The Council, with respect to the definition of a nonbank
financial company for purposes of Title I of the Dodd-Frank Act (other
than with respect to the definition of a significant nonbank financial
company), or the Board, with respect to the definition of a significant
nonbank financial company, determines, based on all the facts and
circumstances, that--
(i) The consolidated annual gross financial revenues of the company
represent 85 percent or more of the company's consolidated annual gross
revenues; or
(ii) The consolidated total financial assets of the company
represent 85 percent or more of the company's consolidated total assets.
(b) Consolidated annual gross financial revenues. For purposes of
this section, the ``consolidated annual gross financial revenues'' of a
company means that portion of the consolidated annual gross revenues of
the company (as determined in accordance with applicable accounting
standards) that are derived, directly or indirectly, by the company or
any of its subsidiaries from--
[[Page 211]]
(1) Activities that are financial in nature; or
(2) The ownership, control, or activities of an insured depository
institution or any subsidiary of an insured depository institution.
(c) Consolidated total financial assets. For purposes of this
section, the ``consolidated total financial assets'' of a company means
that portion of the consolidated total assets of the company (as
determined in accordance with applicable accounting standards) that are
related to--
(1) Activities that are financial in nature; or
(2) The ownership, control, or activities of an insured depository
institution or any subsidiary of an insured depository institution.
(d) Activities that are financial in nature--(1) In general. For
purposes of determining whether a company is predominantly engaged in
financial activities under this section, activities that are financial
in nature are set forth in the appendix to this part. Nothing in this
part limits the authority of the Board under any other provision of law
or regulation to modify the activities determined to be financial in
nature for purposes of this section or for purposes of the BHC Act or to
provide interpretations of section 4(k) of the BHC Act.
(2) Effect of other authority. Any activity described in the
appendix is financial in nature for purposes of this part regardless of
whether--
(i) A bank holding company (including a financial holding company or
a company that is, or is treated in the United States as, a bank holding
company) may be authorized to engage in the activity, or own or control
shares of a company engaged in such activity, under any other provisions
of the BHC Act or other Federal law including, but not limited to,
section 4(a)(2), section 4(c)(5), section 4(c)(6), section 4(c)(7),
section 4(c)(9), or section 4(c)(13) of the BHC Act (12 U.S.C.
1843(a)(2), (c)(5), (c)(6), (c)(7), (c)(9), or (c)(13)) and the Board's
implementing regulations; or
(ii) Other provisions of Federal or state law or regulations
prohibit, restrict, or otherwise place conditions on the conduct of the
activity by a bank holding company (including a financial holding
company or a company that is, or is treated in the United States, as a
bank holding company) or bank holding companies generally.
(e) Rules of construction. For purposes of determining whether a
company is predominantly engaged in financial activities under this
section--
(1) Unconsolidated investments. (i) Unless otherwise determined by
the Council or the Board in accordance with paragraph (e)(1)(ii) of this
section, revenues derived from, and assets related to, an investment by
the company in an entity whose financial statements are not consolidated
with those of the company are presumed to be financial in nature.
(ii) A company may seek to rebut the presumption described in
paragraph (e)(1)(i) of this section by providing evidence to the
Council, with respect to the definition of a nonbank financial company
for purposes of Title I of the Dodd-Frank Act (other than with respect
to the definition of a significant nonbank financial company), or the
Board, with respect to the definition of a significant nonbank financial
company, that the shares or ownership interests are not held in
connection with a bona fide merchant or investment banking activity, are
not held in connection with the activity of investing for others, do not
represent an investment in an entity engaged in activities that are
financial in nature as defined in the appendix, or are not otherwise
related to a financial activity.
(2) Accounts receivable. (i) Unless otherwise determined by the
Council or the Board in accordance with paragraph (e)(2)(ii) of this
section, an account receivable is presumed to be an asset related to the
financial activity of extending credit.
(ii) A company may seek to rebut the presumption described in
paragraph (e)(2)(i) of this section by providing evidence to the
Council, with respect to the definition of a nonbank financial company
for purposes of Title I of the Dodd-Frank Act (other than with respect
to the definition of a significant nonbank financial company), or the
Board, with respect to the definition of a significant nonbank financial
company, that the account receivable is not related to a financial
activity.
[[Page 212]]
(3) Goodwill. Goodwill is excluded from a company's consolidated
total assets and consolidated total financial assets.
(4) Cash and cash equivalents. (i) Cash is excluded from a company's
consolidated total assets and consolidated total financial assets.
(ii) Cash equivalents are assets related to a financial activity.
(5) Intangible assets. Intangible assets are treated in the same
manner as the transaction or asset that gives rise to the intangible
asset.
Sec. 242.4 Significant nonbank financial companies and
significant bank holding companies.
For purposes of Title I of the Dodd-Frank Act, the following
definitions shall apply:
(a) Significant nonbank financial company. A ``significant nonbank
financial company'' means--
(1) Any nonbank financial company supervised by the Board; and
(2) Any other nonbank financial company that had $50 billion or more
in total consolidated assets (as determined in accordance with
applicable accounting standards) as of the end of its most recently
completed fiscal year.
(b) Significant bank holding company. A ``significant bank holding
company'' means any bank holding company or company that is, or is
treated in the United States as, a bank holding company, that had $50
billion or more in total consolidated assets as of the end of the most
recently completed calendar year, as reported on either the Federal
Reserve's FR Y-9C (Consolidated Financial Statement for Bank Holding
Companies), or any successor form thereto, or the Federal Reserve's Form
FR Y-7Q (Capital and Asset Report for Foreign Banking Organizations), or
any successor form thereto.
Sec. Appendix A to Part 242--Financial Activities for Purposes of Title
I of the Dodd-Frank Act
(a) Lending, exchanging, transferring, investing for others, or
safeguarding money or securities.
(b) Insuring, guaranteeing, or indemnifying against loss, harm,
damage, illness, disability, or death, or providing and issuing
annuities, and acting as principal, agent, or broker for purposes of the
foregoing, in any state.
(c) Providing financial, investment, or economic advisory services,
including advising an investment company (as defined in section 3 of the
Investment Company Act of 1940).
(d) Issuing or selling instruments representing interests in pools
of assets permissible for a bank to hold directly.
(e) Underwriting, dealing in, or making a market in securities.
(f) Engaging in any activity that the Board has determined to be so
closely related to banking or managing or controlling banks as to be a
proper incident thereto, which include--
(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, including the following activities:
(i) Real estate and personal property appraising. Performing
appraisals of real estate and tangible and intangible personal property,
including securities.
(ii) Arranging commercial real estate equity financing. Acting as
intermediary for the financing of commercial or industrial income-
producing real estate by arranging for the transfer of the title,
control, and risk of such a real estate project to one or more
investors.
(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 \1\ of assets of a type that
[[Page 213]]
an insured depository institution may originate and own.
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\1\ 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.
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(vii) Acquiring debt in default. Acquiring debt that is in default
at the time of acquisition.
(viii) Real estate settlement servicing. Providing real estate
settlement services.\2\
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\2\ 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; \3\
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\3\ The requirement that the lease is on a nonoperating basis means
that the company does 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 is on a nonoperating basis means that the company does 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.
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(ii) The initial term of the lease is at least 90 days; and
(iii) In the case of leases involving real property:
(A) At the inception of the initial lease, the effect of the
transaction will yield a return that will compensate the lessor for not
less than the lessor's full investment in the property plus the
estimated total cost of financing the property over the term of the
lease from rental payments, estimated tax benefits, and the estimated
residual value of the property at the expiration of the initial lease;
and
(B) The estimated residual value of property for purposes of
paragraph (f)(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 that is
not a bank for purposes of the BHC Act.
(ii) Operating savings associations. Owning, controlling, or
operating a savings association.
(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 that 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; \4\
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\4\ 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).
(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.
(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.
[[Page 214]]
(iv) Futures commission merchant. Acting as a futures commission
merchant for unaffiliated persons in the execution, clearance, or
execution and clearance of any futures contract and option on a futures
contract.
(v) Other transactional services. Providing to customers as agent
transactional services with respect to swaps and similar transactions,
any transaction described in paragraph (f)(8) of this appendix, 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.
(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), nonfinancial asset, or group of
assets, other than a bank-ineligible security,\5\ if--
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\5\ 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.
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(1) A state member bank is authorized to invest in the asset
underlying the contract;
(2) The contract requires cash settlement;
(3) The contract allows for assignment, termination, or offset prior
to delivery or expiration, and the company--
(i) Makes every reasonable effort to avoid taking or making delivery
of the asset underlying the contract; or
(ii) Receives and instantaneously transfers title to the underlying
asset, by operation of contract and without taking or making physical
delivery of the asset; or
(4) The contract does not allow for assignment, termination, or
offset prior to delivery or expiration and is based on an asset for
which futures contracts or options on futures contracts have been
approved for trading on a U.S. contract market by the Commodity Futures
Trading Commission, and the company--
(i) Makes every reasonable effort to avoid taking or making delivery
of the asset underlying the contract; or
(ii) Receives and instantaneously transfers title to the underlying
asset, by operation of contract and without taking or making physical
delivery of the asset.
(C) Forward contracts, options,\6\ 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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\6\ 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. Bank holding companies that deal in these instruments must
do so 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 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: \7\
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\7\ In performing this activity, 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) Revenues derived from, or assets related to, a company's
management consulting activities under this subparagraph will not be
considered to be financial if the company:
(1) Owns or controls, directly or indirectly, more than 5 percent of
the voting securities of the client institution; or
[[Page 215]]
(2) Allows 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 permitted by the Board.
(C) Up to 30 percent of a nonbank company's assets or revenues
related to management consulting services provided to customers not
described in paragraph (f)(9)(i)(A)(1) or regarding matters not
described in paragraph (f)(9)(i)(A)(2) of this appendix will be included
in the company's financial assets or revenues.
(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 \8\ and individuals currently employed
by, or recently displaced from, a financial organization;
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\8\ 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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(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.\9\
---------------------------------------------------------------------------
\9\ See also the Board's interpretation on courier activities (12
CFR 225.129), which sets forth conditions for 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 company or any
of its subsidiaries; and
(B) Limited to ensuring the repayment of the outstanding balance due
on the extension of credit \10\ in the event of the death, disability,
or involuntary unemployment of the debtor.
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\10\ 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 (f)(3) of this appendix.
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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 \11\ that is a subsidiary of a company, if:
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\11\ 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 \12\
and the credit is secured by the home; and
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\12\ 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 company or a subsidiary 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.
[[Page 216]]
(iv) Insurance-agency activities conducted on May 1, 1982. Engaging
in any specific insurance-agency activity \13\ if the 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.\14\ Revenues derived from, or assets related to, a
company's specific insurance agency activity under this clause will be
considered financial only if the company:
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\13\ Nothing contained in this provision precludes a 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.
\14\ 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) Engages in such specific insurance agency activity only at
locations:
(1) In the state in which the 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 company or
subsidiary thereof or by any other subsidiary of such company on May 1,
1982; and
(B) Provides 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 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 company or its
subsidiaries; and
(B) Group insurance that protects the employees of the company or
its subsidiaries.
(vi) Small companies. Engaging in any insurance-agency activity if
the company has total consolidated assets of $50 million or less.
Revenues derived from, or assets related to, a company's insurance-
agency activities under this paragraph will be considered financial only
if the company does not engage in the sale of life insurance or
annuities except as provided in paragraphs (f)(11) (i) and (iii) of this
appendix, and does 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 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 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 the data to be processed, stored or
furnished are financial, banking or economic.
(ii) Up to 30 percent of a nonbank company's assets or revenues
related to providing general purpose hardware in connection with
providing data processing products or services described in paragraph
(f)(14)(i) of this appendix will be included in the company's financial
assets or revenues.
(15) Administrative services. Providing administrative and other
services to mutual funds.
(16) Securities exchange. Owning shares of a securities exchange.
(17) Certification authority. Acting as a certification authority
for digital signatures and authenticating the identity of persons
conducting financial and nonfinancial transactions.
(18) Employment histories. 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.
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(19) Check cashing and wire transmission. Check cashing and wire
transmission services.
(20) Services offered in connection with banking services. 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.
(21) Real estate title abstracting.
(g) Engaging, in the United States, in any activity that a bank
holding company may engage in outside of the United States; and the
Board has determined, under regulations prescribed or interpretations
issued pursuant to section 4(c)(13) of the BHC Act (12 U.S.C.
1843(c)(13)) to be usual in connection with the transaction of banking
or other financial operations abroad. Those activities include--
(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 company to control
the person to which the services are provided.
(2) Operating a travel agency in connection with financial services.
(3) Organizing, sponsoring, and managing a mutual fund.
(4) Commercial banking and other banking activities.
(h) Directly, or indirectly acquiring or controlling, whether as
principal, on behalf of 1 or more entities, or otherwise, shares,
assets, or ownership interests (including debt or equity securities,
partnership interests, trust certificates, or other instruments
representing ownership) of a company or other entity, whether or not
constituting control of such company or entity, engaged in any activity
not financial in nature as defined in this appendix if:
(1) Such shares, assets, or ownership interests are acquired and
held as part of a bona fide underwriting or merchant or investment
banking activity, including investment activities engaged in for the
purpose of appreciation and ultimate resale or disposition of the
investment;
(2) Such shares, assets, or ownership interests are held for a
period of time to enable the sale or disposition thereof on a reasonable
basis consistent with the financial viability of the activities
described in paragraph (h)(1) of this appendix; and
(3) During the period such shares, assets, or ownership interests
are held, the company does not routinely manage or operate such company
or entity except as may be necessary or required to obtain a reasonable
return on investment upon resale or disposition.
(i) Directly or indirectly acquiring or controlling, whether as
principal, on behalf of 1 or more entities, or otherwise, shares,
assets, or ownership interests (including debt or equity securities,
partnership interests, trust certificates or other instruments
representing ownership) of a company or other entity, whether or not
constituting control of such company or entity, engaged in any activity
not financial in nature as defined in this appendix if--
(1) Such shares, assets, or ownership interests are acquired and
held by 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;
(2) Such shares, assets, or ownership interests represent an
investment made in the ordinary course of business of such insurance
company in accordance with relevant state law governing such
investments; and
(3) During the period such shares, assets, or ownership interests
are held, the company does not routinely manage or operate such company
except as may be necessary or required to obtain a reasonable return on
investment.
(j) Lending, exchanging, transferring, investing for others, or
safeguarding financial assets other than money or securities.
(k) Providing any device or other instrumentality for transferring
money or other financial assets.
(l) Arranging, effecting, or facilitating financial transactions for
the account of third parties.
PART 243_RESOLUTION PLANS--Table of Contents
Sec.
243.1 Authority and scope.
243.2 Definitions.
243.3 Resolution plan required.
243.4 Informational content of a resolution plan.
243.5 Review of resolution plans; resubmission of deficient resolution
plans.
243.6 Failure to cure deficiencies on resubmission of a resolution plan.
243.7 Consultation.
243.8 No limiting effect or private right of action; confidentiality of
resolution plans.
243.9 Enforcement.
Authority: 12 U.S.C. 5365.
Source: 76 FR 67340, Nov. 1, 2011, unless otherwise noted.
Sec. 243.1 Authority and scope.
(a) Authority. This part is issued pursuant to section 165(d)(8) of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-
Frank Act) (Pub. L. 111-203, 124 Stat. 1376, 1426-1427), 12 U.S.C.
5365(d)(8), which requires the Board of Governors of the
[[Page 218]]
Federal Reserve System (Board) and the Federal Deposit Insurance
Corporation (Corporation) to jointly issue rules implementing the
provisions of section 165(d) of the Dodd-Frank Act.
(b) Scope. This part applies to each covered company and establishes
rules and requirements regarding the submission and content of a
resolution plan, as well as procedures for review by the Board and
Corporation of a resolution plan.
Sec. 243.2 Definitions.
For purposes of this part:
(a) Bankruptcy Code means title 11 of the United States Code.
(b) Company means a corporation, partnership, limited liability
company, depository institution, business trust, special purpose entity,
association, or similar organization, but does not include any
organization, the majority of the voting securities of which are owned
by the United States.
(c) Control. A company controls another company when the first
company, directly or indirectly, owns, or holds with power to vote, 25
percent or more of any class of the second company's outstanding voting
securities.
(d) Core business lines means those business lines of the covered
company, including associated operations, services, functions and
support, that, in the view of the covered company, upon failure would
result in a material loss of revenue, profit, or franchise value.
(e) Council means the Financial Stability Oversight Council
established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
(f) Covered company--(1) In general. A ``covered company'' means:
(i) Any nonbank financial company supervised by the Board;
(ii) Any bank holding company, as that term is defined in section 2
of the Bank Holding Company Act, as amended (12 U.S.C. 1841), and the
Board's Regulation Y (12 CFR part 225), that has $50 billion or more in
total consolidated assets, as determined based on the average of the
company's four most recent Consolidated Financial Statements for Bank
Holding Companies as reported on the Federal Reserve's Form FR Y-9C
(``FR Y-9C''); and
(iii) Any foreign bank or company that is a bank holding company or
is treated as a bank holding company under section 8(a) of the
International Banking Act of 1978 (12 U.S.C. 3106(a)), and that has $50
billion or more in total consolidated assets, as determined based on the
foreign bank's or company's most recent annual or, as applicable, the
average of the four most recent quarterly Capital and Asset Reports for
Foreign Banking Organizations as reported on the Federal Reserve's Form
FR Y-7Q (``FR Y-7Q'').
(2) Once a covered company meets the requirements described in
paragraph (f)(1)(ii) or (iii) of this section, the company shall remain
a covered company for purposes of this part unless and until the company
has less than $45 billion in total consolidated assets, as determined
based on the--
(i) Average total consolidated assets as reported on the company's
four most recent FR Y-9Cs, in the case of a covered company described in
paragraph (f)(1)(ii) of this section; or
(ii) Total consolidated assets as reported on the company's most
recent annual FR Y-7Q, or, as applicable, average total consolidated
assets as reported on the company's four most recent quarterly FR Y-7Qs,
in the case of a covered company described in paragraph (f)(1)(iii) of
this section.
Nothing in this paragraph (f)(2) shall preclude a company from
becoming a covered company pursuant to paragraph (f)(1) of this section.
(3) Multi-tiered holding company. In a multi-tiered holding company
structure, covered company means the top-tier of the multi-tiered
holding company only.
(4) Asset threshold for bank holding companies and foreign banking
organizations. The Board may, pursuant to a recommendation of the
Council, raise any asset threshold specified in paragraph (f)(1)(ii) or
(iii) of this section.
(5) Exclusion. A bridge financial company chartered pursuant to 12
U.S.C. 5390(h) shall not be deemed to be a covered company hereunder.
(g) Critical operations means those operations of the covered
company, including associated services, functions
[[Page 219]]
and support, the failure or discontinuance of which, in the view of the
covered company or as jointly directed by the Board and the Corporation,
would pose a threat to the financial stability of the United States.
(h) Depository institution has the same meaning as in section
3(c)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)(1)) and
includes a state-licensed uninsured branch, agency, or commercial
lending subsidiary of a foreign bank.
(i) Foreign banking organization means--
(1) A foreign bank, as defined in section 1(b)(7) of the
International Banking Act of 1978 (12 U.S.C. 3101(7)), that:
(i) Operates a branch, agency, or commercial lending company
subsidiary in the United States;
(ii) Controls a bank in the United States; or
(iii) Controls an Edge corporation acquired after March 5, 1987; and
(2) Any company of which the foreign bank is a subsidiary.
(j) Foreign-based company means any covered company that is not
incorporated or organized under the laws of the United States.
(k) Functionally regulated subsidiary has the same meaning as in
section 5(c)(5) of the Bank Holding Company Act, as amended (12 U.S.C.
1844(c)(5)).
(l) Material entity means a subsidiary or foreign office of the
covered company that is significant to the activities of a critical
operation or core business line (as defined in this part).
(m) Material financial distress with regard to a covered company
means that:
(1) The covered company has incurred, or is likely to incur, losses
that will deplete all or substantially all of its capital, and there is
no reasonable prospect for the company to avoid such depletion;
(2) The assets of the covered company are, or are likely to be, less
than its obligations to creditors and others; or
(3) The covered company is, or is likely to be, unable to pay its
obligations (other than those subject to a bona fide dispute) in the
normal course of business.
(n) Nonbank financial company supervised by the Board means a
nonbank financial company or other company that the Council has
determined under section 113 of the Dodd-Frank Act (12 U.S.C. 5323)
shall be supervised by the Board and for which such determination is
still in effect.
(o) Rapid and orderly resolution means a reorganization or
liquidation of the covered company (or, in the case of a covered company
that is incorporated or organized in a jurisdiction other than the
United States, the subsidiaries and operations of such foreign company
that are domiciled in the United States) under the Bankruptcy Code that
can be accomplished within a reasonable period of time and in a manner
that substantially mitigates the risk that the failure of the covered
company would have serious adverse effects on financial stability in the
United States.
(p) Subsidiary means a company that is controlled by another
company, and an indirect subsidiary is a company that is controlled by a
subsidiary of a company.
(q) 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.
Sec. 243.3 Resolution plan required.
(a) Initial and annual resolution plans required--(1) Each covered
company shall submit its initial resolution plan to the Board and the
Corporation on or before the date set forth below (``Initial Submission
Date''):
(i) July 1, 2012, with respect to any covered company that, as of
the effective date of this part, had $250 billion or more in total
nonbank assets (or, in the case of a covered company that is a foreign-
based company, in total U.S. nonbank assets);
(ii) July 1, 2013, with respect to any covered company that is not
described in paragraph (a)(1)(i) of this section, and that, as of the
effective date of this part had $100 billion or more in total nonbank
assets (or, in the case of a covered company that is a foreign-based
company, in total U.S. nonbank assets); and
(iii) December 31, 2013, with respect to any other covered company
that is a covered company as of the effective
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date of this part but that is not described in paragraph (a)(1)(i) or
(ii) of this section.
(2) A company that becomes a covered company after the effective
date of this part shall submit its initial resolution plan no later than
the next July 1 following the date the company becomes a covered
company, provided such date occurs no earlier than 270 days after the
date on which the company became a covered company.
(3) After filing its initial resolution plan pursuant to paragraph
(a)(1) or (2) of this section, each covered company shall annually
submit a resolution plan to the Board and the Corporation on or before
each anniversary date of its Initial Submission Date.
(4) Notwithstanding anything to the contrary in this paragraph (a),
the Board and Corporation may jointly determine that a covered company
shall file its initial or annual resolution plan by a date other than as
provided in this paragraph (a). The Board and the Corporation shall
provide a covered company with written notice of a determination under
this paragraph (a)(4) no later than 180 days prior to the date on which
the Board and Corporation jointly determined to require the covered
company to submit its resolution plan.
(b) Authority to require interim updates and notice of material
events--(1) In general. The Board and the Corporation may jointly
require that a covered company file an update to a resolution plan
submitted under paragraph (a) of this section, within a reasonable
amount of time, as jointly determined by the Board and Corporation. The
Board and the Corporation shall make a request pursuant to this
paragraph (b)(1) in writing, and shall specify the portions or aspects
of the resolution plan the covered company shall update.
(2) Notice of material events. Each covered company shall provide
the Board and the Corporation with a notice no later than 45 days after
any event, occurrence, change in conditions or circumstances, or other
change that results in, or could reasonably be foreseen to have, a
material effect on the resolution plan of the covered company. Such
notice should describe the event, occurrence or change and explain why
the event, occurrence or change may require changes to the resolution
plan. The covered company shall address any event, occurrence or change
with respect to which it has provided notice pursuant to this paragraph
(b)(2) in the following resolution plan submitted by the covered
company.
(3) Exception. A covered company shall not be required to file a
notice under paragraph (b)(2) of this section if the date on which the
covered company would be required to submit the notice under paragraph
(b)(2) would be within 90 days prior to the date on which the covered
company is required to file an annual resolution plan under paragraph
(a) of this section.
(c) Authority to require more frequent submissions or extend time
period.--The Board and Corporation may jointly:
(1) Require that a covered company submit a resolution plan more
frequently than required pursuant to paragraph (a) of this section; and
(2) Extend the time period that a covered company has to submit a
resolution plan or a notice following material events under paragraphs
(a) and (b) of this section.
(d) Access to information.--In order to allow evaluation of the
resolution plan, each covered company must provide the Board and the
Corporation such information and access to personnel of the covered
company as the Board and the Corporation jointly determine during the
period for reviewing the resolution plan is necessary to assess the
credibility of the resolution plan and the ability of the covered
company to implement the resolution plan. The Board and the Corporation
will rely to the fullest extent possible on examinations conducted by or
on behalf of the appropriate Federal banking agency for the relevant
company.
(e) Board of directors approval of resolution plan.--Prior to
submission of a resolution plan under paragraph (a) of this section, the
resolution plan of a covered company shall be approved by:
(1) The board of directors of the covered company and noted in the
minutes; or
(2) In the case of a foreign-based covered company only, a delegee
acting under the express authority of the
[[Page 221]]
board of directors of the covered company to approve the resolution
plan.
(f) Resolution plans provided to the Council.--The Board shall make
the resolution plans and updates submitted by the covered company
pursuant to this section available to the Council upon request.
Sec. 243.4 Informational content of a resolution plan.
(a) In general--(1) Domestic covered companies. Except as otherwise
provided in paragraph (a)(3) of this section, the resolution plan of a
covered company that is organized or incorporated in the United States
shall include the information specified in paragraphs (b) through (i) of
this section with respect to the subsidiaries and operations that are
domiciled in the United States as well as the foreign subsidiaries,
offices, and operations of the covered company.
(2) Foreign-based covered companies.--Except as otherwise provided
in paragraph (a)(3) of the section, the resolution plan of a covered
company that is organized or incorporated in a jurisdiction other than
the United States (other than a bank holding company) or that is a
foreign banking organization shall include:
(i) The information specified in paragraphs (b) through (i) of this
section with respect to the subsidiaries, branches and agencies, and
critical operations and core business lines, as applicable, that are
domiciled in the United States or conducted in whole or material part in
the United States. With respect to the information specified in
paragraph (g) of this section, the resolution plan of a foreign-based
covered company shall also identify, describe in detail, and map to
legal entity the interconnections and interdependencies among the U.S.
subsidiaries, branches and agencies, and critical operations and core
business lines of the foreign-based covered company and any foreign-
based affiliate; and
(ii) A detailed explanation of how resolution planning for the
subsidiaries, branches and agencies, and critical operations and core
business lines of the foreign-based covered company that are domiciled
in the United States or conducted in whole or material part in the
United States is integrated into the foreign-based covered company's
overall resolution or other contingency planning process.
(3) Tailored resolution plan--(i) Eligible covered company.--
Paragraph (a)(3)(ii) of this section applies to any covered company that
as of December 31 of the calendar year prior to the date its resolution
plan is required to be submitted under this part--
(A) Has less than $100 billion in total nonbank assets (or, in the
case of a covered company that is a foreign-based company, in total U.S.
nonbank assets); and
(B) The total insured depository institution assets of which
comprise 85 percent or more of the covered company's total consolidated
assets (or, in the case of a covered company that is a foreign-based
company, the assets of the U.S. insured depository institution
operations, branches, and agencies of which comprise 85 percent or more
of such covered company's U.S. total consolidated assets).
(ii) Tailored resolution plan elements. A covered company described
in paragraph (a)(3)(i) of this section may file a resolution plan that
is limited to the following items--
(A) An executive summary, as specified in paragraph (b) of this
section;
(B) The information specified in paragraphs (c) through (f) and
paragraph (h) of this section, but only with respect to the covered
company and its nonbanking material entities and operations;
(C) The information specified in paragraphs (g) and (i) of this
section with respect to the covered company and all of its insured
depository institutions (or, in the case of a covered company that is a
foreign-based company, the U.S. insured depository institutions,
branches, and agencies) and nonbank material entities and operations.
The interconnections and interdependencies identified pursuant to (g) of
this section shall be included in the analysis provided pursuant to
paragraph (c) of this section.
(iii) Notice.--A covered company that meets the requirements of
paragraph (a)(3)(i) of this section and that intends to submit a
resolution plan pursuant to this paragraph (a)(3), shall provide the
[[Page 222]]
Board and Corporation with written notice of such intent and its
eligibility under paragraph (a)(3)(i) no later than 270 days prior to
the date on which the covered company is required to submit its
resolution plan. Within 90 of receiving such notice, the Board and
Corporation may jointly determine that the covered company must submit a
resolution plan that meets some or all of the requirements as set forth
in paragraph (a)(1) or (2) of this section, as applicable.
(4) Required and prohibited assumptions.--In preparing its plan for
rapid and orderly resolution in the event of material financial distress
or failure required by this part, a covered company shall:
(i) Take into account that such material financial distress or
failure of the covered company may occur under the baseline, adverse and
severely adverse economic conditions provided to the covered company by
the Board pursuant to 12 U.S.C. 5365(i)(1)(B); provided, however, a
covered company may submit its initial resolution plan assuming the
baseline conditions only, or, if a baseline scenario is not then
available, a reasonable substitute developed by the covered company; and
(ii) Not rely on the provision of extraordinary support by the
United States or any other government to the covered company or its
subsidiaries to prevent the failure of the covered company.
(b) Executive summary.--Each resolution plan of a covered company
shall include an executive summary describing:
(1) The key elements of the covered company's strategic plan for
rapid and orderly resolution in the event of material financial distress
at or failure of the covered company.
(2) Material changes to the covered company's resolution plan from
the company's most recently filed resolution plan (including any notices
following a material event or updates to the resolution plan).
(3) Any actions taken by the covered company since filing of the
previous resolution plan to improve the effectiveness of the covered
company's resolution plan or remediate or otherwise mitigate any
material weaknesses or impediments to effective and timely execution of
the resolution plan.
(c) Strategic analysis.--Each resolution plan shall include a
strategic analysis describing the covered company's plan for rapid and
orderly resolution in the event of material financial distress or
failure of the covered company. Such analysis shall--
(1) Include detailed descriptions of the--
(i) Key assumptions and supporting analysis underlying the covered
company's resolution plan, including any assumptions made concerning the
economic or financial conditions that would be present at the time the
covered company sought to implement such plan;
(ii) Range of specific actions to be taken by the covered company to
facilitate a rapid and orderly resolution of the covered company, its
material entities, and its critical operations and core business lines
in the event of material financial distress or failure of the covered
company;
(iii) Funding, liquidity and capital needs of, and resources
available to, the covered company and its material entities, which shall
be mapped to its critical operations and core business lines, in the
ordinary course of business and in the event of material financial
distress at or failure of the covered company;
(iv) Covered company's strategy for maintaining operations of, and
funding for, the covered company and its material entities, which shall
be mapped to its critical operations and core business lines;
(v) Covered company's strategy in the event of a failure or
discontinuation of a material entity, core business line or critical
operation, and the actions that will be taken by the covered company to
prevent or mitigate any adverse effects of such failure or
discontinuation on the financial stability of the United States;
provided, however, if any such material entity is subject to an
insolvency regime other than the Bankruptcy Code, a covered company may
exclude that entity from its strategic analysis unless that entity
either has $50 billion or more in total assets or conducts a critical
operation; and
[[Page 223]]
(vi) Covered company's strategy for ensuring that any insured
depository institution subsidiary of the covered company will be
adequately protected from risks arising from the activities of any
nonbank subsidiaries of the covered company (other than those that are
subsidiaries of an insured depository institution);
(2) Identify the time period(s) the covered company expects would be
needed for the covered company to successfully execute each material
aspect and step of the covered company's plan;
(3) Identify and describe any potential material weaknesses or
impediments to effective and timely execution of the covered company's
plan;
(4) Discuss the actions and steps the covered company has taken or
proposes to take to remediate or otherwise mitigate the weaknesses or
impediments identified by the covered company, including a timeline for
the remedial or other mitigatory action; and
(5) Provide a detailed description of the processes the covered
company employs for:
(i) Determining the current market values and marketability of the
core business lines, critical operations, and material asset holdings of
the covered company;
(ii) Assessing the feasibility of the covered company's plans
(including timeframes) for executing any sales, divestitures,
restructurings, recapitalizations, or other similar actions contemplated
in the covered company's resolution plan; and
(iii) Assessing the impact of any sales, divestitures,
restructurings, recapitalizations, or other similar actions on the
value, funding, and operations of the covered company, its material
entities, critical operations and core business lines.
(d) Corporate governance relating to resolution planning.--Each
resolution plan shall:
(1) Include a detailed description of:
(i) How resolution planning is integrated into the corporate
governance structure and processes of the covered company;
(ii) The covered company's policies, procedures, and internal
controls governing preparation and approval of the covered company's
resolution plan;
(iii) The identity and position of the senior management official(s)
of the covered company that is primarily responsible for overseeing the
development, maintenance, implementation, and filing of the covered
company's resolution plan and for the covered company's compliance with
this part; and
(iv) The nature, extent, and frequency of reporting to senior
executive officers and the board of directors of the covered company
regarding the development, maintenance, and implementation of the
covered company's resolution plan;
(2) Describe the nature, extent, and results of any contingency
planning or similar exercise conducted by the covered company since the
date of the covered company's most recently filed resolution plan to
assess the viability of or improve the resolution plan of the covered
company; and
(3) Identify and describe the relevant risk measures used by the
covered company to report credit risk exposures both internally to its
senior management and board of directors, as well as any relevant risk
measures reported externally to investors or to the covered company's
appropriate Federal regulator.
(e) Organizational structure and related information.--Each
resolution plan shall--
(1) Provide a detailed description of the covered company's
organizational structure, including:
(i) A hierarchical list of all material entities within the covered
company's organization (including legal entities that directly or
indirectly hold such material entities) that:
(A) Identifies the direct holder and the percentage of voting and
nonvoting equity of each legal entity and foreign office listed; and
(B) The location, jurisdiction of incorporation, licensing, and key
management associated with each material legal entity and foreign office
identified;
(ii) A mapping of the covered company's critical operations and core
business lines, including material asset holdings and liabilities
related to such
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critical operations and core business lines, to material entities;
(2) Provide an unconsolidated balance sheet for the covered company
and a consolidating schedule for all material entities that are subject
to consolidation by the covered company;
(3) Include a description of the material components of the
liabilities of the covered company, its material entities, critical
operations and core business lines that, at a minimum, separately
identifies types and amounts of the short-term and long-term
liabilities, the secured and unsecured liabilities, and subordinated
liabilities;
(4) Identify and describe the processes used by the covered company
to:
(i) Determine to whom the covered company has pledged collateral;
(ii) Identify the person or entity that holds such collateral; and
(iii) Identify the jurisdiction in which the collateral is located,
and, if different, the jurisdiction in which the security interest in
the collateral is enforceable against the covered company;
(5) Describe any material off-balance sheet exposures (including
guarantees and contractual obligations) of the covered company and its
material entities, including a mapping to its critical operations and
core business lines;
(6) Describe the practices of the covered company, its material
entities and its core business lines related to the booking of trading
and derivatives activities;
(7) Identify material hedges of the covered company, its material
entities, and its core business lines related to trading and derivative
activities, including a mapping to legal entity;
(8) Describe the hedging strategies of the covered company;
(9) Describe the process undertaken by the covered company to
establish exposure limits;
(10) Identify the major counterparties of the covered company and
describe the interconnections, interdependencies and relationships with
such major counterparties;
(11) Analyze whether the failure of each major counterparty would
likely have an adverse impact on or result in the material financial
distress or failure of the covered company; and
(12) Identify each trading, payment, clearing, or settlement system
of which the covered company, directly or indirectly, is a member and on
which the covered company conducts a material number or value amount of
trades or transactions. Map membership in each such system to the
covered company's material entities, critical operations and core
business lines.
(f) Management information systems--(1) Each resolution plan shall
include--
(i) A detailed inventory and description of the key management
information systems and applications, including systems and applications
for risk management, accounting, and financial and regulatory reporting,
used by the covered company and its material entities. The description
of each system or application provided shall identify the legal owner or
licensor, the use or function of the system or application, service
level agreements related thereto, any software and system licenses, and
any intellectual property associated therewith;
(ii) A mapping of the key management information systems and
applications to the material entities, critical operations and core
business lines of the covered company that use or rely on such systems
and applications;
(iii) An identification of the scope, content, and frequency of the
key internal reports that senior management of the covered company, its
material entities, critical operations and core business lines use to
monitor the financial health, risks, and operation of the covered
company, its material entities, critical operations and core business
lines; and
(iv) A description of the process for the appropriate supervisory or
regulatory agencies to access the management information systems and
applications identified in paragraph (f) of this section; and
(v) A description and analysis of--
(A) The capabilities of the covered company's management information
systems to collect, maintain, and report, in a timely manner to
management of the covered company, and to the Board, the information and
data underlying the resolution plan; and
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(B) Any deficiencies, gaps or weaknesses in such capabilities, and a
description of the actions the covered company intends to take to
promptly address such deficiencies, gaps, or weaknesses, and the time
frame for implementing such actions.
(2) The Board will use its examination authority to review the
demonstrated capabilities of each covered company to satisfy the
requirements of paragraph (f)(1)(v) of this section. The Board will
share with the Corporation information regarding the capabilities of the
covered company to collect, maintain, and report in a timely manner
information and data underlying the resolution plan.
(g) Interconnections and interdependencies. To the extent not
elsewhere provided, identify and map to the material entities the
interconnections and interdependencies among the covered company and its
material entities, and among the critical operations and core business
lines of the covered company that, if disrupted, would materially affect
the funding or operations of the covered company, its material entities,
or its critical operations or core business lines. Such interconnections
and interdependencies may include:
(1) Common or shared personnel, facilities, or systems (including
information technology platforms, management information systems, risk
management systems, and accounting and recordkeeping systems);
(2) Capital, funding, or liquidity arrangements;
(3) Existing or contingent credit exposures;
(4) Cross-guarantee arrangements, cross-collateral arrangements,
cross-default provisions, and cross-affiliate netting agreements;
(5) Risk transfers; and
(6) Service level agreements.
(h) Supervisory and regulatory information. Each resolution plan
shall--
(1) Identify any:
(i) Federal, state, or foreign agency or authority (other than a
Federal banking agency) with supervisory authority or responsibility for
ensuring the safety and soundness of the covered company, its material
entities, critical operations and core business lines; and
(ii) Other Federal, state, or foreign agency or authority (other
than a Federal banking agency) with significant supervisory or
regulatory authority over the covered company, and its material entities
and critical operations and core business lines.
(2) Identify any foreign agency or authority responsible for
resolving a foreign-based material entity and critical operations or
core business lines of the covered company; and
(3) Include contact information for each agency identified in
paragraphs (h)(1) and (2) of this section.
(i) Contact information. Each resolution plan shall identify a
senior management official at the covered company responsible for
serving as a point of contact regarding the resolution plan of the
covered company, and include contact information (including phone
number, email address, and physical address) for a senior management
official of the material entities of the covered company.
(j) Inclusion of previously submitted resolution plan informational
elements by reference. An annual submission of or update to a resolution
plan submitted by a covered company may include by reference
informational elements (but not strategic analysis or executive summary
elements) from a resolution plan previously submitted by the covered
company to the Board and the Corporation, provided that:
(1) The resolution plan seeking to include informational elements by
reference clearly indicates:
(i) The informational element the covered company is including by
reference; and
(ii) Which of the covered company's previously submitted resolution
plan(s) originally contained the information the covered company is
including by reference; and
(2) The covered company certifies that the information the covered
company is including by reference remains accurate.
(k) Exemptions. The Board and the Corporation may jointly exempt a
covered company from one or more of the requirements of this section.
[[Page 226]]
Sec. 243.5 Review of resolution plans; resubmission of
deficient resolution plans.
(a) Acceptance of submission and review. (1) The Board and
Corporation shall review a resolution plan submitted under section this
subpart within 60 days.
(2) If the Board and Corporation jointly determine within the time
described in paragraph (a)(1) of this section that a resolution plan is
informationally incomplete or that substantial additional information is
necessary to facilitate review of the resolution plan:
(i) The Board and Corporation shall jointly inform the covered
company in writing of the area(s) in which the resolution plan is
informationally incomplete or with respect to which additional
information is required; and
(ii) The covered company shall resubmit an informationally complete
resolution plan or such additional information as jointly requested to
facilitate review of the resolution plan no later than 30 days after
receiving the notice described in paragraph (a)(2)(i) of this section,
or such other time period as the Board and Corporation may jointly
determine.
(b) Joint determination regarding deficient resolution plans. If the
Board and Corporation jointly determine that the resolution plan of a
covered company submitted under Sec. 243.3(a) is not credible or would
not facilitate an orderly resolution of the covered company under the
Bankruptcy Code, the Board and Corporation shall jointly notify the
covered company in writing of such determination. Any joint notice
provided under this paragraph shall identify the aspects of the
resolution plan that the Board and Corporation jointly determined to be
deficient.
(c) Resubmission of a resolution plan. Within 90 days of receiving a
notice of deficiencies issued pursuant to paragraph (b) of this section,
or such shorter or longer period as the Board and Corporation may
jointly determine, a covered company shall submit a revised resolution
plan to the Board and Corporation that addresses the deficiencies
jointly identified by the Board and Corporation, and that discusses in
detail:
(1) The revisions made by the covered company to address the
deficiencies jointly identified by the Board and the Corporation;
(2) Any changes to the covered company's business operations and
corporate structure that the covered company proposes to undertake to
facilitate implementation of the revised resolution plan (including a
timeline for the execution of such planned changes); and
(3) Why the covered company believes that the revised resolution
plan is credible and would result in an orderly resolution of the
covered company under the Bankruptcy Code.
(d) Extensions of time. Upon their own initiative or a written
request by a covered company, the Board and Corporation may jointly
extend any time period under this section. Each extension request shall
be supported by a written statement of the covered company describing
the basis and justification for the request.
Sec. 243.6 Failure to cure deficiencies on resubmission of a
resolution plan.
(a) In general. The Board and Corporation may jointly determine that
a covered company or any subsidiary of a covered company shall be
subject to more stringent capital, leverage, or liquidity requirements,
or restrictions on the growth, activities, or operations of the covered
company or the subsidiary if:
(1) The covered company fails to submit a revised resolution plan
under Sec. 243.5(c) within the required time period; or
(2) The Board and the Corporation jointly determine that a revised
resolution plan submitted under Sec. 243.5(c) does not adequately
remedy the deficiencies jointly identified by the Board and the
Corporation under Sec. 243.5(b).
(b) Duration of requirements or restrictions.--Any requirements or
restrictions imposed on a covered company or a subsidiary thereof
pursuant to paragraph (a) of this section shall cease to apply to the
covered company or subsidiary, respectively, on the date that the Board
and the Corporation jointly determine the covered company has submitted
a revised resolution plan
[[Page 227]]
that adequately remedies the deficiencies jointly identified by the
Board and the Corporation under Sec. 243.5(b).
(c) Divestiture. The Board and Corporation, in consultation with the
Council, may jointly, by order, direct the covered company to divest
such assets or operations as are jointly identified by the Board and
Corporation if:
(1) The Board and Corporation have jointly determined that the
covered company or a subsidiary thereof shall be subject to requirements
or restrictions pursuant to paragraph (a) of this section; and
(2) The covered company has failed, within the 2-year period
beginning on the date on which the determination to impose such
requirements or restrictions under paragraph (a) of this section was
made, to submit a revised resolution plan that adequately remedies the
deficiencies jointly identified by the Board and the Corporation under
Sec. 243.5(b); and
(3) The Board and Corporation jointly determine that the divestiture
of such assets or operations is necessary to facilitate an orderly
resolution of the covered company under the Bankruptcy Code in the event
the company was to fail.
Sec. 243.7 Consultation.
Prior to issuing any notice of deficiencies under Sec. 243.5(b),
determining to impose requirements or restrictions under Sec. 243.6(a),
or issuing a divestiture order pursuant to Sec. 243.6(c) with respect
to a covered company that is likely to have a significant impact on a
functionally regulated subsidiary or a depository institution subsidiary
of the covered company, the Board--
(a) Shall consult with each Council member that primarily supervises
any such subsidiary; and
(b) May consult with any other Federal, state, or foreign supervisor
as the Board considers appropriate.
Sec. 243.8 No limiting effect or private right of action;
confidentiality of resolution plans.
(a) No limiting effect on bankruptcy or other resolution
proceedings.--A resolution plan submitted pursuant to this part shall
not have any binding effect on:
(1) A court or trustee in a proceeding commenced under the
Bankruptcy Code;
(2) A receiver appointed under title II of the Dodd-Frank Act (12
U.S.C. 5381 et seq.);
(3) A bridge financial company chartered pursuant to 12 U.S.C.
5390(h); or
(4) Any other authority that is authorized or required to resolve a
covered company (including any subsidiary or affiliate thereof) under
any other provision of Federal, state, or foreign law.
(b) No private right of action.--Nothing in this part creates or is
intended to create a private right of action based on a resolution plan
prepared or submitted under this part or based on any action taken by
the Board or the Corporation with respect to any resolution plan
submitted under this part.
(c) Form of resolution plans. Each resolution plan of a covered
company shall be divided into a public section and a confidential
section. Each covered company shall segregate and separately identify
the public section from the confidential section. The public section
shall consist of an executive summary of the resolution plan that
describes the business of the covered company and includes, to the
extent material to an understanding of the covered company:
(1) The names of material entities;
(2) A description of core business lines;
(3) Consolidated or segment financial information regarding assets,
liabilities, capital and major funding sources;
(4) A description of derivative activities and hedging activities;
(5) A list of memberships in material payment, clearing and
settlement systems;
(6) A description of foreign operations;
(7) The identities of material supervisory authorities;
(8) The identities of the principal officers;
(9) A description of the corporate governance structure and
processes related to resolution planning;
(10) A description of material management information systems; and
[[Page 228]]
(11) A description, at a high level, of the covered company's
resolution strategy, covering such items as the range of potential
purchasers of the covered company, its material entities and core
business lines.
(d) Confidential treatment of resolution plans. (1) The
confidentiality of resolution plans and related materials shall be
determined in accordance with applicable exemptions under the Freedom of
Information Act (5 U.S.C. 552(b)) and the Board's Rules Regarding
Availability of Information (12 CFR part 261), and the Corporation's
Disclosure of Information Rules (12 CFR part 309).
(2) Any covered company submitting a resolution plan or related
materials pursuant to this part that desires confidential treatment of
the information under 5 U.S.C. 552(b)(4), the Board's Rules Regarding
Availability of Information (12 CFR part 261), and the Corporation's
Disclosure of Information Rules (12 CFR part 309) may file a request for
confidential treatment in accordance with those rules.
(3) To the extent permitted by law, information comprising the
Confidential Section of a resolution plan will be treated as
confidential.
(4) To the extent permitted by law, the submission of any nonpublic
data or information under this part shall not constitute a waiver of, or
otherwise affect, any privilege arising under Federal or state law
(including the rules of any Federal or state court) to which the data or
information is otherwise subject. Privileges that apply to resolution
plans and related materials are protected pursuant to Section 18(x) of
the FDI Act, 12 U.S.C. 1828(x).
Sec. 243.9 Enforcement.
The Board and Corporation may jointly enforce an order jointly
issued by the Board and Corporation under Sec. Sec. 243.6(a) or
243.6(c) of this part. The Board, in consultation with the Corporation,
may take any action to address any violation of this part by a covered
company under section 8 of the Federal Deposit Insurance Act (12 U.S.C.
1818).
PART 244_CREDIT RISK RETENTION (REGULATION RR)--Table of Contents
Subpart A_Authority, Purpose, Scope and Definitions
Sec.
244.1 Authority, purpose, and scope.
244.2 Definitions.
Subpart B_Credit Risk Retention
244.3 Base risk retention requirement.
244.4 Standard risk retention.
244.5 Revolving pool securitizations.
244.6 Eligible ABCP conduits.
244.7 Commercial mortgage-backed securities.
244.8 Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation ABS.
244.9 Open market CLOs.
244.10 Qualified tender option bonds.
Subpart C_Transfer of Risk Retention
244.11 Allocation of risk retention to an originator.
244.12 Hedging, transfer and financing prohibitions.
Subpart D_Exceptions and Exemptions
244.13 Exemption for qualified residential mortgages.
244.14 Definitions applicable to qualifying commercial loans, qualifying
commercial real estate loans, and qualifying automobile loans.
244.15 Qualifying commercial loans, commercial real estate loans, and
automobile loans.
244.16 Underwriting standards for qualifying commercial loans.
244.17 Underwriting standards for qualifying CRE loans.
244.18 Underwriting standards for qualifying automobile loans.
244.19 General exemptions.
244.20 Safe harbor for certain foreign-related transactions.
244.21 Additional exemptions.
244.22 Periodic review of the QRM definition, exempted three-to-four
unit residential mortgage loans, and community-focused
residential mortgage exemption.
Authority: 12 U.S.C. 221 et seq., 1461 et seq., 1818, 1841 et seq.,
3103 et seq., and 15 U.S.C. 78o-11.
Source: 79 FR 77740, 77764, Dec. 24, 2014, unless otherwise noted.
[[Page 229]]
Subpart A_Authority, Purpose, Scope and Definitions
Sec. 244.1 Authority, purpose, and scope.
(a) Authority--(1) In general. This part (Regulation RR) is issued
by the Board of Governors of the Federal Reserve System under section
15G of the Securities Exchange Act of 1934, as amended (Exchange Act)
(15 U.S.C. 78o-11), as well as under the Federal Reserve Act, as amended
(12 U.S.C. 221 et seq.); section 8 of the Federal Deposit Insurance Act
(FDI Act), as amended (12 U.S.C. 1818); the Bank Holding Company Act of
1956, as amended (BHC Act) (12 U.S.C. 1841 et seq.); the Home Owners'
Loan Act of 1933 (HOLA) (12 U.S.C. 1461 et seq.); section 165 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act) (12 U.S.C. 5365); and the International Banking Act of 1978, as
amended (12 U.S.C. 3101 et seq.).
(2) Nothing in this part shall be read to limit the authority of the
Board to take action under provisions of law other than 15 U.S.C. 78o-
11, including action to address unsafe or unsound practices or
conditions, or violations of law or regulation, under section 8 of the
FDI Act.
(b) Purpose. This part requires any securitizer to retain an
economic interest in a portion of the credit risk for any asset that the
securitizer, through the issuance of an asset-backed security,
transfers, sells, or conveys to a third party in a transaction within
the scope of section 15G of the Exchange Act. This part specifies the
permissible types, forms, and amounts of credit risk retention, and
establishes certain exemptions for securitizations collateralized by
assets that meet specified underwriting standards or that otherwise
qualify for an exemption.
(c) Scope. (1) This part applies to any securitizer that is:
(i) A state member bank (as defined in 12 CFR 208.2(g)); or
(ii) Any subsidiary of a state member bank.
(2) Section 15G of the Exchange Act and the rules issued thereunder
apply to any securitizer that is:
(i) A bank holding company (as defined in 12 U.S.C. 1842);
(ii) A foreign banking organization (as defined in 12 CFR
211.21(o));
(iii) An Edge or agreement corporation (as defined in 12 CFR
211.1(c)(2) and (3));
(iv) A nonbank financial company that the Financial Stability
Oversight Council has determined under section 113 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) (12
U.S.C. 5323) shall be supervised by the Board and for which such
determination is still in effect; or
(v) A savings and loan holding company (as defined in 12 U.S.C.
1467a); and
(vi) Any subsidiary of the foregoing.
(3) Compliance with this part is required:
(i) With respect to any securitization transaction collateralized by
residential mortgages on December 24, 2015; and
(ii) With respect to any other securitization transaction on
December 24, 2016.
[79 FR 77764, Dec. 24, 2014]
Sec. 244.2 Definitions.
For purposes of this part, the following definitions apply:
ABS interest means:
(1) Any type of interest or obligation issued by an issuing entity,
whether or not in certificated form, including a security, obligation,
beneficial interest or residual interest (other than an uncertificated
regular interest in a REMIC that is held by another REMIC, where both
REMICs are part of the same structure and a single REMIC in that
structure issues ABS interests to investors, or a non-economic residual
interest issued by a REMIC), payments on which are primarily dependent
on the cash flows of the collateral owned or held by the issuing entity;
and
(2) Does not include common or preferred stock, limited liability
interests, partnership interests, trust certificates, or similar
interests that:
(i) Are issued primarily to evidence ownership of the issuing
entity; and
(ii) The payments, if any, on which are not primarily dependent on
the cash flows of the collateral held by the issuing entity; and
(3) Does not include the right to receive payments for services
provided
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by the holder of such right, including servicing, trustee services and
custodial services.
Affiliate of, or a person affiliated with, a specified person means
a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common
control with, the person specified.
Appropriate Federal banking agency has the same meaning as in
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
Asset means a self-liquidating financial asset (including but not
limited to a loan, lease, mortgage, or receivable).
Asset-backed security has the same meaning as in section 3(a)(79) of
the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(79)).
Collateral means, with respect to any issuance of ABS interests, the
assets that provide the cash flow and the servicing assets that support
such cash flow for the ABS interests irrespective of the legal structure
of issuance, including security interests in assets or other property of
the issuing entity, fractional undivided property interests in the
assets or other property of the issuing entity, or any other property
interest in or rights to cash flow from such assets and related
servicing assets. Assets or other property collateralize an issuance of
ABS interests if the assets or property serve as collateral for such
issuance.
Commercial real estate loan has the same meaning as in Sec. 244.14.
Commission means the Securities and Exchange Commission.
Control including the terms ``controlling,'' ``controlled by'' and
``under common control with'':
(1) Means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract, or
otherwise.
(2) Without limiting the foregoing, a person shall be considered to
control another person if the first person:
(i) Owns, controls or holds with power to vote 25 percent or more of
any class of voting securities of the other person; or
(ii) Controls in any manner the election of a majority of the
directors, trustees or persons performing similar functions of the other
person.
Credit risk means:
(1) The risk of loss that could result from the failure of the
borrower in the case of a securitized asset, or the issuing entity in
the case of an ABS interest in the issuing entity, to make required
payments of principal or interest on the asset or ABS interest on a
timely basis;
(2) The risk of loss that could result from bankruptcy, insolvency,
or a similar proceeding with respect to the borrower or issuing entity,
as appropriate; or
(3) The effect that significant changes in the underlying credit
quality of the asset or ABS interest may have on the market value of the
asset or ABS interest.
Creditor has the same meaning as in 15 U.S.C. 1602(g).
Depositor means:
(1) The person that receives or purchases and transfers or sells the
securitized assets to the issuing entity;
(2) The sponsor, in the case of a securitization transaction where
there is not an intermediate transfer of the assets from the sponsor to
the issuing entity; or
(3) The person that receives or purchases and transfers or sells the
securitized assets to the issuing entity in the case of a securitization
transaction where the person transferring or selling the securitized
assets directly to the issuing entity is itself a trust.
Eligible horizontal residual interest means, with respect to any
securitization transaction, an ABS interest in the issuing entity:
(1) That is an interest in a single class or multiple classes in the
issuing entity, provided that each interest meets, individually or in
the aggregate, all of the requirements of this definition;
(2) With respect to which, on any payment date or allocation date on
which the issuing entity has insufficient funds to satisfy its
obligation to pay all contractual interest or principal due, any
resulting shortfall will reduce amounts payable to the eligible
horizontal residual interest prior to any reduction in the amounts
payable to any other ABS interest, whether
[[Page 231]]
through loss allocation, operation of the priority of payments, or any
other governing contractual provision (until the amount of such ABS
interest is reduced to zero); and
(3) That, with the exception of any non-economic REMIC residual
interest, has the most subordinated claim to payments of both principal
and interest by the issuing entity.
Eligible horizontal cash reserve account means an account meeting
the requirements of Sec. 244.4(b).
Eligible vertical interest means, with respect to any securitization
transaction, a single vertical security or an interest in each class of
ABS interests in the issuing entity issued as part of the securitization
transaction that constitutes the same proportion of each such class.
Federal banking agencies means the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, and the
Federal Deposit Insurance Corporation.
GAAP means generally accepted accounting principles as used in the
United States.
Issuing entity means, with respect to a securitization transaction,
the trust or other entity:
(1) That owns or holds the pool of assets to be securitized; and
(2) In whose name the asset-backed securities are issued.
Majority-owned affiliate of a person means an entity (other than the
issuing entity) that, directly or indirectly, majority controls, is
majority controlled by or is under common majority control with, such
person. For purposes of this definition, majority control means
ownership of more than 50 percent of the equity of an entity, or
ownership of any other controlling financial interest in the entity, as
determined under GAAP.
Originator means a person who:
(1) Through an extension of credit or otherwise, creates an asset
that collateralizes an asset-backed security; and
(2) Sells the asset directly or indirectly to a securitizer or
issuing entity.
REMIC has the same meaning as in 26 U.S.C. 860D.
Residential mortgage means:
(1) A transaction that is a covered transaction as defined in Sec.
1026.43(b) of Regulation Z (12 CFR 1026.43(b)(1));
(2) Any transaction that is exempt from the definition of ``covered
transaction'' under Sec. 1026.43(a) of Regulation Z (12 CFR
1026.43(a)); and
(3) Any other loan secured by a residential structure that contains
one to four units, whether or not that structure is attached to real
property, including an individual condominium or cooperative unit and,
if used as a residence, a mobile home or trailer.
Retaining sponsor means, with respect to a securitization
transaction, the sponsor that has retained or caused to be retained an
economic interest in the credit risk of the securitized assets pursuant
to subpart B of this part.
Securitization transaction means a transaction involving the offer
and sale of asset-backed securities by an issuing entity.
Securitized asset means an asset that:
(1) Is transferred, sold, or conveyed to an issuing entity; and
(2) Collateralizes the ABS interests issued by the issuing entity.
Securitizer means, with respect to a securitization transaction,
either:
(1) The depositor of the asset-backed securities (if the depositor
is not the sponsor); or
(2) The sponsor of the asset-backed securities.
Servicer means any person responsible for the management or
collection of the securitized assets or making allocations or
distributions to holders of the ABS interests, but does not include a
trustee for the issuing entity or the asset-backed securities that makes
allocations or distributions to holders of the ABS interests if the
trustee receives such allocations or distributions from a servicer and
the trustee does not otherwise perform the functions of a servicer.
Servicing assets means rights or other assets designed to assure the
servicing or timely distribution of proceeds to ABS interest holders and
rights or other assets that are related or incidental to purchasing or
otherwise acquiring and holding the issuing entity's securitized assets.
Servicing assets include amounts received by the issuing entity as
proceeds of securitized assets,
[[Page 232]]
including proceeds of rights or other assets, whether as remittances by
obligors or as other recoveries.
Single vertical security means, with respect to any securitization
transaction, an ABS interest entitling the sponsor to a specified
percentage of the amounts paid on each class of ABS interests in the
issuing entity (other than such single vertical security).
Sponsor means a person who organizes and initiates a securitization
transaction by selling or transferring assets, either directly or
indirectly, including through an affiliate, to the issuing entity.
State has the same meaning as in Section 3(a)(16) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(16)).
United States or U.S. means the United States of America, including
its territories and possessions, any State of the United States, and the
District of Columbia.
Wholly-owned affiliate means a person (other than an issuing entity)
that, directly or indirectly, wholly controls, is wholly controlled by,
or is wholly under common control with, another person. For purposes of
this definition, ``wholly controls'' means ownership of 100 percent of
the equity of an entity.
Subpart B_Credit Risk Retention
Sec. 244.3 Base risk retention requirement.
(a) Base risk retention requirement. Except as otherwise provided in
this part, the sponsor of a securitization transaction (or majority-
owned affiliate of the sponsor) shall retain an economic interest in the
credit risk of the securitized assets in accordance with any one of
Sec. Sec. 244.4 through 244.10. Credit risk in securitized assets
required to be retained and held by any person for purposes of
compliance with this part, whether a sponsor, an originator, an
originator-seller, or a third-party purchaser, except as otherwise
provided in this part, may be acquired and held by any of such person's
majority-owned affiliates (other than an issuing entity).
(b) Multiple sponsors. If there is more than one sponsor of a
securitization transaction, it shall be the responsibility of each
sponsor to ensure that at least one of the sponsors of the
securitization transaction (or at least one of their majority-owned or
wholly-owned affiliates, as applicable) retains an economic interest in
the credit risk of the securitized assets in accordance with any one of
Sec. 244.4, Sec. 244.5, Sec. 244.8, Sec. 244.9, or Sec. 244.10.
Sec. 244.4 Standard risk retention.
(a) General requirement. Except as provided in Sec. Sec. 244.5
through 244.10, the sponsor of a securitization transaction must retain
an eligible vertical interest or eligible horizontal residual interest,
or any combination thereof, in accordance with the requirements of this
section.
(1) If the sponsor retains only an eligible vertical interest as its
required risk retention, the sponsor must retain an eligible vertical
interest in a percentage of not less than 5 percent.
(2) If the sponsor retains only an eligible horizontal residual
interest as its required risk retention, the amount of the interest must
equal at least 5 percent of the fair value of all ABS interests in the
issuing entity issued as a part of the securitization transaction,
determined using a fair value measurement framework under GAAP.
(3) If the sponsor retains both an eligible vertical interest and an
eligible horizontal residual interest as its required risk retention,
the percentage of the fair value of the eligible horizontal residual
interest and the percentage of the eligible vertical interest must equal
at least five.
(4) The percentage of the eligible vertical interest, eligible
horizontal residual interest, or combination thereof retained by the
sponsor must be determined as of the closing date of the securitization
transaction.
(b) Option to hold base amount in eligible horizontal cash reserve
account. In lieu of retaining all or any part of an eligible horizontal
residual interest under paragraph (a) of this section, the sponsor may,
at closing of the securitization transaction, cause to be established
and funded, in cash, an eligible horizontal cash reserve account in the
amount equal to the fair value of such eligible horizontal residual
interest or part thereof, provided that the
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account meets all of the following conditions:
(1) The account is held by the trustee (or person performing similar
functions) in the name and for the benefit of the issuing entity;
(2) Amounts in the account are invested only in cash and cash
equivalents; and
(3) Until all ABS interests in the issuing entity are paid in full,
or the issuing entity is dissolved:
(i) Amounts in the account shall be released only to:
(A) Satisfy payments on ABS interests in the issuing entity on any
payment date on which the issuing entity has insufficient funds from any
source to satisfy an amount due on any ABS interest; or
(B) Pay critical expenses of the trust unrelated to credit risk on
any payment date on which the issuing entity has insufficient funds from
any source to pay such expenses and:
(1) Such expenses, in the absence of available funds in the eligible
horizontal cash reserve account, would be paid prior to any payments to
holders of ABS interests; and
(2) Such payments are made to parties that are not affiliated with
the sponsor; and
(ii) Interest (or other earnings) on investments made in accordance
with paragraph (b)(2) of this section may be released once received by
the account.
(c) Disclosures. A sponsor relying on this section shall provide, or
cause to be provided, to potential investors, under the caption ``Credit
Risk Retention'', a reasonable period of time prior to the sale of the
asset-backed securities in the securitization transaction the following
disclosures in written form and within the time frames set forth in this
paragraph (c):
(1) Horizontal interest. With respect to any eligible horizontal
residual interest held under paragraph (a) of this section, a sponsor
must disclose:
(i) A reasonable period of time prior to the sale of an asset-backed
security issued in the same offering of ABS interests,
(A) The fair value (expressed as a percentage of the fair value of
all of the ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS interests are issued, as applicable)) of the eligible horizontal
residual interest that the sponsor expects to retain at the closing of
the securitization transaction. If the specific prices, sizes, or rates
of interest of each tranche of the securitization are not available, the
sponsor must disclose a range of fair values (expressed as a percentage
of the fair value of all of the ABS interests issued in the
securitization transaction and dollar amount (or corresponding amount in
the foreign currency in which the ABS interests are issued, as
applicable)) of the eligible horizontal residual interest that the
sponsor expects to retain at the close of the securitization transaction
based on a range of bona fide estimates or specified prices, sizes, or
rates of interest of each tranche of the securitization. A sponsor
disclosing a range of fair values based on a range of bona fide
estimates or specified prices, sizes or rates of interest of each
tranche of the securitization must also disclose the method by which it
determined any range of prices, tranche sizes, or rates of interest.
(B) A description of the material terms of the eligible horizontal
residual interest to be retained by the sponsor;
(C) A description of the valuation methodology used to calculate the
fair values or range of fair values of all classes of ABS interests,
including any portion of the eligible horizontal residual interest
retained by the sponsor;
(D) All key inputs and assumptions or a comprehensive description of
such key inputs and assumptions that were used in measuring the
estimated total fair value or range of fair values of all classes of ABS
interests, including the eligible horizontal residual interest to be
retained by the sponsor.
(E) To the extent applicable to the valuation methodology used, the
disclosure required in paragraph (c)(1)(i)(D) of this section shall
include, but should not be limited to, quantitative information about
each of the following:
(1) Discount rates;
(2) Loss given default (recovery);
(3) Prepayment rates;
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(4) Default rates;
(5) Lag time between default and recovery; and
(6) The basis of forward interest rates used.
(F) The disclosure required in paragraphs (c)(1)(i)(C) and (D) of
this section shall include, at a minimum, descriptions of all inputs and
assumptions that either could have a material impact on the fair value
calculation or would be material to a prospective investor's ability to
evaluate the sponsor's fair value calculations. To the extent the
disclosure required in this paragraph (c)(1) includes a description of a
curve or curves, the description shall include a description of the
methodology that was used to derive each curve and a description of any
aspects or features of each curve that could materially impact the fair
value calculation or the ability of a prospective investor to evaluate
the sponsor's fair value calculation. To the extent a sponsor uses
information about the securitized assets in its calculation of fair
value, such information shall not be as of a date more than 60 days
prior to the date of first use with investors; provided that for a
subsequent issuance of ABS interests by the same issuing entity with the
same sponsor for which the securitization transaction distributes
amounts to investors on a quarterly or less frequent basis, such
information shall not be as of a date more than 135 days prior to the
date of first use with investors; provided further, that the balance or
value (in accordance with the transaction documents) of the securitized
assets may be increased or decreased to reflect anticipated additions or
removals of assets the sponsor makes or expects to make between the cut-
off date or similar date for establishing the composition of the asset
pool collateralizing such asset-backed security and the closing date of
the securitization.
(G) A summary description of the reference data set or other
historical information used to develop the key inputs and assumptions
referenced in paragraph (c)(1)(i)(D) of this section, including loss
given default and default rates;
(ii) A reasonable time after the closing of the securitization
transaction:
(A) The fair value (expressed as a percentage of the fair value of
all of the ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS are issued, as applicable)) of the eligible horizontal residual
interest the sponsor retained at the closing of the securitization
transaction, based on actual sale prices and finalized tranche sizes;
(B) The fair value (expressed as a percentage of the fair value of
all of the ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in which
the ABS are issued, as applicable)) of the eligible horizontal residual
interest that the sponsor is required to retain under this section; and
(C) To the extent the valuation methodology or any of the key inputs
and assumptions that were used in calculating the fair value or range of
fair values disclosed prior to sale and required under paragraph
(c)(1)(i) of this section materially differs from the methodology or key
inputs and assumptions used to calculate the fair value at the time of
closing, descriptions of those material differences.
(iii) If the sponsor retains risk through the funding of an eligible
horizontal cash reserve account:
(A) The amount to be placed (or that is placed) by the sponsor in
the eligible horizontal cash reserve account at closing, and the fair
value (expressed as a percentage of the fair value of all of the ABS
interests issued in the securitization transaction and dollar amount (or
corresponding amount in the foreign currency in which the ABS interests
are issued, as applicable)) of the eligible horizontal residual interest
that the sponsor is required to fund through the eligible horizontal
cash reserve account in order for such account, together with other
retained interests, to satisfy the sponsor's risk retention requirement;
(B) A description of the material terms of the eligible horizontal
cash reserve account; and
(C) The disclosures required in paragraphs (c)(1)(i) and (ii) of
this section.
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(2) Vertical interest. With respect to any eligible vertical
interest retained under paragraph (a) of this section, the sponsor must
disclose:
(i) A reasonable period of time prior to the sale of an asset-backed
security issued in the same offering of ABS interests,
(A) The form of the eligible vertical interest;
(B) The percentage that the sponsor is required to retain as a
vertical interest under this section; and
(C) A description of the material terms of the vertical interest and
the amount that the sponsor expects to retain at the closing of the
securitization transaction.
(ii) A reasonable time after the closing of the securitization
transaction, the amount of the vertical interest the sponsor retained at
closing, if that amount is materially different from the amount
disclosed under paragraph (c)(2)(i) of this section.
(d) Record maintenance. A sponsor must retain the certifications and
disclosures required in paragraphs (a) and (c) of this section in its
records and must provide the disclosure upon request to the Commission
and its appropriate Federal banking agency, if any, until three years
after all ABS interests are no longer outstanding.
Sec. 244.5 Revolving pool securitizations.
(a) Definitions. For purposes of this section, the following
definitions apply:
Revolving pool securitization means an issuing entity that is
established to issue on multiple issuance dates more than one series,
class, subclass, or tranche of asset-backed securities that are
collateralized by a common pool of securitized assets that will change
in composition over time, and that does not monetize excess interest and
fees from its securitized assets.
Seller's interest means an ABS interest or ABS interests:
(1) Collateralized by the securitized assets and servicing assets
owned or held by the issuing entity, other than the following that are
not considered a component of seller's interest:
(i) Servicing assets that have been allocated as collateral only for
a specific series in connection with administering the revolving pool
securitization, such as a principal accumulation or interest reserve
account; and
(ii) Assets that are not eligible under the terms of the
securitization transaction to be included when determining whether the
revolving pool securitization holds aggregate securitized assets in
specified proportions to aggregate outstanding investor ABS interests
issued; and
(2) That is pari passu with each series of investor ABS interests
issued, or partially or fully subordinated to one or more series in
identical or varying amounts, with respect to the allocation of all
distributions and losses with respect to the securitized assets prior to
early amortization of the revolving securitization (as specified in the
securitization transaction documents); and
(3) That adjusts for fluctuations in the outstanding principal
balance of the securitized assets in the pool.
(b) General requirement. A sponsor satisfies the risk retention
requirements of Sec. 244.3 with respect to a securitization transaction
for which the issuing entity is a revolving pool securitization if the
sponsor maintains a seller's interest of not less than 5 percent of the
aggregate unpaid principal balance of all outstanding investor ABS
interests in the issuing entity.
(c) Measuring the seller's interest. In measuring the seller's
interest for purposes of meeting the requirements of paragraph (b) of
this section:
(1) The unpaid principal balance of the securitized assets for the
numerator of the 5 percent ratio shall not include assets of the types
excluded from the definition of seller's interest in paragraph (a) of
this section;
(2) The aggregate unpaid principal balance of outstanding investor
ABS interests in the denominator of the 5 percent ratio may be reduced
by the amount of funds held in a segregated principal accumulation
account for the repayment of outstanding investor ABS interests, if:
(i) The terms of the securitization transaction documents prevent
funds in the principal accumulation account from being applied for any
purpose
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other than the repayment of the unpaid principal of outstanding investor
ABS interests; and
(ii) Funds in that account are invested only in the types of assets
in which funds held in an eligible horizontal cash reserve account
pursuant to Sec. 244.4 are permitted to be invested;
(3) If the terms of the securitization transaction documents set
minimum required seller's interest as a proportion of the unpaid
principal balance of outstanding investor ABS interests for one or more
series issued, rather than as a proportion of the aggregate outstanding
investor ABS interests in all outstanding series combined, the
percentage of the seller's interest for each such series must, when
combined with the percentage of any minimum seller's interest set by
reference to the aggregate outstanding investor ABS interests, equal at
least 5 percent;
(4) The 5 percent test must be determined and satisfied at the
closing of each issuance of ABS interests to investors by the issuing
entity, and
(i) At least monthly at a seller's interest measurement date
specified under the securitization transaction documents, until no ABS
interest in the issuing entity is held by any person not a wholly-owned
affiliate of the sponsor; or
(ii) If the revolving pool securitization fails to meet the 5
percent test as of any date described in paragraph (c)(4)(i) of this
section, and the securitization transaction documents specify a cure
period, the 5 percent test must be determined and satisfied within the
earlier of the cure period, or one month after the date described in
paragraph (c)(4)(i).
(d) Measuring outstanding investor ABS interests. In measuring the
amount of outstanding investor ABS interests for purposes of this
section, ABS interests held for the life of such ABS interests by the
sponsor or its wholly-owned affiliates may be excluded.
(e) Holding and retention of the seller's interest; legacy trusts.
(1) Notwithstanding Sec. 244.12(a), the seller's interest, and any
offsetting horizontal retention interest retained pursuant to paragraph
(g) of this section, must be retained by the sponsor or by one or more
wholly-owned affiliates of the sponsor, including one or more depositors
of the revolving pool securitization.
(2) If one revolving pool securitization issues collateral
certificates representing a beneficial interest in all or a portion of
the securitized assets held by that securitization to another revolving
pool securitization, which in turn issues ABS interests for which the
collateral certificates are all or a portion of the securitized assets,
a sponsor may satisfy the requirements of paragraphs (b) and (c) of this
section by retaining the seller's interest for the assets represented by
the collateral certificates through either of the revolving pool
securitizations, so long as both revolving pool securitizations are
retained at the direction of the same sponsor or its wholly-owned
affiliates.
(3) If the sponsor retains the seller's interest associated with the
collateral certificates at the level of the revolving pool
securitization that issues those collateral certificates, the proportion
of the seller's interest required by paragraph (b) of this section
retained at that level must equal the proportion that the principal
balance of the securitized assets represented by the collateral
certificates bears to the principal balance of the securitized assets in
the revolving pool securitization that issues the ABS interests, as of
each measurement date required by paragraph (c) of this section.
(f) Offset for pool-level excess funding account. The 5 percent
seller's interest required on each measurement date by paragraph (c) of
this section may be reduced on a dollar-for-dollar basis by the balance,
as of such date, of an excess funding account in the form of a
segregated account that:
(1) Is funded in the event of a failure to meet the minimum seller's
interest requirements or other requirement to maintain a minimum balance
of securitized assets under the securitization transaction documents by
distributions otherwise payable to the holder of the seller's interest;
(2) Is invested only in the types of assets in which funds held in a
horizontal cash reserve account pursuant to Sec. 244.4 are permitted to
be invested; and
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(3) In the event of an early amortization, makes payments of amounts
held in the account to holders of investor ABS interests in the same
manner as payments to holders of investor ABS interests of amounts
received on securitized assets.
(g) Combined seller's interests and horizontal interest retention.
The 5 percent seller's interest required on each measurement date by
paragraph (c) of this section may be reduced to a percentage lower than
5 percent to the extent that, for all series of investor ABS interests
issued after the applicable effective date of this Sec. 244.5, the
sponsor, or notwithstanding Sec. 244.12(a) a wholly-owned affiliate of
the sponsor, retains, at a minimum, a corresponding percentage of the
fair value of ABS interests issued in each series, in the form of one or
more of the horizontal residual interests meeting the requirements of
paragraphs (h) or (i).
(h) Residual ABS interests in excess interest and fees. The sponsor
may take the offset described in paragraph (g) of this section for a
residual ABS interest in excess interest and fees, whether certificated
or uncertificated, in a single or multiple classes, subclasses, or
tranches, that meets, individually or in the aggregate, the requirements
of this paragraph (h);
(1) Each series of the revolving pool securitization distinguishes
between the series' share of the interest and fee cash flows and the
series' share of the principal repayment cash flows from the securitized
assets collateralizing the revolving pool securitization, which may
according to the terms of the securitization transaction documents,
include not only the series' ratable share of such cash flows but also
excess cash flows available from other series;
(2) The residual ABS interest's claim to any part of the series'
share of the interest and fee cash flows for any interest payment period
is subordinated to all accrued and payable interest due on the payment
date to more senior ABS interests in the series for that period, and
further reduced by the series' share of losses, including defaults on
principal of the securitized assets collateralizing the revolving pool
securitization (whether incurred in that period or carried over from
prior periods) to the extent that such payments would have been included
in amounts payable to more senior interests in the series;
(3) The revolving pool securitization continues to revolve, with one
or more series, classes, subclasses, or tranches of asset-backed
securities that are collateralized by a common pool of assets that
change in composition over time; and
(4) For purposes of taking the offset described in paragraph (g) of
this section, the sponsor determines the fair value of the residual ABS
interest in excess interest and fees, and the fair value of the series
of outstanding investor ABS interests to which it is subordinated and
supports using the fair value measurement framework under GAAP, as of:
(i) The closing of the securitization transaction issuing the
supported ABS interests; and
(ii) The seller's interest measurement dates described in paragraph
(c)(4) of this section, except that for these periodic determinations
the sponsor must update the fair value of the residual ABS interest in
excess interest and fees for the numerator of the percentage ratio, but
may at the sponsor's option continue to use the fair values determined
in (h)(4)(i) for the outstanding investor ABS interests in the
denominator.
(i) Offsetting eligible horizontal residual interest. The sponsor
may take the offset described in paragraph (g) of this section for ABS
interests that would meet the definition of eligible horizontal residual
interests in Sec. 244.2 but for the sponsor's simultaneous holding of
subordinated seller's interests, residual ABS interests in excess
interests and fees, or a combination of the two, if:
(1) The sponsor complies with all requirements of paragraphs (b)
through (e) of this section for its holdings of subordinated seller's
interest, and paragraph (h) for its holdings of residual ABS interests
in excess interests and fees, as applicable;
(2) For purposes of taking the offset described in paragraph (g) of
this section, the sponsor determines the fair value of the eligible
horizontal residual
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interest as a percentage of the fair value of the outstanding investor
ABS interests in the series supported by the eligible horizontal
residual interest, determined using the fair value measurement framework
under GAAP:
(i) As of the closing of the securitization transaction issuing the
supported ABS interests; and
(ii) Without including in the numerator of the percentage ratio any
fair value based on:
(A) The subordinated seller's interest or residual ABS interest in
excess interest and fees;
(B) the interest payable to the sponsor on the eligible horizontal
residual interest, if the sponsor is including the value of residual ABS
interest in excess interest and fees pursuant to paragraph (h) of this
section in taking the offset in paragraph (g) of this section; and,
(C) the principal payable to the sponsor on the eligible horizontal
residual interest, if the sponsor is including the value of the seller's
interest pursuant to paragraphs (b) through (f) of this section and
distributions on that seller's interest are available to reduce charge-
offs that would otherwise be allocated to reduce principal payable to
the offset eligible horizontal residual interest.
(j) Specified dates. A sponsor using data about the revolving pool
securitization's collateral, or ABS interests previously issued, to
determine the closing-date percentage of a seller's interest, residual
ABS interest in excess interest and fees, or eligible horizontal
residual interest pursuant to this Sec. 244.5 may use such data
prepared as of specified dates if:
(1) The sponsor describes the specified dates in the disclosures
required by paragraph (k) of this section; and
(2) The dates are no more than 60 days prior to the date of first
use with investors of disclosures required for the interest by paragraph
(k) of this section, or for revolving pool securitizations that make
distributions to investors on a quarterly or less frequent basis, no
more than 135 days prior to the date of first use with investors of such
disclosures.
(k) Disclosure and record maintenance--(1) Disclosure. A sponsor
relying on this section shall provide, or cause to be provided, to
potential investors, under the caption ``Credit Risk Retention'' the
following disclosure in written form and within the time frames set
forth in this paragraph (k):
(i) A reasonable period of time prior to the sale of an asset-backed
security, a description of the material terms of the seller's interest,
and the percentage of the seller's interest that the sponsor expects to
retain at the closing of the securitization transaction, measured in
accordance with the requirements of this Sec. 244.5, as a percentage of
the aggregate unpaid principal balance of all outstanding investor ABS
interests issued, or as a percentage of the aggregate unpaid principal
balance of outstanding investor ABS interests for one or more series
issued, as required by the terms of the securitization transaction;
(ii) A reasonable time after the closing of the securitization
transaction, the amount of seller's interest the sponsor retained at
closing, if that amount is materially different from the amount
disclosed under paragraph (k)(1)(i) of this section; and
(iii) A description of the material terms of any horizontal residual
interests offsetting the seller's interest in accordance with paragraphs
(g), (h), and (i) of this section; and
(iv) Disclosure of the fair value of those horizontal residual
interests retained by the sponsor for the series being offered to
investors and described in the disclosures, as a percentage of the fair
value of the outstanding investor ABS interests issued, described in the
same manner and within the same timeframes required for disclosure of
the fair values of eligible horizontal residual interests specified in
Sec. 244.4(c).
(2) Adjusted data. Disclosures required by this paragraph (k) to be
made a reasonable period of time prior to the sale of an asset-backed
security of the amount of seller's interest, residual ABS interest in
excess interest and fees, or eligible horizontal residual interest may
include adjustments to the amount of securitized assets for additions or
removals the sponsor expects to make before the closing date and
adjustments to the amount of outstanding investor ABS interests for
expected increases and decreases of those
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interests under the control of the sponsor.
(3) Record maintenance. A sponsor must retain the disclosures
required in paragraph (k)(1) of this section in its records and must
provide the disclosure upon request to the Commission and its
appropriate Federal banking agency, if any, until three years after all
ABS interests are no longer outstanding.
(l) Early amortization of all outstanding series. A sponsor that
organizes a revolving pool securitization that relies on this Sec.
244.5 to satisfy the risk retention requirements of Sec. 244.3, does
not violate the requirements of this part if its seller's interest falls
below the level required by Sec. 244. 5 after the revolving pool
securitization commences early amortization, pursuant to the terms of
the securitization transaction documents, of all series of outstanding
investor ABS interests, if:
(1) The sponsor was in full compliance with the requirements of this
section on all measurement dates specified in paragraph (c) of this
section prior to the commencement of early amortization;
(2) The terms of the seller's interest continue to make it pari
passu with or subordinate in identical or varying amounts to each series
of outstanding investor ABS interests issued with respect to the
allocation of all distributions and losses with respect to the
securitized assets;
(3) The terms of any horizontal interest relied upon by the sponsor
pursuant to paragraph (g) to offset the minimum seller's interest amount
continue to require the interests to absorb losses in accordance with
the terms of paragraph (h) or (i) of this section, as applicable; and
(4) The revolving pool securitization issues no additional ABS
interests after early amortization is initiated to any person not a
wholly-owned affiliate of the sponsor, either at the time of issuance or
during the amortization period.
Sec. 244.6 Eligible ABCP conduits.
(a) Definitions. For purposes of this section, the following
additional definitions apply:
100 percent liquidity coverage means an amount equal to the
outstanding balance of all ABCP issued by the conduit plus any accrued
and unpaid interest without regard to the performance of the ABS
interests held by the ABCP conduit and without regard to any credit
enhancement.
ABCP means asset-backed commercial paper that has a maturity at the
time of issuance not exceeding 397 days, exclusive of days of grace, or
any renewal thereof the maturity of which is likewise limited.
ABCP conduit means an issuing entity with respect to ABCP.
Eligible ABCP conduit means an ABCP conduit, provided that:
(1) The ABCP conduit is bankruptcy remote or otherwise isolated for
insolvency purposes from the sponsor of the ABCP conduit and from any
intermediate SPV;
(2) The ABS interests acquired by the ABCP conduit are:
(i) ABS interests collateralized solely by assets originated by an
originator-seller and by servicing assets;
(ii) Special units of beneficial interest (or similar ABS interests)
in a trust or special purpose vehicle that retains legal title to leased
property underlying leases originated by an originator-seller that were
transferred to an intermediate SPV in connection with a securitization
collateralized solely by such leases and by servicing assets;
(iii) ABS interests in a revolving pool securitization
collateralized solely by assets originated by an originator-seller and
by servicing assets; or
(iv) ABS interests described in paragraph (2)(i), (ii), or (iii) of
this definition that are collateralized, in whole or in part, by assets
acquired by an originator-seller in a business combination that
qualifies for business combination accounting under GAAP, and, if
collateralized in part, the remainder of such assets are assets
described in paragraph (2)(i), (ii), or (iii) of this definition; and
(v) Acquired by the ABCP conduit in an initial issuance by or on
behalf of an intermediate SPV:
(A) Directly from the intermediate SPV,
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(B) From an underwriter of the ABS interests issued by the
intermediate SPV, or
(C) From another person who acquired the ABS interests directly from
the intermediate SPV;
(3) The ABCP conduit is collateralized solely by ABS interests
acquired from intermediate SPVs as described in paragraph (2) of this
definition and servicing assets; and
(4) A regulated liquidity provider has entered into a legally
binding commitment to provide 100 percent liquidity coverage (in the
form of a lending facility, an asset purchase agreement, a repurchase
agreement, or other similar arrangement) to all the ABCP issued by the
ABCP conduit by lending to, purchasing ABCP issued by, or purchasing
assets from, the ABCP conduit in the event that funds are required to
repay maturing ABCP issued by the ABCP conduit. With respect to the 100
percent liquidity coverage, in the event that the ABCP conduit is unable
for any reason to repay maturing ABCP issued by the issuing entity, the
liquidity provider shall be obligated to pay an amount equal to any
shortfall, and the total amount that may be due pursuant to the 100
percent liquidity coverage shall be equal to 100 percent of the amount
of the ABCP outstanding at any time plus accrued and unpaid interest
(amounts due pursuant to the required liquidity coverage may not be
subject to credit performance of the ABS interests held by the ABCP
conduit or reduced by the amount of credit support provided to the ABCP
conduit and liquidity support that only funds performing loans or
receivables or performing ABS interests does not meet the requirements
of this section).
Intermediate SPV means a special purpose vehicle that:
(1)(i) Is a direct or indirect wholly-owned affiliate of the
originator-seller; or
(ii) Has nominal equity owned by a trust or corporate service
provider that specializes in providing independent ownership of special
purpose vehicles, and such trust or corporate service provider is not
affiliated with any other transaction parties;
(2) Is bankruptcy remote or otherwise isolated for insolvency
purposes from the eligible ABCP conduit and from each originator-seller
and each majority-owned affiliate in each case that, directly or
indirectly, sells or transfers assets to such intermediate SPV;
(3) Acquires assets from the originator-seller that are originated
by the originator-seller or acquired by the originator-seller in the
acquisition of a business that qualifies for business combination
accounting under GAAP or acquires ABS interests issued by another
intermediate SPV of the originator-seller that are collateralized solely
by such assets; and
(4) Issues ABS interests collateralized solely by such assets, as
applicable.
Originator-seller means an entity that originates assets and sells
or transfers those assets, directly or through a majority-owned
affiliate, to an intermediate SPV, and includes (except for the purposes
of identifying the sponsorship and affiliation of an intermediate SPV
pursuant to this Sec. 244.6) any affiliate of the originator-seller
that, directly or indirectly, majority controls, is majority controlled
by or is under common majority control with, the originator-seller. For
purposes of this definition, majority control means ownership of more
than 50 percent of the equity of an entity, or ownership of any other
controlling financial interest in the entity, as determined under GAAP.
Regulated liquidity provider means:
(1) A depository institution (as defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813));
(2) A bank holding company (as defined in 12 U.S.C. 1841), or a
subsidiary thereof;
(3) A savings and loan holding company (as defined in 12 U.S.C.
1467a), provided all or substantially all of the holding company's
activities are permissible for a financial holding company under 12
U.S.C. 1843(k), or a subsidiary thereof; or
(4) A foreign bank whose home country supervisor (as defined in
Sec. 211.21 of the Federal Reserve Board's Regulation K (12 CFR
211.21)) has adopted capital standards consistent with the Capital
Accord of the Basel Committee on Banking Supervision, as amended, and
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that is subject to such standards, or a subsidiary thereof.
(b) In general. An ABCP conduit sponsor satisfies the risk retention
requirement of Sec. 244.3 with respect to the issuance of ABCP by an
eligible ABCP conduit in a securitization transaction if, for each ABS
interest the ABCP conduit acquires from an intermediate SPV:
(1) An originator-seller of the intermediate SPV retains an economic
interest in the credit risk of the assets collateralizing the ABS
interest acquired by the eligible ABCP conduit in the amount and manner
required under Sec. 244.4 or Sec. 244.5; and
(2) The ABCP conduit sponsor:
(i) Approves each originator-seller permitted to sell or transfer
assets, directly or indirectly, to an intermediate SPV from which an
eligible ABCP conduit acquires ABS interests;
(ii) Approves each intermediate SPV from which an eligible ABCP
conduit is permitted to acquire ABS interests;
(iii) Establishes criteria governing the ABS interests, and the
securitized assets underlying the ABS interests, acquired by the ABCP
conduit;
(iv) Administers the ABCP conduit by monitoring the ABS interests
acquired by the ABCP conduit and the assets supporting those ABS
interests, arranging for debt placement, compiling monthly reports, and
ensuring compliance with the ABCP conduit documents and with the ABCP
conduit's credit and investment policy; and
(v) Maintains and adheres to policies and procedures for ensuring
that the requirements in this paragraph (b) of this section have been
met.
(c) Originator-seller compliance with risk retention. The use of the
risk retention option provided in this section by an ABCP conduit
sponsor does not relieve the originator-seller that sponsors ABS
interests acquired by an eligible ABCP conduit from such originator-
seller's obligation to comply with its own risk retention obligations
under this part.
(d) Disclosures--(1) Periodic disclosures to investors. An ABCP
conduit sponsor relying upon this section shall provide, or cause to be
provided, to each purchaser of ABCP, before or contemporaneously with
the first sale of ABCP to such purchaser and at least monthly
thereafter, to each holder of commercial paper issued by the ABCP
conduit, in writing, each of the following items of information, which
shall be as of a date not more than 60 days prior to date of first use
with investors:
(i) The name and form of organization of the regulated liquidity
provider that provides liquidity coverage to the eligible ABCP conduit,
including a description of the material terms of such liquidity
coverage, and notice of any failure to fund.
(ii) With respect to each ABS interest held by the ABCP conduit:
(A) The asset class or brief description of the underlying
securitized assets;
(B) The standard industrial category code (SIC Code) for the
originator-seller that will retain (or has retained) pursuant to this
section an interest in the securitization transaction; and
(C) A description of the percentage amount of risk retention
pursuant to the rule by the originator-seller, and whether it is in the
form of an eligible horizontal residual interest, vertical interest, or
revolving pool securitization seller's interest, as applicable.
(2) Disclosures to regulators regarding originator-sellers. An ABCP
conduit sponsor relying upon this section shall provide, or cause to be
provided, upon request, to the Commission and its appropriate Federal
banking agency, if any, in writing, all of the information required to
be provided to investors in paragraph (d)(1) of this section, and the
name and form of organization of each originator-seller that will retain
(or has retained) pursuant to this section an interest in the
securitization transaction.
(e) Sale or transfer of ABS interests between eligible ABCP
conduits. At any time, an eligible ABCP conduit that acquired an ABS
interest in accordance with the requirements set forth in this section
may transfer, and another eligible ABCP conduit may acquire, such ABS
interest, if the following conditions are satisfied:
(1) The sponsors of both eligible ABCP conduits are in compliance
with this section; and
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(2) The same regulated liquidity provider has entered into one or
more legally binding commitments to provide 100 percent liquidity
coverage to all the ABCP issued by both eligible ABCP conduits.
(f) Duty to comply. (1) The ABCP conduit sponsor shall be
responsible for compliance with this section.
(2) An ABCP conduit sponsor relying on this section:
(i) Shall maintain and adhere to policies and procedures that are
reasonably designed to monitor compliance by each originator-seller
which is satisfying a risk retention obligation in respect of ABS
interests acquired by an eligible ABCP conduit with the requirements of
paragraph (b)(1) of this section; and
(ii) In the event that the ABCP conduit sponsor determines that an
originator-seller no longer complies with the requirements of paragraph
(b)(1) of this section, shall:
(A) Promptly notify the holders of the ABCP, and upon request, the
Commission and its appropriate Federal banking agency, if any, in
writing of:
(1) The name and form of organization of any originator-seller that
fails to retain risk in accordance with paragraph (b)(1) of this section
and the amount of ABS interests issued by an intermediate SPV of such
originator-seller and held by the ABCP conduit;
(2) The name and form of organization of any originator-seller that
hedges, directly or indirectly through an intermediate SPV, its risk
retention in violation of paragraph (b)(1) of this section and the
amount of ABS interests issued by an intermediate SPV of such
originator-seller and held by the ABCP conduit; and
(3) Any remedial actions taken by the ABCP conduit sponsor or other
party with respect to such ABS interests; and
(B) Take other appropriate steps pursuant to the requirements of
paragraphs (b)(2)(iv) and (v) of this section which may include, as
appropriate, curing any breach of the requirements in this section, or
removing from the eligible ABCP conduit any ABS interest that does not
comply with the requirements in this section.