[Federal Register: December 1, 1998 (Volume 63, Number 230)]
[Rules and Regulations]
[Page 66275-66338]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01de98-22]
[[Page 66275]]
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Part III
Federal Deposit Insurance Corporation
_______________________________________________________________________
12 CFR Parts 303, 337, and 362
Activities of Insured State Banks and Insured Savings Associations;
Proposed and Final Rules
[[Page 66276]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 303, 337 and 362
RIN 3064-AC12
Activities of Insured State Banks and Insured Savings
Associations
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: As part of the FDIC's systematic review of its regulations and
written policies under section 303(a) of the Riegle Community
Development and Regulatory Improvement Act of 1994 (CDRI), the FDIC has
revised and consolidated its rules and regulations governing activities
and investments of insured state banks and insured savings
associations. The rule implements sections 24, 28, and 18(m) of the
Federal Deposit Insurance Act, and also establishes certain safety and
soundness standards pursuant to the FDIC's authority under section 8.
The FDIC's final rule establishes a number of new exceptions and allows
institutions to conduct certain activities after providing the FDIC
with notice rather than filing an application. Subject to appropriate
separations and limitations, the activities that may be conducted
through a majority-owned subsidiary under these expedited notice
processing criteria are real estate investment and securities
underwriting. The FDIC combined its regulations governing the
activities and investments of insured state banks with those governing
insured savings associations. In addition, the FDIC's final rule
updates its regulations governing the safety and soundness of
securities activities of subsidiaries and affiliates of insured state
nonmember banks. The FDIC's final rule modernizes this group of
regulations and harmonizes the provisions governing activities that are
not permissible for national banks with those governing the securities
underwriting and distribution activities of subsidiaries of state
nonmember banks. The FDIC's final rule makes a number of substantive
changes and amends the regulations by deleting obsolete provisions,
rewriting the regulatory text to make it more readable, conforming the
treatment of state banks and savings associations to the extent
possible given the underlying statutory and regulatory scheme governing
the different charters. The FDIC's final rule also conforms most of the
disclosures required under the current regulation to the Interagency
Statement on the Retail Sale of Nondeposit Investment Products.
EFFECTIVE DATE: January 1, 1999.
FOR FURTHER INFORMATION CONTACT: Curtis Vaughn, Examination Specialist,
(202/898-6759), Division of Supervision; Linda L. Stamp, Counsel, (202/
898-7310) or Jamey Basham, Counsel, (202/898-7265), Legal Division,
FDIC, 550 17th Street, N.W., Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
I. Background
Section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (RCDRIA) required that the FDIC review its
regulations for the purpose of streamlining those regulations, reducing
any unnecessary costs and eliminating unwarranted constraints on credit
availability while faithfully implementing statutory requirements.
Pursuant to that statutory direction, the FDIC reviewed part 362
``Activities and Investments of Insured State Banks,'' subpart G of
Part 303, effective October 1, 1998, (formerly Sec. 303.13) ``Filings
by Savings Associations'', and Sec. 337.4 ``Securities Activities of
Subsidiaries of Insured State Banks: Bank Transactions with Affiliated
Securities Companies'', and proposed making a number of changes to
those regulations. That proposal is found in the September 12, 1997,
issue of the Federal Register at 62 FR 47969.
The FDIC's final rule restructures existing part 362, placing the
substance of the text of the current regulation into new subpart A.
Subpart A addresses the Activities of Insured State Banks implementing
section 24 of the Federal Deposit Insurance Act (FDI Act). 12 U.S.C.
1831a. Section 24 restricts and prohibits insured state banks and their
subsidiaries from engaging in activities and investments of a type that
are not permissible for national banks and their subsidiaries. Through
this new final rule, the FDIC introduces a new streamlined notice
processing concept for insured state nonmember banks that want to
engage in certain activities that are impermissible for national banks
and their subsidiaries.
Due to the experience that the FDIC has gained in reviewing
applications from insured state nonmember banks since the enactment of
section 24, the FDIC has standardized the eligibility criteria and
conditions for two activities. This mechanism gives insured state
nonmember banks a level of certainty that has been lacking for banks
that want to diversify their earnings and maintain their
competitiveness by investing in subsidiaries that engage in activities
not permissible for national banks. This framework sets forth the
eligibility criteria and conditions for majority-owned subsidiaries of
insured state nonmember banks to engage in real estate investment and
securities underwriting. This framework allows insured state nonmember
banks to proceed with their business plans in these areas with relative
certainty that the FDIC will consent to the execution of their plans
and with assurance that consent will be forthcoming on a predictable
schedule. This framework allows the insured state nonmember banks to be
creative and innovative in their business plan within the structure
appropriate to the activities being undertaken. The FDIC hopes that
this rule will assist the insured state nonmember banks as they
progress into the competitive financial environment of the 21st century
in which they operate their business.
The FDIC's final rule moves the part of the FDIC's regulations
governing securities underwriting not permissible for national banks
(currently at 12 CFR 337.4) into subpart A of part 362. Although the
proposal contemplated that the entire regulation, Securities Activities
of Insured State Nonmember Banks, found in Sec. 337.4 of this chapter
would be removed and reserved, we have postponed that action while
redeveloping some of the safety and soundness criteria that govern
insured state bank subsidiaries that engage in the public sale,
distribution or underwriting of securities and other activities that
are not permissible for a national bank but that are permissible for
national bank subsidiaries. The redeveloped regulatory language that
will amend subpart B of this regulation is published as a proposed rule
elsewhere in this issue of the Federal Register for further public
comment. During the period that Sec. 337.4 still exists, where
activities are covered by both Sec. 337.4 and this final rule, we have
provided relief from the requirements of Sec. 337.4 in this rulemaking.
For those activities that were covered under Sec. 337.4 and are now
covered under this part 362, we have attempted to modernize the
regulations governing those activities by updating the requirements,
revising the regulations by deleting obsolete provisions, rewriting the
regulatory text to make it more readable, removing a number of the
obsolete current restrictions on those activities, and removing the
disclosures required under the current regulation.
[[Page 66277]]
Safety and Soundness Rules Governing Insured State Nonmember Banks
is found in the new subpart B. Subpart B establishes modern standards
for insured state nonmember banks to conduct real estate investment
activities through a subsidiary, and for those insured state nonmember
banks that are not affiliated with a bank holding company (nonbank
banks), to conduct securities activities in an affiliated organization.
The existing restrictions on these securities activities are found in
Sec. 337.4 of this chapter.
Subpart G of part 303, effective October 1, 1998, (formerly
Sec. 303.13) of this chapter which relates to activities and filings by
savings associations is revised in a number of ways. First, the
substantive portions applicable to state savings associations of
subpart G are placed in new subpart C of part 362. The substantive
requirements applicable to all savings associations when Acquiring,
Establishing, or Conducting New Activities through a Subsidiary are
moved to new subpart D.
In the proposal, subpart E contained the revised application and
notice procedures as well as delegations of authority for insured state
banks, and subpart F contained the revised application and notice
procedures as well as delegations of authority for insured savings
associations. On a parallel track, the FDIC has completed its revision
of part 303 of the FDIC's rules and regulations. Part 303 contains
substantially all of the FDIC's applications procedures and delegations
of authority. Subparts G and H of part 303 were designated as the place
where the text of subparts E and F of our proposed rule would be
located. As a part of the part 303 review process and for ease of
reference, the FDIC is removing the applications procedures relating to
activities and investments of insured state banks from part 362 and
placing them in subpart G of part 303. The procedures applicable to
insured savings associations are consolidated in subpart H of part 303.
These subparts are published as an amendment to part 303 as a part of
this final regulation.
Part 362 of the FDIC's regulations implements the provisions of
section 24 of the FDI Act. Section 24 was added to the FDI Act by the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
With certain exceptions, section 24 limits the direct equity
investments of state chartered insured banks to equity investments of a
type permissible for national banks. Section 24 prohibits an insured
state bank from directly, or indirectly through a subsidiary, engaging
as principal in any activity that is not permissible for a national
bank unless the bank meets its capital requirements and the FDIC
determines that the activity will not pose a significant risk to the
appropriate deposit insurance fund. In addition, section 24 prohibits
the subsidiary of an insured state bank from directly or indirectly
engaging as principal in any activity that is not permissible for a
national bank subsidiary unless the bank meets its capital requirements
and the FDIC determines that the activity will not pose a significant
risk to the appropriate deposit insurance fund. The FDIC may make such
determinations by regulation or order. The statute requires
institutions that held equity investments not conforming to the new
requirements to divest no later than December 19, 1996. The statute
also requires that banks file certain notices with the FDIC concerning
grandfathered investments.
Part 362 was adopted in two stages. The provisions of the current
regulation concerning equity investments appeared in the Federal
Register on November 9, 1992, at 57 FR 53234. The provisions of the
current regulation concerning activities of insured state banks and
their majority-owned subsidiaries appeared in the Federal Register on
December 8, 1993, at 58 FR 64455.
Subpart G of Part 303, effective October 1, 1998, (formerly
Sec. 303.13) of the FDIC's regulations (12 CFR 303.140) implements FDI
Act sections 28 (12 U.S.C. 1831e) and 18(m) (12 U.S.C. 1828(m)). Both
sections were added to the FDI Act by the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA). While section
28 of the FDI Act and section 24 of the FDI Act are similar, there are
a number of fundamental differences between the two provisions which
caused the implementing regulations to differ in some respects.
Section 18(m) of the FDI Act requires state and federal savings
associations to provide the FDIC with notice 30 days before
establishing or acquiring a subsidiary or engaging in any new activity
through a subsidiary. Section 28 governs the activities and equity
investments of state savings associations and provides that no state
savings association may engage as principal in any activity of a type
or in an amount that is impermissible for a federal savings association
unless the FDIC determines that the activity will not pose a
significant risk to the affected deposit insurance fund and the savings
association is in compliance with the fully phased-in capital
requirements prescribed under section 5(t) of the Home Owners' Loan Act
(12 U.S.C. 1464(t)) (HOLA). Except for its investment in service
corporations, a state savings association is prohibited from acquiring
or retaining any equity investment that is not permissible for a
federal savings association. A state savings association may acquire or
retain an investment in a service corporation of a type or in an amount
not permissible for a federal savings association if the FDIC
determines that neither the amount invested in the service corporation
nor the activities of the service corporation pose a significant risk
to the affected deposit insurance fund and the savings association
continues to meet the fully phased-in capital requirements. A savings
association was required to divest itself of prohibited equity
investments no later than July 1, 1994. Section 28 also prohibits state
and federal savings associations from acquiring any corporate debt
security that is not of investment grade (commonly known as ``junk
bonds'').
Section 303.13 of the FDIC's regulations was adopted as an interim
final rule on December 29, 1989 (54 FR 53548). The FDIC revised the
rule after reviewing the comments and the regulation as adopted
appeared in the Federal Register on September 17, 1990 (55 FR 38042).
The regulation established application and notice procedures governing
requests by a state savings association to directly, or through a
service corporation, engage in activities that are not permissible for
a federal savings association; the intent of a state savings
association to engage in permissible activities in an amount exceeding
that permissible for a federal savings association; or the intent of a
state savings association to divest corporate debt securities not of
investment grade. The regulation also established procedures to give
prior notice for the establishment or acquisition of a subsidiary or
the conduct of new activities through a subsidiary. Section 303.13 was
recently moved with stylistic, but not substantive changes, to subpart
G of part 303, effective October 1, 1998 of the FDIC's regulations.
Section 337.4 of the FDIC's regulations (12 CFR 337.4) governs
securities activities of subsidiaries of insured state nonmember banks
as well as transactions between insured state nonmember banks and their
securities subsidiaries and affiliates. The regulation was adopted in
1984 (49 FR 46723) and is designed to promote the safety and soundness
of insured state nonmember banks that have subsidiaries which engage in
securities activities, including activities that are impermissible for
banks directly under section 16 of the Banking Act of 1933
[[Page 66278]]
(12 U.S.C. section 24 (seventh)), commonly known as the Glass-Steagall
Act. For those subsidiaries that engage in underwriting activities that
are prohibited for a bank, the regulation requires that these
subsidiaries qualify as bona fide subsidiaries, establishes transaction
restrictions between a bank and its subsidiaries or other affiliates
that engage in such securities activities, requires that an insured
state nonmember bank give prior notice to the FDIC before establishing
or acquiring any securities subsidiary, requires that disclosures be
provided to securities customers in certain instances, and requires
that a bank's investment in such a securities subsidiary be deducted
from the bank's capital.
On August 23, 1996, the FDIC published a notice of proposed
rulemaking (61 FR 43486, August 23, 1996) (August 1996 proposed rule)
to amend part 362. Under that proposed rule, a notice procedure would
have replaced the application currently required in the case of real
estate, life insurance, and annuity investment activities provided
certain conditions and restrictions were met. The proposed rule set
forth notice processing procedures for real estate, life insurance
policies, and annuity contract investments for well-capitalized, well-
managed insured state banks. While the August 1996 proposed rule would
have amended existing part 362, this new final rule replaces existing
part 362.
After considering the comments to the August 1996 proposed rule and
reconsidering the issues underlying the current regulation, the FDIC
withdrew that proposed rule in favor of the more comprehensive approach
presently adopted. One major change was the elimination of a life
insurance policy and annuity contract investment notice due to
intervening guidance provided by the Office of the Comptroller of the
Currency (OCC) that appears to eliminate the necessity for an
application with respect to virtually all of the life insurance and
annuity investments received by the FDIC in the past. While section 24
and the part 362 application process would continue to apply to those
life insurance and annuity investments which are impermissible for
national banks, the FDIC has decided that there is no need to adopt a
notice process that specifically addresses what we expect to be an
extremely small number of situations.
II. Description of the Final Rule
The FDIC divided part 362 into four subparts and changed some of
the structure of the rule. Generally, we moved substantive aspects of
the regulation that were formerly found in the definitions of terms
like ``bona fide subsidiary'' to the applicable regulation text. This
reorganization should assist the reader in understanding and applying
the regulation. Next we deleted most of the provisions relating to
divesture because we found them to be unnecessary due to the passage of
time. Third, we combined the rules covering the equity investments of
banks and savings associations into part 362 to regulate these
investments as consistently as possible given the limitations imposed
by the different statutes that govern each kind of insured institution.
Finally, although the FDIC agrees with the principles applicable to
transactions between insured depository institutions and its affiliates
contained in sections 23A and 23B of the Federal Reserve Act (12 U.S.C.
371c and 371c-1), our experience over the last five years in applying
section 24 has led us to conclude that extending 23A and 23B by
reference to bank subsidiaries is inadvisable. For that reason, the
final regulation does not incorporate sections 23A and 23B of the
Federal Reserve Act by cross-reference; rather, the regulation adapts
similar principles to those set forth in sections 23A and 23B to the
bank/subsidiary relationship as appropriate. In drafting the final
rule, we have considered each of the requirements contained in sections
23A and 23B in the context of transactions between an insured
institution and its subsidiary and refined the restrictions
appropriately. We are comfortable that this approach strikes a better
balance between caution and commercial reality by harmonizing the
capital deductions and the principles of 23A and 23B.
Subpart A of the final rule deals with the activities and
investments of insured state banks. Except for those sections
pertaining to the applications, notices and related delegations of
authority (procedural provisions), existing part 362 essentially
becomes subpart A under the current proposal. The procedural provisions
of existing part 362 have been transferred to subpart G of part 303.
Subpart A addresses the activities of insured state banks in
Sec. 362.3. The activities carried on in subsidiaries of insured state
banks are addressed separately in Sec. 362.4.
Under a safety and soundness standard, subpart B of the final
regulation requires subsidiaries of insured state nonmember banks
engaged in certain activities to meet the standards established by the
FDIC, even if the OCC determines that those activities are permissible
for a national bank subsidiary. The FDIC has determined that real
estate investment activities may pose significant risks to the deposit
insurance funds. For that reason, the FDIC established standards that
an insured state nonmember bank must meet before engaging in real
estate investment activities that are not permissible for a national
bank, even if they are permissible for the subsidiary of a national
bank.
Subpart B also establishes modern standards for insured state
nonmember banks to govern transactions between those insured state
nonmember banks that are not affiliated with a bank holding company
(nonbank banks) and affiliated organizations conducting securities
activities. The existing restrictions on these securities activities
are found in Sec. 337.4 of this chapter. The new rule only covers those
entities not covered by orders issued by the Board of Governors of the
Federal Reserve System (FRB) governing the securities activities of
those banks that are affiliated with a bank holding company or a member
bank.
In addition, subpart B prohibits an insured state nonmember bank
not affiliated with a company that is treated as a bank holding company
(see section 4(f) of the Bank Holding Company Act, 12 U.S.C. 1843(f)),
from becoming affiliated with a company that directly engages in the
underwriting of securities not permissible for a bank itself unless the
standards established under the proposed regulation are met.
Subpart C of the final rule concerns the activities and investments
of insured state savings associations. The substantive provisions
applicable to activities of savings associations currently appearing in
subpart G of part 303, effective October 1, 1998, (formerly
Sec. 303.13) would be revised in a number of ways and placed in new
subpart C. To the extent possible, activities and investments of
insured state savings associations are treated consistently with the
treatment accorded insured state banks. Thus, we revised a number of
definitions currently contained in subpart G of part 303 to track the
definitions used in subpart A of part 362.
Subpart D of the final rule requires that an insured savings
association provide a 30-day notice to the FDIC whenever the
institution establishes or acquires a subsidiary or conducts a new
activity through a subsidiary. This provision does not alter the notice
required by statute and current subpart G of part 303. We moved this
requirement to a new subpart to accommodate Federally chartered savings
associations by limiting the
[[Page 66279]]
amount of regulation text they would have to read to learn how to
comply with this statutory notice.
III. Comment Summary
The FDIC received 129 comments in response to the proposed
regulation. The overall comments generally favored the FDIC's approach
to streamlining the consent process for banks and savings associations
to engage in activities using standardized criteria with seven comments
specifically supporting the FDIC's efforts to streamline these rules.
Comments were received from 102 financial institutions, 2 one bank
holding companies, 3 state banking departments, 14 trade associations,
2 investment companies, 4 Congressmen, 1 federal banking regulator and
1 individual.
The overwhelming majority of the comments (107), primarily from
Massachusetts, were focused on concerns over proposed changes to the
standards governing holding equity securities in subsidiaries by banks
having grandfathered authority to hold the securities at the bank
level. We have responded to these comments by reinstating the exception
for a grandfathered bank to hold equity securities in a subsidiary. A
complete discussion of this issue is found in the section by section
analysis.
With regard to the structure of the rule and the consolidation of
the banking and savings activities into a single rule, five comments
expressly supported the FDIC's efforts to accomplish these goals.
However, one comment suggested using a table like the Office of Thrift
Supervision (OTS) has used to aid understanding this complex and
difficult regulation. Three comments support cross-referencing the
Interagency Statement rather than restating disclosure requirements. A
readability analysis was submitted by one individual and, based upon
the results, the individual questioned whether the FDIC was successful
in achieving the stated objective of using plain English. This
individual offered his services to the FDIC as a writing consultant.
Other general comments observed that diversifying into new activities
increases safety and soundness and were pleased that the FDIC supports
state institutions' exercising of new powers. Two comments indicated
that in the preamble, the FDIC had overstated the authority of the FRB
to impose more stringent standards on any activity conducted by a state
member bank. This statement is derived from section 24(i); however, we
intended to refer to those activities not permissible for national
banks. At least one bank and the state banking departments advocate
further streamlining of the regulations to make it easier for banks to
use their capital through subsidiaries. The bank suggested that banks
must have more flexibility to keep their capital in the banking system,
rather than paying out more dividends to shareholders. Although we
favor diversifying the banks' income stream and making bankers'
compliance burden as light as possible, we also are charged with
maintaining safety and soundness and meeting the requirements of
section 24 of the FDI Act. Thus, we strive to balance these interests
in crafting more flexible regulations.
Most of the remaining comments addressed the substance of the
regulation and provided constructive feedback on the regulation text.
Two comments focusing on the Purpose and Scope Section suggested a
definition of what is meant by ``acting as principal,'' although we
already had a definition of ``as principal.'' Two comments objected to
the FDIC accepting the time period imposed by the National Bank Act on
real estate that is acquired for debts previously contracted as a
limitation that carries over to state banks. We believe that the
authority of a national bank to own real estate is governed by the
statute and that this limitation is inherent in that authority. Thus,
we believe that a state bank is constrained by this same limitation
unless relief can be granted by the FDIC. Relief may be granted by the
FDIC only if the state bank transfers the property to a majority-owned
subsidiary with appropriate capital and complies with whatever other
constraints the FDIC deems adequate to protect the deposit insurance
fund from significant risk.
In the definitions section, eight comments requested that we expand
the definition of majority-owned subsidiary to include limited
liability companies and limited partnership interests. One comment
suggested that the qualified housing exception also include limited
liability companies. Four comments expressed concern over the change to
the definition of ``change of control.'' Four comments expressed
concern about the change to the definition of ``significant risk to the
deposit insurance fund.'' One comment suggested a definition of
``investment in subsidiary'' and further clarification of the items to
be included in debt and equity.
With regard to the activities of insured state banks, two comments
supported the FDIC's new interpretation of when the ``in an amount''
limitation is applicable. Six comments addressed insurance activities,
including three addressing the appropriate disclosures. Five comments
addressed the change in the measurement of the applicable capital limit
for adjustable rate and money market preferred stock. Six comments
addressed the 4(c)(8) list (closely related to banking) activities,
including specific alternatives on real estate leasing. One comment
supported the change in the qualified housing projects exception to
conform the meaning of lower income to that used in the community
reinvestment regulations in defining low and moderate income.
With regard to the activities of subsidiaries of insured state
banks, one comment thought the control concept was unnecessary for
lower tier subsidiaries. Over one hundred ten comment letters addressed
the various issues involving the holding of equity securities through a
majority-owned subsidiary, with the overwhelming majority of the
comments coming from Massachusetts banking interests to advocate not
changing the constraints governing banks in that state owning
grandfathered equity securities in a subsidiary. Several of these
comment letters identified more than one issue. Twenty comments
addressed the issues involved with engaging in real estate investment
activity through a majority-owned subsidiary. Nine comments addressed
the issues identified in securities underwriting activity through a
majority-owned subsidiary. Eleven comments addressed the eligible
depository institution criteria. Twelve comments addressed the eligible
subsidiary criteria and generally expressed the view that the eligible
subsidiary was an improvement over the bona fide subsidiary concept
found in the old rule. Seventeen comments addressed the investment and
transaction limits criteria. Eight comments were directed to the way
the capital requirements operate. One comment said that banks should
have the option of complying with original conditions or the new rule.
With regard to the real estate activities covered by subpart B,
five comments addressed this issue and generally thought that the FDIC
should not impose additional regulations on state nonmember banks.
With regard to subpart C governing savings associations, one
comment expressed the view that thrifts do not know what is permissible
for national banks and needed greater specificity in the regulation.
There were no comments on subpart D; however, no substantive change was
made to this statutory filing requirement.
[[Page 66280]]
With regard to subparts E and F governing the notice and
application processing and content, two comments were received in favor
of firmer processing deadlines.
IV. Section by Section Analysis
A. Subpart A--Activities of Insured State Banks
Section 362.1 Purpose and Scope
As described in the preamble accompanying the proposal, included
within the proposed changes to the regulation was the inclusion of a
purpose and scope paragraph describing the statutory background,
intent, and nature of items covered by this subpart. Several commenters
acknowledged the FDIC's efforts to restructure the regulation and
agreed that the proposed reorganization simplifies what continues to be
complex material. These commenters stated that the use of purpose and
scope paragraphs helps clarify the coverage of each subpart.
The intent of Sec. 362.1 is to clarify that the purpose and scope
of subpart A is to ensure that activities and investments undertaken by
insured state banks and their subsidiaries do not present a significant
risk to the deposit insurance funds, are not unsafe and are not
unsound, are consistent with the purposes of federal deposit insurance,
and are otherwise consistent with law. Subpart A implements the
provisions of section 24 of the FDI Act that restrict and prohibit
insured state banks and their subsidiaries from engaging in activities
and investments of a type that are not permissible for national banks
and their subsidiaries. The phrase ``activity permissible for a
national bank'' means any activity authorized for national banks under
any statute including the National Bank Act (12 U.S.C. 21 et. seq.), as
well as activities recognized as permissible for a national bank in
regulations, official circulars, bulletins, orders or written
interpretations issued by the OCC.
This subpart governs activities conducted ``as principal'' and
therefore does not govern activities conducted as agent for a customer,
conducted in a brokerage, custodial, advisory, or administrative
capacity, conducted as trustee, or conducted in any substantially
similar capacity. As explained in the preamble accompanying the
proposal, we moved this language from Sec. 362.2(c) of the former
version of part 362 where the term ``as principal'' was defined to mean
acting other than as agent for a customer, acting as trustee, or
conducting an activity in a brokerage, custodial or advisory capacity.
The FDIC previously described this definition as not covering, for
example, acting as agent for the sale of insurance, acting as agent for
the sale of securities, acting as agent for the sale of real estate, or
acting as agent in arranging for travel services. Likewise, providing
safekeeping services, providing personal financial planning services,
and acting as trustee were described as not being ``as principal''
activities within the meaning of this definition. In contrast, real
estate development, insurance underwriting, issuing annuities, and
securities underwriting would constitute ``as principal'' activities.
Further, for example, travel agency activities have not been
brought within the scope of part 362 and would not require prior
consent from the FDIC even though a national bank is not permitted to
act as travel agent. Agency activities are not covered by the
regulations because the state bank would not be acting ``as principal''
in providing those services. Thus, the fact that a national bank may
not engage in travel agency activities is of no consequence. Of course,
state banks would have to be authorized to engage in travel agency
activities under state law. We intend to continue to interpret section
24 and part 362 as excluding any coverage of activities being conducted
as agent. To highlight this issue, provide clarity, and alert the
reader of this rule that activities being conducted as agent are not
within the scope of section 24 and part 362, this language was moved to
the purpose and scope paragraph in the proposal.
Comments addressing the proposed treatment of ``as principal'' were
submitted by two industry trade groups. One group agreed that moving
the applicable language to the purpose and scope paragraph helps
clarify that section 24 does not apply to activities conducted in an
agency or similar capacity. However, both commenters recommended that
the FDIC define ``as principal'' by specifying what is meant by acting
as principal rather than providing a list of capacities exempt from
that definition. In other words, the commenters desired a definition
consisting of an inclusive list rather than a list of exemptions.
Additionally, one commenter expressed concern that the current list of
exempt capacities may omit certain agency-like roles. As such, the
commenter recommended that the FDIC include ``substantially similar
capacities'' in the list of capacities that are not considered to be
conducted ``as principal''.
The FDIC continues to believe that including the ``as principal''
language in the purpose and scope paragraph provides clarity regarding
activities coming within the scope of section 24. As such, the FDIC
elects not to separately define ``as principal'', and has deleted as
redundant an overlapping definition of ``as principal'' contained in
Sec. 362.2(c) of the proposal. Additionally, the FDIC cannot reasonably
list all capacities that will be considered to be ``as principal''.
Therefore, the FDIC is not persuaded that changing the nature of the
definition to an inclusive list of capacities that are considered ``as
principal'' would alleviate confusion. Instead, ``as principal''
activities will continue to be described as being all capacities other
than the listed exceptions. The FDIC nonetheless agrees that the
current list may exclude certain agency-like roles and is therefore
adding the phrase ``or in any substantially similar capacity'' to the
regulatory language of Sec. 362.1(b)(1). Also, the FDIC has added a
list of examples of activities that are not ``as principal'' to provide
the public with additional guidance.
The preamble of the proposal also explains that equity investments
acquired in connection with debts previously contracted (DPC) are not
within the scope of this subpart when held within the shorter of the
time limits prescribed by state or federal law. The exclusion of equity
investments acquired in connection with DPC was moved from the
definition of ``equity investment'' in the former regulation to the
purpose and scope paragraph to highlight this issue, provide clarity,
and alert the reader of this rule that these investments are not within
the scope of section 24 and part 362. Interests taken as DPC are
excluded from the scope of this regulation provided that the interests
are not held for investment purposes and are not held longer than the
shorter of any time limit on holding such interests (1) set by
applicable state law or regulation or (2) the maximum time limit on
holding such interests set by applicable statute for a national bank.
The result of the modification would be to make it clear, for example,
that real estate taken DPC may not be held for longer than 10 years
(see 12 U.S.C. 29) or any shorter period of time set by the state. In
the case of equity securities taken DPC, the bank must divest the
equity securities ``within a reasonable time'' (i.e, as soon as
possible consistent with obtaining a reasonable return) (see OCC
Interpretive Letter No. 395, August 24, 1987, (1988-89 Transfer Binder)
Fed Banking L. Rep. (CCH) p. 85619, which interprets and applies the
National Bank Act) or no later than the time permitted under state law
if that time period is
[[Page 66281]]
shorter. Of course, a state bank permitted to hold such interests under
state law may apply to the FDIC for consent to continue to hold the
real property through a majority-owned subsidiary. In the final rule,
the FDIC has added some general information about the manner in which a
national bank may hold DPC.
Two commenters objected to the FDIC imposing the national bank
holding period limits on insured state banks if those limits are
shorter than otherwise permitted under state law. One commenter
suggested applying a ``reasonable time period'' divestiture standard
similar to that concerning equity securities acquired DPC. The holding
periods governing a national bank's ability to own real estate acquired
DPC are contained within section 29 of the National Bank Act (12.
U.S.C. 29). Because a national bank can hold real estate acquired DPC
in limited circumstances, section 24 only allows a state bank to hold
such interests under the same constraints, i.e., for a maximum of 10
years. Conversely, section 29 does not contain divestiture periods for
equity securities acquired DPC and the FDIC has therefore elected to
defer to a ``reasonable time'' standard. However, due to the statutory
limitation in section 29, no changes are made to the exception for real
estate acquired DPC and the regulation will continue to apply the
holding periods in the manner proposed.
As discussed in the proposal's preamble, the intent of the insured
state bank in holding equity investments acquired in connection with
DPC is also relevant to the analysis of whether the equity investment
is permitted. Any interest taken DPC may not be held for investment
purposes. For example, a bank may be able to expend monies in
connection with DPC property and/or take other actions with regard to
that property. However, if those expenditures and actions are not
permissible for a national bank, the property will not fall within the
DPC exception. For an additional example, if the bank's actions are
speculative in nature or go beyond what is necessary and prudent in
order for the bank to recover on the loan, a national bank would not be
permitted to take these actions. The FDIC expects bank management to
document that DPC property is being actively marketed; current
appraisals or other means of establishing fair market value may be used
to support management's decision not to dispose of property if offers
to purchase the property have been received and rejected by management.
Similarly, the proposal also moved to the purpose and scope
paragraph language governing any interest in real estate in which the
real property is (1) used or intended in good faith to be used within a
reasonable time by an insured state bank or its subsidiaries as offices
or related facilities for the conduct of its business or future
expansion of its business or (2) used as public welfare investments of
a type permissible for national banks. Again, this language was moved
from the definition of ``equity investment'' in the former regulation
to highlight this issue, provide clarity, and alert the reader of this
rule that such investments are not within the scope of this subpart. In
the case of real property held for use at some time in the future as
premises, the holding of the property must reflect a bona fide intent
on the part of the bank to use the property in the future as premises.
We are not aware of any statutory time frame that applies in the case
of a national bank which limits the holding of such property to a
specific time period. Therefore, the issue of the precise time frame
under which future premises may be held without implicating part 362
must be decided on a case-by-case basis. If the holding period allowed
under state law is longer than what the FDIC determines to be
reasonable and consistent with a bona fide intent to use the property
for future premises, the bank will be so informed and will be required
to convert the property to use, divest the property, or apply for
consent to hold the property through a majority-owned subsidiary of the
bank. We note that the OCC's regulations indicate that real property
held for future premises should normally be converted to use within
five years after which time it will be considered other real estate
owned and must be actively marketed and divested within no more than
ten years (12 CFR part 34). We understand that the time periods set
forth in the OCC's regulations reflect safety and soundness
determinations by that agency. As such, and in keeping with what has
been to date the FDIC's posture with regard to safety and soundness
determinations of the OCC, the FDIC will make its own judgment to
determine when a reasonable time has elapsed for holding property for
future premises.
The purpose and scope paragraph also explains that a subsidiary of
an insured state bank may not engage in activities that are not
permissible for a subsidiary of a national bank unless the bank is in
compliance with applicable capital standards and the FDIC has
determined that the activity poses no significant risk to the deposit
insurance fund. Subpart A provides standards for certain activities
that are not permissible for a subsidiary of a national bank.
Additionally, because of safety and soundness concerns relating to real
estate investment activities, subpart B reflects special rules for
subsidiaries of insured state nonmember banks that engage in real
estate investment activities of a type that are not permissible for a
national bank, but that may be otherwise permissible for a subsidiary
of a national bank.
The FDIC intends to allow insured state banks and their
subsidiaries to undertake safe and sound activities and investments
that do not present a significant risk to the deposit insurance funds
and that are consistent with the purposes of federal deposit insurance
and other applicable law. This subpart does not authorize any insured
state bank to make investments or to conduct activities that are not
authorized or that are prohibited by either state or federal law.
Section 362.2 Definitions
Revised subpart A Sec. 362.2 contains the definitions applicable to
this subpart. Most definitions are unchanged from those used in the
current regulation. Nonetheless, the proposal contains edits to enhance
clarity and readability, define additional terms, and delete certain
definitions as unnecessary.
To standardize as many definitions as possible, we incorporated the
following definitions from section 3 of the FDI Act (12 U.S.C. 1813):
``depository institution'', ``insured state bank'', ``bank'', ``state
bank'', ``savings association'', ``state savings association'',
``insured depository institution'', ``federal savings association'',
and ``insured state nonmember bank''. This standardization required
that we delete the definitions of the first two terms, ``depository
institution'' and ``insured state bank'', currently found in part 362.
No substantive change was intended by this modification. The remaining
terms were added by reference to provide clarity throughout the
proposed part 362 because we incorporate many of the definitions from
subpart A into the other part 362 subparts. The FDIC received no
comments concerning these changes and is therefore adopting the
referenced definitions as proposed.
Several definitions were carried forward in the proposal from the
current regulation either unchanged or containing only minor edits to
enhance clarity or readability without changing the meaning. The
following definitions
[[Page 66282]]
were carried forward without any substantive meaning changes:
``control'', ``extension of credit'', ``executive officer'',
``director'', ``principal shareholder'', ``related interest'',
``national securities exchange'', ``residents of state'',
``subsidiary'', and ``tier one capital''. Again, the FDIC received no
comments on the referenced definitions which are adopted as proposed.
The name of one definition was simplified without substantively
changing its meaning. The subject definition was formerly found in
Sec. 362.2(g) and was described as follows ``an insured state bank will
be considered to convert its charter''. This definition is now provided
by Sec. 362.2(f) and is named ``convert its charter''. No commenters
addressed this simplified title which is adopted as proposed.
The definitions of ``activity permissible for a national bank'',
``an activity is considered to be conducted as principal'', and
``equity investment permissible for a national bank'' were deleted in
the proposed and final rule because the substance of the information
contained in those definitions was incorporated into the scope
paragraph in Sec. 362.1. When developing the proposal, the FDIC
concluded that moving the information contained in these definitions to
the scope paragraph made the coverage of the rule clearer.
Additionally, placing this information at the beginning of the subpart
is consistent with the purpose of a scope paragraph. Some readers may
save time by realizing sooner that the regulation may be inapplicable
to conduct contemplated by a particular bank. It also may be more
logical for the reader to consider the scope paragraph to determine the
rule's applicability, rather than having to rely on the definition
section. Moreover, we concluded that it would be unnecessary to
duplicate this same information in the definition section. The FDIC
received no specific comments on the proposed treatment, but
respondents commenting on the overall structure of the proposal
generally favored the use of the purpose and scope paragraphs. The
final regulation incorporates the changes as proposed. The proposed
definition of ``as principal'' at Sec. 362.2(c) duplicates material set
out in the scope section at Sec. 362.1(b)(1), and has therefore been
eliminated in the final rule. Appropriate definitional language has
been added to Sec. 362.1(b)(1).
The proposal also deleted the definition of ``equity interest in
real estate'' and moved the recitation of the permissibility of owning
real estate for bank premises and future premises, owning real estate
for public welfare investments, and owning real estate from DPC to the
scope paragraph for the reasons stated in the preceding paragraph.
These activities are permissible for national banks and we concluded
that it was unnecessary to continue to restate this information in the
definition section of the regulation. No substantive change is intended
by the simplification of this language. Further, we determined that the
remainder of the definition of ``equity interest in real estate'' did
little to enhance clarity or understanding; therefore, we are relying
on the language defining ``equity investment'' to cover real estate
investments.
Conforming changes were made to the definition of ``equity
investment'' by removing the reference to the deleted definition of
``equity interest in real estate''. Additionally, the remaining part of
the ``equity investment'' definition was shortened and edited to
enhance readability. This definition is intended to encompass an
investment in an equity security, partnership interest, or real estate
as it did in the former regulation. No substantive changes were
intended by the changes described in this or the preceding paragraph.
The FDIC received no comments on these changes which are adopted as
proposed.
With regard to the definition of ``equity security'', we modified
the definition by deleting references to circumstances where holding
equity securities is permissible for national banks, such as when
equity securities are held as a result of a foreclosure or other
arrangements concerning debts previously contracted. Language
discussing the exclusion of DPC and other investments that are
permissible for national banks was relocated to the scope paragraph for
the reasons previously stated. Like the exceptions concerning equity
investments in real estate, no substantive change is intended by the
relocation of the subject exceptions to the purpose and scope
paragraph. No comments were received on this proposed treatment which
is adopted as proposed.
The definitions of ``investment in a department'' and
``department'' were deleted because they are no longer needed in the
revised regulation text. The core standards applicable to a department
of a bank are detailed in Sec. 362.3(c) and defining the term
``department'' is therefore unnecessary. If a calculation of an
``investment in a department'' needs to be made, the FDIC intends to
defer to governing state law. As a result, a definition of ``investment
in a department'' is unnecessary and was deleted. There were no
comments addressing the removal of these definitions.
Similarly, we deleted the definition of ``investment in a
subsidiary'' because the definition is no longer needed in the revised
regulation text. Amounts subject to the investment limits of
Sec. 362.4(d) are listed clearly in that subsection. The FDIC opted to
list amounts subject to investment limits in Sec. 362.4(d) to separate
those debt-type investments from the equity-type investments subject to
the capital treatment of Sec. 362.4(e). The regulation also contains
other investment limits applicable to both debt and equity investments.
Because of these different types of investment limits, the FDIC did not
find a single ``investment in a subsidiary'' definition helpful.
Therefore, the FDIC has elected not to incorporate such a definition
despite a request by one commenter. However, as the same commenter
suggested, the FDIC has attempted to clearly delineate amounts subject
to the various investment limits, transaction restrictions, and capital
requirements when applicable through both the regulation text and the
corresponding preamble language.
We deleted the definition of ``bona fide subsidiary'' and chose to
make similar characteristics part of the ``eligible subsidiary''
criteria in Sec. 362.4(c)(2). Including these criteria as a part of the
substantive regulation text in the referenced subsection, rather than
as a definition, makes reading the rule easier and the meaning clearer.
No commenters addressed this treatment. Comments concerning the various
elements of the eligible subsidiary criteria are discussed elsewhere in
this preamble under the appropriate section.
The regulation substitutes the current definition of ``lower
income'' with a cross reference in Sec. 362.3(a)(2)(ii) to the
definition of ``low income'' and ``moderate income'' used for purposes
of part 345 of the FDIC's regulations (12 CFR 345) which implements the
Community Reinvestment Act (CRA). 12 U.S.C. 2901, et. seq. Under part
345, ``low income'' means an individual income that is less than 50
percent of the area median income or a median family income that is
less than 50 percent in the case of a census tract or a block numbering
area delineated by the United States Census in the most recent
decennial census. ``Moderate income'' means an individual income that
is at least 50 percent but less than 80 percent of the area median or a
median family income that is at least 50 but less than 80 percent in
the case of a census tract or block numbering area.
The ``lower income'' definition is relevant for purposes of
applying the
[[Page 66283]]
exception in the regulation which allows an insured state bank to be a
partner in a limited partnership whose sole purpose is direct or
indirect investment in the acquisition, rehabilitation, or new
construction of qualified housing projects (housing for lower income
persons). As we anticipate that insured state banks will seek to use
such investments in meeting their community reinvestment obligations,
the FDIC is of the opinion that conforming the definition of lower
income to that used for CRA purposes will benefit banks. This change
has the effect of expanding the housing projects that qualify for the
exception. The FDIC received one comment addressing the altered
definition with the respondent favorably noting and supporting the
resultant effect. The final regulation adopts this change as proposed.
The regulation includes an altered definition of the term
``activity''. As modified, the definition includes both activities and
investments. Where equity investments are intended to be excluded from
a particular section of the regulation, we expressly exclude those
investments in the regulatory text. Previously, the term ``activity''
was defined differently depending upon whether it was used in
connection with the direct conduct of business by an insured state bank
or in connection with the conduct of business by a subsidiary of the
bank. This change was made both to simplify the regulation and to
reflect the section 24 definition of ``activity''. No comments were
received on this proposed change.
It is noted that no comments were received regarding the proposed
suggestion also to modify the ``activity'' definition to incorporate a
recent interpretation by the agency that determined that the act of
making a political campaign contribution does not constitute an
``activity'' for purposes of part 362. The referenced interpretation
uses a three prong analysis to help determine whether particular
conduct should be considered an activity and therefore subject to
review under part 362 if the conduct is not permissible for a national
bank.
First, any conduct that is an integral part of the business of
banking as well as any conduct which is closely related or incidental
to banking should be considered an activity. In applying this factor,
it is important to focus on what banks do that makes them different
from other types of businesses. For example, lending money is clearly
an ``activity'' for purposes of part 362. The second factor asks
whether the conduct is merely a corporate function as opposed to a
banking function. For example, paying dividends to shareholders is
primarily a general corporate function and not one associated with
banking because of some unique characteristic of banking as a business.
Generally, activities that are not general corporate functions will
involve interaction between the bank and its customers rather than its
employees or shareholders. The third factor asks whether the conduct
involves an attempt by the bank to generate a profit. For example,
banks make loans and accept deposits in an effort to make money.
However, contracting with another company to generate monthly customer
statements should not be considered to be an activity in and of itself
as it simply is entered into in support of the ``activity'' of taking
deposits. If at least two of the factors yield a conclusion that the
conduct is part of the authorized conduct of business by the bank, the
better conclusion is that the conduct is an activity. Because of the
lack of interest received on expanding the definition to reflect this
interpretation, no change is made to the definition proposed. The FDIC
intends to continue to apply the above analysis when determining
whether particular conduct should be considered an activity.
The definition of ``real estate investment activity'' was shortened
to mean any interest in real estate held directly or indirectly that is
not permissible for a national bank. This term is used in
Sec. 362.4(b)(5) of subpart A. Additionally, it is used in Sec. 362.8
of subpart B which contains safety and soundness restrictions on real
estate activities of subsidiaries of insured state nonmember banks that
may be deemed to be permissible for operating subsidiaries of national
banks but that would not be permissible for a national bank itself. The
proposed definition contained a parenthetical excluding real estate
leasing from the definition of real estate investment activities. By
excluding leasing from the proposed ``real estate investment activity''
definition, the FDIC was attempting to clearly separate leasing
activity from other real estate investment activities.
Under the current regulation, banks and their majority-owned
subsidiaries are allowed to engage in real estate leasing under the
regulatory exceptions enabling them to engage in activities closely
related to banking.1 These regulatory exceptions were
carried forward in the proposal. However, the FDIC is concerned about
certain activities encompassed within this section. For example, the
4(c)(8) list includes real estate leasing. When an individual or entity
engages in leasing activity as the lessor of a particular parcel, the
landlord has an ownership interest in the underlying real estate. Under
section 24 of the FDI Act, insured state banks are limited in their
ability to own real estate. We are concerned that an insured state bank
could consider this regulation and its certain conditions as the FDIC
having permitted the bank or its majority-owned subsidiaries to own
real estate interests that would not be permissible for a national bank
or a subsidiary of a national bank. To prevent insured state banks from
attempting to use this consent to leasing activity as a way to avoid
the corporate separations, transaction limitations and restrictions,
and capital treatment applicable to other real estate investment
activities, the proposed definition expressly excluded leasing.
Additionally, the FDIC was attempting to ensure that banks using the
notice procedure to engage in real estate investment activities were
not, in effect, operating a commercial business by virtue of the terms
of the leasing activity.
---------------------------------------------------------------------------
\1\ These regulatory exceptions were provided by
Sec. 362.4(c)(3)(ii)(A) and (B) depending upon whether conducted by
the bank or through a majority-owned subsidiary, respectively. The
exceptions provided that insured state banks or their majority-owned
subsidiaries could engage in principal in activities that the FRB by
regulation or order has found to be closely related to banking for
the purposes of section 4(c)(8) of the Bank Holding Company Act (12
U.S.C. 1843(c)(8)).
---------------------------------------------------------------------------
The FDIC recognizes, however, that the proposed definition would
have effectively prevented an insured state bank's majority-owned
subsidiary that was proceeding under the notice procedure from leasing
property that it is otherwise permitted to own or develop.2
As a result, the insured state bank would have been required to submit
an application to seek further consent from the FDIC to lease real
property it was allowed to own. To correct this anomaly, the FDIC has
deleted the parenthetical from the definition and deals with the
activities of real estate leasing and other real estate investment
activities separately as discussed elsewhere in this preamble. The
subject definition is otherwise unchanged from the proposal.
---------------------------------------------------------------------------
\2\ Provided it meets the conditions imposed by
Sec. 362.4(b)(5).
---------------------------------------------------------------------------
The final rule includes a modified definition of ``company'' to
which we added limited liability companies to the list of entities
considered to be a company. This change was made to recognize the
creation of limited liability companies and their growing prevalence in
the market place. Four
[[Page 66284]]
commenters suggested explicitly adding limited liability partnerships
to the list of business structures included in the ``company''
definition. The FDIC believes the suggested change is unnecessary
because limited liability partnerships are already included in the
definition through the term ``partnership''.
As proposed, the FDIC adopted the modified definition of
``significant risk to the fund'' with the second sentence that
clarifies that this definition includes the risk that may be present
either when an activity or an equity investment contributes or may
contribute to the decline in condition of a particular state-chartered
depository institution or when a type of activity or equity investment
is found by the FDIC to contribute or potentially contribute to the
deterioration of the overall condition of the banking system. Our
interpretation of the definition remains unchanged. Significant risk to
the deposit insurance fund is understood to be present whenever there
is a high probability that any insurance fund administered by the FDIC
may suffer a loss. The preamble accompanying the adoption of this
definition in 1992 (57 FR 53220, November 9, 1992) indicated that the
FDIC recognizes that no investment or activity may be said to be
without risk under all circumstances and that such a fact alone will
not cause the agency to determine that a particular activity or
investment poses a significant risk of loss to the fund. The definition
emphasizes that there is a high degree of likelihood under all of the
relevant circumstances that an investment or activity by a particular
bank, or by banks in general or in a given market or region, may
ultimately produce a loss to either of the funds. The relative or
absolute size of the loss that is projected in comparison to the fund
is not determinative of the issue. The preamble indicated that the
definition is consistent with and derived from the legislative history
of section 24 of the FDI Act. Previously, the FDIC rejected the
suggestion that a risk to the fund be found only if a particular
activity or investment is expected to result in the imminent failure of
a bank. The suggestion was rejected in 1992 as the FDIC determined that
it was inappropriate to approach the issue this narrowly in light of
the legislative intent.
Four commenters addressed the proposed change to the wording of
this definition. One industry trade association complimented the
change. However, two other groups expressed concern that the added
sentence results in a definition that is overly broad, and a state bank
stated that the change makes the definition incoherent. The latter
three commenters expressed concern that the added sentence contains no
qualifications or limitations. These commenters state that numerous
activities may negatively impact the condition of an institution or may
contribute to deterioration in the overall banking system without
causing loss to the insurance fund. The commenters suggest that section
24 requires the FDIC to consider the extent of the impact before
determining that an activity presents a significant risk to the fund.
The FDIC agrees with the commenters that consideration must be given to
the extent that a negative event may harm an institution or the overall
banking industry. However, the FDIC believes that both sentences
contained in the definition must be read together. The second sentence
clarifies that significant risk is present whenever there is a high
probability that an activity or an equity investment will or could
result in a loss to an insurance fund administered by the FDIC,
regardless of whether the loss results from one or multiple
institutions. After consideration of the comments and the wording, the
FDIC adopts the expanded definition as proposed.
The proposal re-defined the term ``well-capitalized'' to
incorporate the same meaning set forth in part 325 of this chapter for
an insured state nonmember bank. For other state-chartered depository
institutions, the term ``well-capitalized'' has the same meaning as set
forth in the capital regulations adopted by the state. Importing the
capital definitions used by the various state-chartered depository
institutions should simplify the calculations when they deal with their
appropriate federal banking agency. The other terms defined under
Sec. 362.2(x) of the current regulation were deleted as unnecessary due
to the other changes in the regulation text.
The proposal added definitions of the following terms: ``change in
control'', ``institution'', ``majority-owned subsidiary'', ``security''
and ``state-chartered depository institution.''
After reconsideration of the proposed definition of ``change in
control'', the FDIC decided to adopt certain changes to bring the
definition back into substantive consistency with the broader reach of
the term as is provided by the current regulation. The change in
control definition comes into play primarily in connection with section
24's grandfather with respect to common or preferred stock listed on a
national securities exchange and shares of registered investment
companies. Section 24 states that the grandfather ceases to apply if
the bank converts its charter or undergoes a change in control.
The definition proposed at Sec. 362.2(c) covered any instance in
which the bank undergoes a transaction which requires a notice to be
filed under section 7(j) of the FDI Act (12 U.S.C. 1817(j)) except a
transaction which is presumed to be a change in control for the
purposes of that section under FDIC's or FRB's regulations implementing
section 7(j), or in which the bank is acquired by or merged into a bank
that is not eligible for the grandfather. This proposed definition
eliminated two other instances which the current regulation, at
Sec. 362.3(b)(4)(ii), treats as a change in control: any transaction
subject to section 3 of the Bank Holding Company Act (12 U.S.C. 1842)
other than a one bank holding company formation (section 3
transactions), and a transaction in which control of the bank's parent
company changes (parent control changes).
In the preamble to the proposal, the FDIC indicated that
elimination of the section 3 transactions and the parent control
changes would bring the definition more in line with what constituted a
true change in control. For example, the section 3 transaction language
in the current rule would encompass all mergers between the holding
company of a grandfathered bank and another bank holding company,
regardless of which holding company was the survivor. However, upon
further reflection, the FDIC has decided that total elimination of the
section 3 transactions would create anomalous results. If a controlling
interest in a grandfathered bank was acquired by an unrelated holding
company (which requires approval under section 3), it is difficult to
argue how this is materially less of a change in control than if
control of the bank was acquired by an individual in a section 7(j)
transaction. Still, there are cases in which a rigid application of the
section 3 transactions would reach too far. In contrast to the example
in which a bank holding company acquires control of a grandfathered
bank, the FRB's approval under section 3 is required if a bank holding
company acquires anything more than five percent of any outstanding
class of a bank's voting shares. The revised definition at
Sec. 362.2(c) contained in the final rule therefore includes
transactions subject to section 3 approval only when a bank holding
company acquires control of a grandfathered bank through the section 3
transaction. The current exclusion for one bank holding
[[Page 66285]]
company formations also is maintained in the final rule.
Also, the elimination of the parent control changes in the proposed
rule created potentially confusing ambiguities, particularly when
coupled with the elimination of the section 3 transactions. For
example, if the holding company of a bank eligible for the grandfather
is acquired and merged into an unrelated bank holding company (again,
which requires approval under section 3), it is difficult to argue how
this is materially less of a change in control than if the bank itself
was merged with an unrelated bank. But the merger and acquisition
language in the proposed definition referred only to the bank itself.
The final rule expands the merger language to holding companies,
accordingly. As another example, it is difficult to argue that a
transaction requiring the holding company of a grandfathered bank to
submit a change in control notice under section 7(j) is materially less
of a change in control than a transaction requiring the grandfathered
bank itself to file such a notice, and the 7(j) language in the
proposed rule did not expressly refer to holding company transactions.
In the final rule, the FDIC has therefore revised the 7(j) language to
clarify its applicability to both scenarios.
The FDIC received three similar comments expressing concern about
the proposed changes to the ``change in control'' definition. The
commenters acknowledge that deleting certain instances from the current
definition reduces the instances in which a bank would lose its
grandfathered rights. Nonetheless, the commenters feel that it is
unclear whether the proposed changes may have also inadvertently
broadened the reach of the remaining transactions causing the
grandfathered right to be terminated. This ambiguity appears to result
from an incomplete understanding of whether the definition continues to
exclude transactions presumed to be a change in control under the
FDIC's and FRB's regulations implementing section 7(j) of the FDI Act.
The FDIC wants to assure commenters that the regulatory language of the
final definition, like that of the proposal, continues to exclude such
presumed changes in control from the events that result in a loss of
the subject grandfathered rights.
One additional commenter took exception to the FDIC's position
concerning the ability to look to the substance of a transaction in
determining whether grandfather rights terminate. The commenter
objected to the FDIC's statement in the preamble to the proposed rule
that state banks should be aware that, depending upon the
circumstances, the grandfather could be considered terminated after a
merger transaction in which an eligible bank is the survivor. For
example, if a state bank that is not eligible for the grandfather is
merged into a much smaller state bank that is eligible for the
grandfather, the FDIC may determine that in substance the eligible bank
has been acquired by a bank that is not eligible for the grandfather.
The commenter argues that the FDIC's interpretation is inconsistent
with the FDIC's current regulations, and claims that if the FDIC
subjects such transactions to subjective criteria such as relative
asset size, institutions considering mergers or acquisitions will be
disadvantaged because of the uncertainty regarding the potential loss
of grandfathered status. The commenter also asserts that the FDIC's
interpretation is inconsistent with congressional intent because
section 24 did not define change in control; Congress clearly intended
the use of ``change in control'' language in section 24(f)(5) to
reference the meaning of the phrase ``change in control'' established
by the Change in Bank Control Act (CBCA) (12 U.S.C. 1817(j)). In the
commenter's view, since the CBCA predates section 24 by nine years,
Congress intended to use ``change in control'' as a term of art.
The interpretation set out in the preamble to the proposal is
consistent with the FDIC's current regulation and is in fact set out in
the preamble accompanying the FDIC's original adoption of the change in
control provisions under part 362 in 1992. 57 FR 53227 (Nov. 9, 1992).
The commenter's argument takes too narrow a view of section 24(f)(5),
as the FDIC pointed out in proposing the change of control provisions
of current part 362. In light of the broader congressional action under
section 24 to generally prohibit equity investments by state banks
which are not permissible for a national bank, and the limited nature
of the grandfather exception, it is appropriate to define the universe
of events constituting a change in control so as to encompass
transactions constituting a true acquisition. 57 FR 30444 (July 9,
1992). In modifying the change in control provisions of part 362, the
FDIC has narrowed the definition somewhat, as discussed above, to
approximate more closely when a true change in control of the bank has
taken place. If, as the commenter argues, change in control only
includes transactions subject to the CBCA, the exclusion under the CBCA
for all transactions reviewable under the Bank Merger Act (12 U.S.C.
1828(c)) or the Bank Holding Company Act would be brought to bear.
Therefore, the FDIC rejects the arguments provided by the commenter as
being an overly narrow interpretation of the statute.
We defined ``state-chartered depository institution'' and
``institution'' to mean any state bank or state savings association
insured by the FDIC. These definitions should enhance readability and
eliminate ambiguity concerning the subject terms. Defining
``institution'' enables us to shorten the drafting of the rule. No
comments were received regarding these definitions which are adopted as
proposed.
Additionally, the proposal added a definition of ``majority-owned
subsidiary'' which was defined to mean any corporation in which the
parent insured state bank owns a majority of the outstanding voting
stock. This definition was added to clarify our intention that
expedited notice procedures only be available when an insured state
bank interposes an entity providing limited liability to the parent
institution. We interpret Congress's intention in imposing the
majority-owned subsidiary requirement in section 24 of the FDI Act to
generally require that such a subsidiary provide limited liability to
the insured state bank. Thus, except in unusual circumstances, we have
and will require majority-owned subsidiaries to adopt a form of
business that provides limited liability to the parent bank. In
assessing our experience with applications, we have determined that the
notice procedure will be available only to banks that engage in
activities through a majority-owned subsidiary that takes the corporate
form of business. We welcome applications that may take a different
form of business such as a limited partnership or limited liability
company, but would like to develop more experience with appropriate
separations to protect the bank from liability under these other forms
of business enterprise through the application process before including
such entities in a notice procedure.
Eight commenters objected to the FDIC's decision to construct the
definition around the corporate form of business. The commenters were
unanimous in suggesting that the FDIC expand the definition to include
limited liability companies (LLCs), limited liability partnerships
(LLPs), and limited partnerships. Several of the commenters note that
these forms of business have been in existence in many states for a
number of years, and they project that the presence of such
[[Page 66286]]
structures will continue to increase given the tax benefits, limited
liability, and flexible structure provided by these business forms. The
respondents contend that these business forms sufficiently insulate the
members and partners from liability. One commenter noted that they are
aware of no significant judicial challenge to the liability insulation
provided by these business forms. As such, the commenter asserts that
the proposed definition contravenes congressional intent because it
does not recognize a business form that would provide limited liability
to the insured state bank. Finally, the commenters note that both the
FRB and the OCC have recently permitted the limited liability
organizational form for operating subsidiaries.
Limited liability partnerships and companies are both relatively
new business forms. There is little definitive legal guidance
concerning the liability protection offered by these organizational
structures. Among the unresolved issues is the question of how to
structure the management of LLCs and LPs to afford the same level of
separateness provided by the corporate form under the eligible
subsidiary criteria. Because of the limited existing case law regarding
piercing the veil of LLCs and LLPs, the FDIC is unable to determine the
appropriate objective separation criteria that will provide the parent
bank with substantially the same liability protection offered by an
independent corporate structure. Thus, we have not expanded the
definition to include LLCs and LLPs at this time. The FDIC views this
decision to preclude LLCs and LLPs as consistent with the agency's
interpretation of the congressional intent to limiting liability for
subsidiaries' activities from accruing to the insured state bank.
The effect of the FDIC's decision is that the notice process is
limited to banks with subsidiaries organized using the corporate form.
We encourage banks to submit applications when they want to use an
alternative business form. Then, the banks can propose appropriate
objective separations that fit the particular activity and the FDIC can
evaluate these separations on a case-by-case basis. At some future
date, more standardized criteria may emerge. Then, the FDIC may
consider re-visiting this issue. The FDIC does not intend any exclusion
of these forms by omitting them from the notice processing criteria.
They simply do not allow for the more limited review involved in an
expedited notice processing system.
Although the FDIC requires the first level majority-owned
subsidiary to be a corporation, it is noted that the final regulation
contains a provision, at Sec. 362.4(b)(3), allowing lower level
subsidiaries to assume other business forms including LLCs and LLPs.
Please refer to the applicable discussion of this section elsewhere in
this preamble.
The final rule also incorporates the definition of ``security''
from part 344 of this chapter to eliminate any ambiguity over the
coverage of this rule when securities activities and investments are
contemplated.
Section 362.3 Activities of Insured State Banks
Equity Investment Prohibition. Section 362.3(a) restates the
statutory prohibition on insured state banks making or retaining any
equity investment of a type that is not permissible for a national
bank. The prohibition does not apply if one of the statutory exceptions
contained in section 24 of the FDI Act (as restated in the current
regulation and carried forward in the final regulation) applies. As
discussed in the preamble accompanying the proposal, the final
regulation eliminates the reference to ``amount'' that is contained in
the current version of Sec. 362.3(a). The FDIC reconsidered our
interpretation of the language of section 24 in which paragraph (c)
prohibits an insured state bank from acquiring or retaining any equity
investment of a type that is impermissible for a national bank and
paragraph (f) prohibits an insured state bank from acquiring or
retaining any equity investment of a type or in an amount that is
impermissible for a national bank. We previously interpreted the
language of paragraph (f) as controlling and read that language into
the entire statute. We reconsidered this approach and decided that it
was not the most reasonable construction of this statute and determined
that the language of the earlier paragraph (c) is controlling without
the necessity to import the language of (f). We believe that the second
mention as contained in paragraph (f) should be limited to those items
discussed under paragraph (f). Thus, the language of paragraph (c)
controls when any other equity investment is being considered.
Therefore, we deleted the amount language from the prohibition stated
in the regulation. The FDIC received comments from two parties
expressly approving this revised interpretation.
Exception for subsidiaries of which the bank is majority owner. The
final regulation retains the exception allowing investments in
subsidiaries of which the bank is majority owner as currently in effect
without any substantive change. However, the FDIC has modified the
language of this section to remove negative inferences and make the
text clearer. Rather than stating that the bank may do what is not
prohibited, the FDIC affirmatively states that an insured state
chartered bank may acquire or retain investments in these subsidiaries.
If an insured state bank holds less than a majority interest in the
subsidiary, and that equity investment is of a type that would be
prohibited to a national bank, the exception does not apply and the
investment is subject to divestiture.
Majority ownership for the exception is understood to mean
ownership of greater than 50 percent of the outstanding voting stock of
the subsidiary. National banks may own a minority interest in certain
types of subsidiaries. (See 12 CFR 5.34 (1998)). Therefore, an insured
state bank may hold a minority interest in a subsidiary if a national
bank could do so. Thus, section 24 does not necessarily require a state
bank to hold at least a majority of the stock of a company in order for
the equity investment in the company to be permissible.
For purposes of the notice procedure, the regulation defines the
business form of a majority-owned subsidiary to be a corporation. As is
discussed above in connection with the definition of a ``Majority-owned
subsidiary'', there may be other forms of business organization that
are suitable for the purposes of this exception such as partnerships or
limited liability companies, but the FDIC prefers to review such
alternate forms of organization on a case-by-case basis through the
application process to assure that appropriate separation between the
insured depository institution and the subsidiary is in place.
To qualify for the exception, the majority-owned subsidiary may
engage only in the activities described in Sec. 362.4(b). The allowable
activities include exceptions to the general statutory prohibition,
some of which have a statutory basis and others of which are derived
through the FDIC's power to create regulatory exceptions.
Investments in qualified housing projects. Section 362.3(a)(2)(ii)
of the final regulation provides an exception for qualified housing
projects. The final regulation combines the language found in two
paragraphs of the current regulation with the resulting paragraph
retaining substantially the same language. Changes were made to clarify
some technical aspects of the manner in which the qualified housing
rules work and are not intended to be substantive. In addition, the
FDIC modified the
[[Page 66287]]
language of the text to remove negative inferences and make the text
clearer.
Under this exception, an insured state bank is allowed to invest as
a limited partner in a partnership, the sole purpose of which is direct
or indirect investment in the acquisition, rehabilitation, or new
construction of a residential housing project intended to primarily
benefit lower income persons throughout the period of the bank's
investment. The bank's investments, when aggregated with any existing
investment in such a partnership or partnerships, may not exceed 2
percent of the bank's total assets. The FDIC expects a bank to use the
figure reported on the bank's most recent consolidated report of
condition (Call Report) prior to making the investment as the measure
of its total assets. If an investment in a qualified housing project
does not exceed the limit at the time the investment is made, the
investment shall be considered to be a legal investment even if the
bank's total assets subsequently decline.
The current exception is limited to instances in which the bank
invests as a limited partner in a partnership. In the proposal, comment
was invited on (1) whether the FDIC should expand the exception to
include limited liability companies and (2) whether doing so is
permissible under the statute. (Section 24(c)(3) of the FDI Act
provides that a state bank may invest ``as a limited partner in a
partnership''.). No comments were received on the legal issue. One
comment applauded our suggestion to expand this statutory exception by
regulation. In the final rule, we have expanded Sec. 362.3(a)(2)(ii) to
permit insured state banks to invest in qualified housing projects as a
limited partner or through a limited liability company.
Although the statutory language in the paragraph allowing an
investment in qualified housing projects explicitly allows only a
limited partnership investment, it does not prohibit other forms of
ownership. For the purpose of this investment and consistent with the
underlying public policy purposes of this statute, we consider limited
liability companies to be substantially equivalent to limited
partnership interests. It is consistent with the FDIC's authority under
the statute to extend the qualified housing projects exception by
regulation to cover the limited liability company form of business
enterprise in this circumstance. Limited partnership interests and
limited liability companies provide similar forms of business
enterprise. Although we have been unwilling to expand the regulatory
exceptions to allow limited liability companies to substitute for
corporate forms of business enterprise where uniform separation
standards were required to protect the bank from the liability of its
subsidiaries that conduct activities not permissible for national bank
subsidiaries, we believe that no similar impediments exist here. We
also acknowledge that we have been reluctant to extend this exception
to limited liability companies in the past when informal
interpretations were requested.3 However, we believe, and no
commenter raised any contrary argument, that it is appropriate to
extend the statutory exception to cover these substantially similar
organizational structures through this regulation. Thus, subject to the
other limitations in the rule, we are allowing by regulation insured
state banks to invest in limited liability companies that invest in the
acquisition, rehabilitation or construction of a qualified housing
project.
---------------------------------------------------------------------------
\3\ See 2 FDIC Law, Regulations, Related Acts (FDIC) 4903; 1994
WL 763183 (F.D.I.C.) and FDIC 94-50, 1994 FDIC Interp. Ltr. LEXIS
89, October 12, 1994.
---------------------------------------------------------------------------
Grandfathered investments in listed common or preferred stock and
shares of registered investment companies. Available only to certain
grandfathered state banks, Sec. 326.3(a)(2)(iii) of the final
regulation carries forward the statutory exception for investments in
common or preferred stock listed on a national securities exchange and
for shares of investment companies registered under the Investment
Company Act of 1940. Although there is no substantive change, the FDIC
has modified the language of this section to remove negative inferences
and make the text clearer.
To use the grandfathered authority, section 24 requires, among
other things, that a state bank file a notice with the FDIC before
relying on the exception and that the FDIC approve the notice. The
notice requirement, content of notice, presumptions with respect to the
notice, and the maximum permissible investment under the grandfather
also are set out in the current regulation. The references contained in
the current regulation describing the notice content and procedures
were deleted because we believe that most, if not all, of banks
eligible for the grandfather already have filed notices with the FDIC.
Thus, we eliminated language governing the specific content and
processing of notices and cross-referencing the notice procedures under
subpart G of part 303. Any bank that has filed a notice need not file
again.
Paragraph (B) of this section of the final regulation provides that
the exception for listed stock and registered shares ceases to apply in
the event that the bank converts its charter or the bank or its parent
holding company undergoes a change in control. This language restates
the statutory language governing when grandfather rights terminate. As
is discussed in the preamble above in connection with the definition of
``change in control'', the FDIC has revised both the current and
proposed scope of transactions encompassed in the notion of a change in
control.
The regulation continues to provide that in the event an eligible
bank undergoes any transaction that results in the loss of the
exception, the bank is not prohibited from retaining its existing
investments unless the FDIC determines that retaining the investments
will adversely affect the bank and the FDIC orders the bank to divest
the stock and/or shares. This provision has been retained in the final
rule without any change except for the deletion of the citation to
specific authorities the FDIC may rely on concerning divestiture.
Rather than containing specific citations, the final regulation merely
references the FDIC's ability to order divestiture under any applicable
authority. State banks should continue to be aware that any inaction by
the FDIC would not preclude a bank's appropriate banking agency (when
that agency is an agency other than the FDIC) from taking steps to
require divestiture of the stock and/or shares if, in that agency's
judgment, divestiture is warranted.
The FDIC has moved, simplified, and shortened the limit on the
maximum permissible investment in listed stock and registered shares.
The final regulation limits the bank's investment in grandfathered
listed stock and registered shares, when made, to a maximum of 100
percent of tier one capital as measured on the bank's most recent Call
Report prior to the investment. The final rule modifies the proposed
regulatory language somewhat, to clarify how the maximum investment
limit is to be determined. The final rule uses the lower of the bank's
cost or the market value of the stock and shares as the measure of
compliance with this limit. The proposal referred to book value. At the
time the FDIC adopted the current version of the rule, call report
instructions and generally accepted accounting principles (GAAP)
provided that equity securities were generally to be carried at the
lower of cost or market value. The FDIC adopted the book value
[[Page 66288]]
approach at that time, in response to industry comments that a market
value approach would exhaust a bank's grandfather authority as the
value of its stock and shares appreciated. Now that call report
instructions and GAAP require stock and shares covered by the rule to
be reported at market value in many cases, the book value approach no
longer serves the desired purpose. The FDIC is expressly referring to
the lower of cost or market approach in the final rule, in order to
maintain consistency with the current rule. The lower of cost or market
approach is also consistent with the federal banking agencies' rules
for determining tier one capital, which require exclusion of net
unrealized holding losses on available-for-sale equity securities with
readily determinable fair values.
Language indicating that investments by well-capitalized banks in
amounts up to 100 percent of tier one capital will be presumed not to
present a significant risk to the fund was deleted, as was language
indicating that it will be presumed to present a significant risk to
the fund for an undercapitalized bank to invest in amounts that high.
In addition, the proposed rule deleted the language stating the
presumption that, absent some mitigating factor, it will not be
presumed to present a significant risk for an adequately capitalized
bank to invest up to 100 percent of tier one capital. The FDIC received
one comment asking that we retain regulatory language describing these
presumptions for well- and adequately-capitalized banks. The commenter
believes that removal of the presumptions will create uncertainty and
may cause banks to hesitate to take full advantage of these investment
opportunities. The FDIC nonetheless believes at this time that it is
not necessary to expressly state these presumptions in the regulation.
However, this action does not alter the FDIC's position regarding the
presumptions.
Language in the current regulation concerning the divestiture of
stock and/or shares in excess of that permitted by the FDIC (as well as
such investments in excess of 100 percent of the bank's tier one
capital) has been deleted under the proposal as no longer necessary due
to the passage of time. In both instances, the time allowed for such
divestiture has passed.
We note that the statute does not impose any conditions or
restrictions on a bank that enjoys the grandfather in terms of per
issuer limits. The proposal invited comment on whether the FDIC should
impose restrictions under the regulation that would, for example, limit
a bank to investing in less than a controlling interest in any given
issuer. Additionally, we asked whether the regulation should
incorporate other limits or restrictions to ensure the grandfathered
investments do not pose a risk. Although no comments specifically
addressed these questions, several commenters referred to the fact that
most institutions to which the grandfather is applicable have already
filed notices with the FDIC regarding those investments. These
institutions have since complied with any imposed conditions, or
subsequently applied to have the conditions altered or removed. The
commenters do not feel that banks should now be subject to requirements
the FDIC did not originally impose. Moreover, the commenters point out
that the FDIC and state banking authorities routinely review investment
portfolios as part of the supervisory process and can address any
deficiencies on a case-by-case basis. Upon further reflection, the FDIC
is persuaded not to impose any new regulatory requirements on these
grandfathered institutions for directly held investments. However, the
FDIC wants to emphasize that it expects banks using this grandfathered
investment authority to establish prudent limits and controls governing
these investments. Equity securities and registered shares that are
held by the bank must be consistent with the institution's overall
investment goals and will be reviewed by examiners in that context. The
FDIC will not take exception to listed stock and registered shares that
are well regarded by knowledgeable investors, marketable, held in
moderate proportions, and meet the institution's overall investment
goals.
Stock investment in insured depository institutions owned
exclusively by other banks and savings associations (banker's banks).
Section 362.3(b)(2)(iv) of the final regulation continues to reflect
the statutory exception that an insured state bank is not prohibited
from acquiring or retaining the shares of depository institutions that
engage only in activities permissible for national banks, are subject
to examination and are regulated by a state bank supervisor, and are
owned by 20 or more depository institutions not one of which owns more
than 15 percent of the voting shares. In addition, the voting shares
must be held only by depository institutions (other than directors'
qualifying shares or shares held under or acquired through a plan
established for the benefit of the officers and employees). Note that
the proposal modified this exception to no longer limit the bank's
investment in such depository institutions to ``voting'' stock. This
change was made to allow banks to hold non-voting interests in these
entities because section 24(f)(3)(B) of the FDIC Act does not limit the
exception to voting stock. However, the final regulation retains the
reference to ``voting'' stock in determining the various ownership and
control thresholds. The FDIC received no comments on this provision
which is adopted as proposed.
Stock investments in insurance companies. Section 362.3(a)(2)(v) of
the final regulation incorporates statutory exceptions permitting state
banks to hold equity investments in insurance companies. The exceptions
are provided by statute and are implemented in the current version of
part 362. For the most part, the exceptions are carried forward into
the final regulation with no substantive editing. The exceptions are
discussed separately below.
Directors and officers liability insurance corporations. The first
exception permits insured state banks to own stock in corporations that
solely underwrite or reinsure financial institution directors' and
officers' liability insurance or blanket bond group insurance. A bank's
investment in any one corporation is limited to 10 percent of the
outstanding stock. Consistent with the proposal, we eliminated the
present limitation of 10 percent of the ``voting'' stock and changed
the present reference from ``company'' to ``corporation'' conforming
the language to the statutory exception.
While the statute and regulation provide a limit on a bank's
investment in the stock of any one insurance company under this
provision, there is no statutory or regulatory ``aggregate'' investment
limit in all insurance companies, nor does the statute combine these
investments with any other exception under which a state bank may
invest in equity securities. In the past, the FDIC has addressed
investment concentration and diversification issues on a case-by-case
basis. Nonetheless, the FDIC invited comment on whether it should
incorporate aggregate limits on grandfathered bank investments in
insurance companies. Responses addressing this issue were submitted by
two trade associations and one bank consortium. While one trade
association suggested that it would be prudent for the FDIC to
incorporate some form of investment limit, the other two parties
strongly opposed the imposition of any regulatory limit on what are
statutory
[[Page 66289]]
exceptions. The FDIC has elected not to impose aggregate investment
limits on equity investments specifically permitted by statute, nor
will it combine the bank's investments in insurance companies with
other equity investments made pursuant to any regulatory exception.
Instead, the FDIC will continue to address investment concentration and
diversification issues on a case-by-case basis.
Stock of savings bank life insurance company. The second exception
for equity investments in insurance companies permits any insured state
bank located in New York, Massachusetts, or Connecticut to own stock in
savings bank life insurance companies provided that certain consumer
disclosures are made. Again, this regulatory provision mirrors the
specific statutory exception found in section 24. The savings bank life
insurance investment exception is broader than the director and officer
liability insurance company exception discussed above. There are no
individual or aggregate investment limitations for investments in
savings bank life insurance companies.
Consistent with the proposal, the provision implementing this
exception in the current regulation was carried forward into the final
regulation with some modifications. The language describing this
exception was revised to affirmatively permit banks located in New
York, Massachusetts, or Connecticut to own stock in a savings bank life
insurance company provided the company provides the required
disclosures. Additionally, the final regulation alters the required
disclosure from that provided by the current regulation. Rather than
continue the disclosure language currently contained in
Sec. 362.3(b)(3), the FDIC has decided to require disclosures of the
type provided for in the Interagency Statement. As a result, these
companies are required to provide their retail customers with written
and oral disclosures consistent with the Interagency Statement when
selling savings bank life insurance policies, other insurance products,
and annuities. The required disclosures in the Interagency Statement
include a statement that the products are not insured by the FDIC, are
not a deposit or other obligation of, or guaranteed by, the bank, and
are subject to investment risks, including the possible loss of the
principal amount invested. While the existing regulatory language is
similar to the Interagency Statement in what it requires to be
disclosed, it is not identical. The last disclosure--that such products
may involve risk of loss--is not required under the current regulation.
Although commenters generally supported referencing the Interagency
Statement rather than incorporating a different disclosure standard, a
savings bank life insurance company and a United States Congressman
objected to the ``risk of loss'' disclosure. The savings bank life
insurance company claims that a disclosure of that nature is a
falsehood unsupported by factual data. Both commenters are concerned
that the ``risk of loss'' disclosure places savings bank life insurance
companies at a competitive disadvantage relative to other entities
selling life insurance products. The Congressman suggested replacing
the required disclosure concerning ``may involve risk of loss'' with
``may involve market risk, if applicable''.
It is the FDIC's view that FDIC-insured deposits differ from
savings bank life insurance products and annuities because investors in
such products are exposed to a possible loss of the principal amount
invested. The Interagency Statement does not distinguish between the
relative loss exposure presented by various nondeposit investment
products. The distinction is simply between insured deposits and other
investment products. Savings bank life insurance, other insurance
products, and annuities contain an investment risk component exposing
the investor to a loss of principal despite the assertion offered by
one commenter. Further, investors in nondeposit products are exposed to
more than market risks. The FDIC is therefore unwilling to change the
nature of the required disclosure.
Nevertheless, the FDIC recognizes that the language proposed in
Sec. 362.3(a)(2)(v)(B) may be interpreted to mean the subject
disclosure must contain the phrase ``may involve risk of loss''. The
FDIC intends for the disclosures to be consistent with the Interagency
Statement and was simply paraphrasing the respective disclosure content
in the event the Interagency Statement is succeeded by another
statement or regulation. Included in the required disclosures is a
statement specifying that the nondeposit product is ``subject to
investment risks, including possible loss of the principal amount
invested''. The actual Interagency Statement language may convey a less
threatening tone concerning the possibility of loss. To avoid confusion
and reflect the FDIC's actual intent, the phrase ``may involve risk of
loss'' was replaced with ``are subject to investment risks, including
possible loss of the principal amount invested'' in the final rule.
The FDIC is aware that insurance companies, including savings bank
life insurance companies, typically offer annuity products and that
many states regulate annuities through their insurance departments. The
FDIC agrees with the OCC that annuities are investment products that
are subject to the requirements found in the Interagency Statement when
sold to retail customers on bank premises as well as in other instances
specified in the Interagency Statement.
Other activities prohibition. Section 362.3(b) of the final
regulation restates the statutory limit prohibiting insured state banks
from directly or indirectly engaging as principal in any activity that
is not permissible for a national bank. Activity is defined in the rule
as the conduct of business by a state-chartered depository institution
and includes acquiring or retaining any investment. Because acquiring
or retaining an investment is an activity by definition, the proposal
added language to make clear that this prohibition does not supersede
the equity investment exceptions of Sec. 362.3(a)(2). The prohibition
does not apply if one of the statutory exceptions contained in section
24 of the FDI Act (restated in the current regulation and carried
forward in the final regulation) applies. The FDIC has also provided a
regulatory exception to the prohibition on other activities concerning
the acquisition of certain debt-like instruments. Insured state banks
desiring to engage in other activities must submit an application to
the FDIC pursuant to Sec. 362.3(b)(2)(i).
Consent through Application. The limit on activities contained in
section 24 states that an insured state bank may not engage as
principal in any type of activity that is not permissible for a
national bank unless the FDIC has determined that the activity would
pose no significant risk to the appropriate deposit insurance fund, and
the bank is and continues to be in compliance with applicable capital
standards prescribed by the appropriate federal banking agency. Section
362.3(b)(2)(i) establishes an application process for the FDIC to make
the determination concerning risk to the funds. The substance of this
process is unchanged from the current regulation.
Insurance underwriting. This exception tracks the statutory
exception in section 24 which grandfathers: (1) Certain insured state
banks engaged in the underwriting of savings bank life insurance
through a department of the bank; (2) any insured state bank that
engaged in underwriting of insurance on
[[Page 66290]]
or before September 30, 1991, which was reinsured in whole or in part
by the Federal Crop Insurance Corporation; and (3) certain well-
capitalized banks engaged in insurance underwriting through a
department of a bank. The exception is carried forward from the current
regulation with a number of modifications.
The savings bank life insurance exception applies to insured state
banks located in Massachusetts, New York, or Connecticut. To use this
exception, banks must engage in the activity through a department of
the bank meeting the core standards discussed below. The standards for
conducting this activity are taken from the current regulation with the
exception of the disclosure standards which are discussed below. We
moved the requirements for a department from the definitions section to
the substantive portion of the regulation text.
The exception for underwriting federal crop insurance is unchanged
from the current regulation, and there are no regulatory limitations on
the conduct of the activity.
An insured state bank that wishes to use the remaining
grandfathered insurance underwriting exception may do so only if the
insured state bank was lawfully providing insurance, as principal, as
of November 21, 1991. Further, the insured state bank must be well-
capitalized if it is to engage in insurance underwriting and the bank
must conduct the insurance underwriting in a department that meets the
core standards described below. Banks taking advantage of this
grandfather provision may underwrite only the same type of insurance
that was underwritten as of November 21, 1991, and may operate and have
customers only in the same states in which it was underwriting policies
on November 21, 1991. The grandfather authority for this activity does
not terminate upon a change in control of the bank or its parent
holding company.
Both savings bank life insurance activities and grandfathered
insurance underwriting must take place in a department of the bank
which meets certain core operating and separation standards. Consistent
with the disclosure requirements of the current regulation, the core
operating standards require the department to inform its customers that
only the assets of the department may be used to satisfy the
obligations of the department. Note that this language does not require
the bank to say that the bank is not responsible for the obligations of
the department. The bank and the department constitute one corporate
entity. In the event of insolvency, the insurance underwriting
department's assets and liabilities would be segregated from the bank's
assets and liabilities due to the requirements of state law. The
regulatory language of the final rule has been changed to clarify that
a bank seeking to operate its department under separation standards
different than the core standards in the rule may submit an application
to the FDIC.
The final regulation eliminates the proposed operating standard
requirement that the department provide customers with written
disclosures consistent with those in the Interagency Statement. The
FDIC proposed replacing the disclosure statement currently imposed by
Sec. 362.4(g)(1)(iii) with that required in the Interagency Statement
to increase consistency and reduce the regulatory burden of differing
requirements. Upon further reflection, the FDIC has decided that while
it is prudent to eliminate the disclosure currently required by part
362, the proposal to impose the Interagency Statement in connection
with this activity in this regulation is unnecessary. Unlike the
statutory exception permitting banks to engage in savings bank life
insurance activities, the authorizing statute does not require a
customer disclosure as a condition of engaging in other grandfathered
insurance activities. Nevertheless, banks engaged in grandfathered
insurance underwriting continue to be subject to the Interagency
Statement in connection with sales to bank customers, including the
disclosure provisions of that statement. Comments support this change
and recognize that any retail sale of nondeposit investment products to
bank customers is subject to the Interagency Statement if made on bank
premises, by a bank employee, or pursuant to a compensated referral.
The FDIC cannot, however, eliminate the regulatory requirement that
insured state banks engaged in savings bank life insurance activities
make disclosures to all consumers. Section 24(e) of the FDI Act
authorizes this activity only if the bank meets the consumer disclosure
requirements. Thus, under the statute, the FDIC must promulgate
consumer disclosures for savings bank life insurance. Section
362.4(c)(1) of the current regulation addresses banks engaging in
savings bank life insurance underwriting activities. The referenced
section requires the bank to make certain disclosures to |
