[Federal Register: September 12, 1997 (Volume 62, Number 177)]
[Proposed Rules]
[Page 47969-48025]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12se97-16]
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Proposed Rules
Federal Register
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This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 47969]]
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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: Notice of proposed rulemaking.
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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 is
seeking public comment on its proposal to revise and consolidate its
rules and regulations governing activities and investments of insured
state banks and insured savings associations. The FDIC proposes to
combine its regulations governing the activities and investments of
insured state banks with those governing insured savings associations.
In addition, the proposal updates the FDIC's regulations governing the
safety and soundness of securities activities of subsidiaries and
affiliates of insured state nonmember banks. The FDIC's proposal
modernizes this group of regulations and harmonizes the provisions
governing activities that are not permissible for national banks with
those governing the securities activities of state nonmember banks. The
proposed regulation will make a number of substantive changes and will
revise 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 proposal establishes a number of new exceptions and will
allow institutions to conduct certain activities after providing the
FDIC with notice rather than filing an application. The proposal also
will revise these regulations by deleting obsolete provisions,
rewriting the regulatory text to make it more readable, removing a
number of the current restrictions on those activities and conforming
the disclosures required under the current regulation to an existing
interagency statement concerning the retail sales of nondeposit
investment products.
DATES: Comments must be received by December 11, 1997.
ADDRESSES: Send written comments to Robert E. Feldman, Executive
Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments
may be hand delivered to the guard station at the rear of the 17th
Street Building (located on F Street), on business days between 7:00
a.m. and 5:00 p.m. (Fax number (202) 898-3838; Internet Address:
comments@fdic.gov). Comments may be inspected and photocopied in the
FDIC Public Information Center, Room 100, 801 17th Street, N.W.
Washington, D.C. 20429, between 9:00 a.m. and 4:30 p.m. on business
days.
FOR FURTHER INFORMATION CONTACT: Curtis Vaughn, Examination Specialist,
(202/898-6759) or John Jilovec, Examination Specialist, (202/898-8958)
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) requires 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 has reviewed part 362
``Activities and Investments of Insured State Banks,'' Sec. 303.13
``Applications and Notices by Savings Associations,'' and Sec. 337.4
``Securities Activities of Subsidiaries of Insured State Banks: Bank
Transactions with Affiliated Securities Companies' and proposes to make
a number of changes to those regulations. The proposal is described in
more detail below. In brief, however, the proposal would restructure
existing part 362, placing the substance of the text of the current
regulation into new subpart A. Subpart A would address the Activities
of Insured State Banks which implements 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. In addition, the proposal would
move the FDIC's regulations governing the securities activities of
subsidiaries of insured state nonmember banks (currently at 12 CFR
337.4) into subpart A of part 362 and revise those 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 to conform the required disclosures to the
Interagency Statement on the Retail Sale of Nondeposit Investment
Products (Interagency Statement).
Safety and Soundness Rules Governing Insured State Nonmember Banks
would be set out in new subpart B. Subpart B would establish 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.
Existing Sec. 303.13 of this chapter which relates to activities of
state savings associations and filings by all savings associations
would be revised in a number of ways and primarily placed in new
subpart C of part 362. Procedures to be used by all savings
associations when Acquiring, Establishing, or Conducting New Activities
through a Subsidiary would be placed in new subpart D. Subpart E would
contain the revised provisions concerning application and notice
procedures as well as delegations for insured state banks. Subpart F
would contain the revised provisions concerning application and notice
procedures as well as delegations for insured savings associations.
[[Page 47970]]
In addition, the FDIC is processing a complete revision of part 303
of the FDIC's rules and regulations. Part 303 contains the FDIC's
applications procedures and delegations of authority. As a part of that
process and for ease of reference, the FDIC is proposing to remove the
applications procedures relating to activities and investments of
insured state banks from part 362 and place them in subpart G of part
303. The procedures applicable to insured savings associations will be
consolidated in subpart H of part 303. We anticipate that the proposed
changes to part 303 will be published for comment within 90 days of
today's publication. At that time, subparts G and H of part 303 will be
designated as the place where the text of subparts E and F of this
proposed rule eventually will be located.
Part 362 of the FDIC's regulations implements the provisions of
section 24 of the FDI Act (12 U.S.C. 1831a). 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. In addition,
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. 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.
Section 303.13 of the FDIC's regulations (12 CFR 303.13) implements
sections 28 and 18(m) of the FDI Act. 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
in the two provisions which caused the implementing regulations to
differ in some respects.
Section 18(m) of the FDI Act (12 U.S.C. 1828(m)) 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 (12 U.S.C. 1831e) 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 (HOLA, 12 U.S.C. 1464(t)). 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 establishes 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 establishes procedures to give
prior notice for the establishment or acquisition of a subsidiary or
the conduct of new activities through a subsidiary.
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 that are impermissible for national banks under
section 16 of the Banking Act of 1933 (12 U.S.C. section 24 seventh),
commonly known as the Glass-Steagall Act. It requires that these
subsidiaries qualify as bona fide subsidiaries, establishes transaction
restrictions between a bank and its subsidiaries or other affiliates
that engage in securities activities that are prohibited for national
banks, 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 a
securities subsidiary engaging in activities that are impermissible for
a national bank 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 proposed rule) to
amend part 362. Under the proposed rule a notice procedure would have
replaced the application currently required in the case of real estate
investment, 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. Under the proposal, all real estate
activities would be required to be conducted in a majority-owned
subsidiary, while life insurance policies and annuity contracts could
be held directly or through a majority-owned subsidiary. Notices would
have been filed with the appropriate FDIC regional office. The FDIC
regional office would have had 60 days to process a notice under the
proposal, with a possible extension of 30 days. If the FDIC did not
object to the
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notice prior to the expiration of the notice period (or any extension),
the bank could have proceeded with the investment activity. In the
event a bank fell out of compliance with any of the eligibility
conditions after starting the activity, it would have been required to
report the noncompliance to the appropriate FDIC regional office within
10 business days of the occurrence.
With respect to investments in real estate activities, the August
proposed rule set forth 9 conditions which banks would have had to meet
to be ``eligible'' for the notice procedure. These 9 conditions
addressed the bank's capital levels and financial condition (must be
well-capitalized after deducting investment in real estate and must
have a Uniform Financial Institutions Rating System (UFIRS) rating of 1
or 2), how the real estate activity would be conducted (a ``bona fide''
subsidiary which only engages in real estate activities), management
experience and independence of the real estate subsidiary (subsidiary
must have management with real estate experience, a written business
plan, and at least one director with real estate experience who is not
an employee, officer or director of the bank), and placed limits on
bank transactions with the subsidiary and customers (sections 23A and
23B of the Federal Reserve Act applied to transactions between the bank
and its subsidiary and tying and insider transactions were prohibited).
The August proposed rule also set forth the contents of the notice that
was to be sent to the FDIC regional office. The required information
included 7 items; information regarding the proposed activity (general
description of proposed real estate activity, a copy of the written
business plan, and a description of the subsidiary's operations
including management's expertise), the amount of investment and impact
on bank capital (aggregate amount of investment in activity and pro
forma effect of deducting such investments on the bank's capital
levels) and the bank's authority to engage in such activity (copy of
the board of directors' resolution authorizing activity and
identification of state law permitting the activity). Under the August
proposal, the regional office could have requested additional
information.
After considering the comments to the August proposed rule and
reconsidering the issues underlying the current regulation, we have
restructured the approach we are taking under part 362. As a result,
the FDIC withdrew the August proposed rule, which is published
elsewhere in today's Federal Register in favor of the more
comprehensive approach presently proposed.
While the August proposed rule amended existing part 362, the
current proposal would replace existing part 362. Unlike the rule
proposed in August, the current proposal is not limited to considering
the notice procedure used under part 362. In drafting the current
proposal, we have deleted items that are either duplicative,
unnecessary due to the passage of time, or have proven unwarranted
given our experience in implementing section 24 over the last five
years. In addition, we have refined the notice procedure that was
proposed in August. We are no longer recommending a life insurance
policy and annuity contract investment notice due to recent guidance
provided by the Office of the Comptroller of the Currency (OCC). The
OCC's guidance 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. We invite comment on whether we are correct
in concluding that there is no longer a need for a notice process for
life insurance and annuity investments which are impermissible for
national banks.
II. Description of Proposal
The FDIC proposes to divide part 362 into six subparts. Before
describing the reorganization of part 362, we would like to make a few
general comments concerning the proposal. First, 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. Second, current part 362 contains a number of
provisions relating to divesture. We have deleted any divestiture
provisions in the current proposal that we found to be unnecessary due
to the passage of time. Third, we are proposing to combine the rules
covering the equity investments of banks and savings associations into
part 362 and to regulate these investments as consistently as possible
given the limitations imposed by statute. Fourth, unlike the
regulations promulgated by the Office of Thrift Supervision we do not
distinguish between activities carried out by a first tier subsidiary
of a savings association versus a lower-tier subsidiary. 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 proposed regulation
does not incorporate sections 23A and 23B of the Federal Reserve Act by
cross-reference; rather, the proposal adapts the principles set forth
in sections 23A and 23B to the bank/subsidiary relationship as
appropriate. In drafting the proposed revision to part 362, 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. The FDIC
requests comment on whether these proposals assist in the application
of the principles of 23A and 23B to the subsidiaries of insured
depository institutions. We also request comment on all aspects of
these restrictions including whether 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 proposed regulation would deal 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 would essentially
become subpart A under the current proposal. The procedural provisions
of existing part 362 have been transferred to subpart E. As proposed,
subpart A addresses the activities of the insured state bank in
Sec. 362.3. The activities carried on in a subsidiary of the insured
state bank are addressed in a separate section (see Sec. 362.4 in the
proposed regulation). We are soliciting comment on whether this
reorganization of part 362 is helpful.
The ability of insured state banks to engage in activities as
principal is directly linked to the ability of a national bank to
engage in the same type of activity. National banks have a limited
ability to hold equity investments in real estate. Even so, if a
particular real estate investment has been determined to be permissible
for a national bank, an insured state bank only needs to document that
determination to undertake the
[[Page 47972]]
investment. Insured state banks that want to undertake a real estate
investment which is impermissible for a national bank (or continue to
hold the real estate investment in the case of investments acquired
before enactment of section 24 of the FDI Act), must file an
application with the FDIC for consent. The FDIC may approve such
applications if the investment is made through a majority-owned
subsidiary, the institution meets the applicable capital standards set
by the appropriate Federal banking agency and the FDIC determines that
the activity does not pose a significant risk to the appropriate
deposit insurance fund.
The FDIC has determined that real estate investment activities may
pose significant risks to the deposit insurance funds. For that reason,
the FDIC is proposing to establish standards that an insured state
nonmember bank must meet before engaging in real estate investment
activities that are not permissible for a national bank. Under a safety
and soundness standard, subpart B of the proposed regulation requires
insured state nonmember banks to meet the standards established by the
FDIC, even if the Comptroller of the Currency determines that those
activities are permissible for a national bank subsidiary. Subpart B
also would establish 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 will only cover 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.
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 national bank unless the standards
established under the proposed regulation are met.
Subpart C of the proposed regulation concerns the activities and
investments of insured state savings associations. The provisions
applicable to activities of savings associations currently appearing in
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 would be treated consistently with
the treatment provided insured state banks. Thus, we revised a number
of definitions currently contained in Sec. 303.13 to track the
definitions used in subpart A. We request comment on whether the
revisions made in subpart C contribute to the efficient operation of
savings associations and their service corporations while continuing to
implement the statutory requirements.
Subpart D of the proposal 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. We moved this requirement to a new subpart to
accommodate Federally chartered savings associations by limiting the
amount of regulation text they would have to read to comply with this
statutory notice. Comment is invited on whether this separation avoids
confusion, enhances readability and simplifies compliance.
Subparts E and F of the proposal each contain the notice and
application requirements and the delegations of authority for the
substantive matters covered by the proposal for insured state banks and
state savings associations, respectively.
The FDIC requests comments about all aspects of the proposed
revision to part 362. In addition, the FDIC is raising specific
questions for public comment as set out in connection with the analysis
of the proposal below.
III. Section by Section Analysis
A. Subpart A--Activities of Insured State Banks
Section 362.1 Purpose and Scope
The purpose and scope of subpart A is to ensure that the 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. This subpart 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, or
conducted as trustee. We moved this language from Sec. 362.2(c) of the
current version of part 362 where the term ``as principal'' is 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. This result
obtains from the fact that 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 would be 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,
we have moved this language to the purpose and scope paragraph. We
[[Page 47973]]
request comment on whether moving this language to the purpose and
scope paragraph assists users of this rule in interpreting its
parameters. We also invite comment on whether the ``as principal''
definition still would be necessary.
Equity investments acquired in connection with debts previously
contracted (DPC) that are held within the shorter of the time limits
prescribed by state or federal law are not subject to the limitations
of this subpart. The exclusion of equity investments acquired in
connection with DPC has been moved from the definition of ``Equity
investment'' 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.
However, the intent of the insured state bank in holding equity
investments acquired in connection with DPC continues to be relevant to
the analysis of whether the equity investment is permitted. 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. 85,619, which interprets and
applies the National Bank Act) or no later than the time permitted
under state law if that time period is shorter.
In addition, any interest taken DPC may not be held for investment
purposes. For example, while a bank may be able to expend monies in
connection with DPC property and/or take other actions with regard to
that property, if those expenditures and actions are speculative in
nature or go beyond what is necessary and prudent in order for the bank
to recover on the loan, the property will not fall within the DPC
exclusion. The FDIC expects that bank management will document that DPC
property is being actively marketed and 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 to highlight this issue, provide clarity and alert the
reader of this rule, we have moved to the purpose and scope paragraph
the language governing any interest in real estate in which the real
property is (a) 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 (b) used as public welfare investments of
a type permissible for national banks. 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 for 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 in no later than ten years. (12 CFR 34). We
understand that the time periods set forth in the OCC's regulation
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
substitute its own judgment to determine when a reasonable time has
elapsed for holding the property.
A subsidiary of an insured state bank may not engage in real estate
investment activities 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 real
estate investment activities that are not permissible for a subsidiary
of a national bank. 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 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--definitions. We have left
most of the definitions unchanged or edited them to enhance clarity or
readability without changing the meaning.
To standardize as many definitions as possible, we have
incorporated several definitions from section 3 of the FDI Act (12 U.S.
C. 1813). These definitions are ``Bank,'' ``State bank,'' ``Savings
association,'' ``State savings association,'' ``Depository
institution,'' ``Insured depository institution,'' ``Insured state
bank,'' ``Federal savings association,'' and ``Insured state nonmember
bank.'' This standardization required that we delete the definitions of
``depository institution'' and ``insured state bank''currently found in
part 362. No substantive change was intended by this change. The
definitions that were added by this change are ``Bank,'' ``State
bank,'' ``Savings association,'' ``State savings association,''
``Insured depository institution,'' ``Federal savings association,''
and ``Insured state nonmember bank.'' These definitions were added to
provide clarity throughout the proposed part 362 because we are
incorporating so many definitions from subpart A into subpart B
governing safety and soundness concerns of insured state nonmember
banks, subpart C governing the activities of state savings
associations, and subpart D governing subsidiaries of all savings
associations. We invite comment on whether readers view these
definitions as needing further changes to enhance clarity and
readability. We also invite comment on whether any of
[[Page 47974]]
the changes we have made may have changed the substance of the
regulation in ways that we may not have intended.
The definitions that have been left unchanged or edited to enhance
clarity or readability without changing the meaning are the following:
``Control,'' ``Extension of credit,'' ``Executive officer,''
``Director,'' ``Principal shareholder,'' ``Related interest,''
``National Securities exchange,'' ``Residents of state,''
``Subsidiary,'' and ``Tier one capital.'' We invite comment on whether
readers view these definitions as needing further changes to enhance
clarity and readability. We also invite comment on whether any of the
changes we have made may have changed the substance of the regulation
in ways that we may not have intended.
The name of one definition has been simplified without
substantively changing the meaning of the definition. That definition
is currently found in Sec. 362.2(g) and is described as follows ``An
insured state bank will be considered to convert its charter.'' We
moved this definition to Sec. 362.2(e) and call this definition,
``Convert its charter.'' The substance of the definition is intended to
remain unchanged by this revised language. We invite comment on whether
readers view the change in this definition as needing any further
changes to enhance clarity and readability. We also invite comment on
whether any of the changes we have made to this definition may have
changed the substance of the regulation in ways that we may not have
intended.
Although most of the definitions as set out in the proposal are the
same or virtually unchanged, a few of the definitions in the proposal
have been substantively revised. The proposed changes to these
definitions are discussed below.
We deleted 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.'' We moved the
substance of the information that was contained in these definitions
into the scope paragraph in Sec. 362.1. We thought that including the
information that was in these definitions in the scope paragraph made
the coverage of the rule clearer to the reader and was consistent with
the purpose of the scope paragraph. We expect that some readers may
save time by realizing sooner that the regulation may be inapplicable
to conduct contemplated by a particular bank. We also thought that the
reader might be more likely to consider the scope paragraph than to
consider the definition section when reading the rule to determine its
applicability. We concluded that it would be unnecessary to duplicate
this same information in the definition section. We invite comment on
whether readers prefer to see these concepts in the scope paragraph and
whether readers also would prefer to see these concepts defined.
We 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 thought that it
was unnecessary to continue to restate this information in the
definition section of the regulation. No substantive change is intended
by this simplification of the language. In addition, 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. We conformed the definition of ``Equity
investment'' by deleting the reference to the deleted definition of
``Equity interest in real estate.'' No substantive change is intended
by shortening this language. We invite comment on whether the readers
view the definition of ``Equity interest in real estate'' as necessary
to enhance clarity and readability on these issues as well as whether
readers prefer seeing these concepts in the scope paragraph.
The remainder of the definition of ``Equity investment'' has been
shortened and edited to enhance readability. We intend no substantive
change by shortening this language. This concept is intended to
encompass an investment in an equity security or real estate as it does
in the current definition. We invite comment on the changes to this
definition and whether any further changes are needed.
With regard to the definition of ``Equity security,'' we modified
this definition by deleting the references to permissible national bank
holdings such as equity securities being held as a result of a
foreclosure or other arrangements concerning debt previously
contracted. Language discussing the exclusion of DPC and other
investments that are permissible for national banks has been relocated
to the scope paragraph for the reasons stated above. Thus, the equity
investment definitions no longer include these references. We intend no
substantive change through the deletion of this redundant language. We
invite comment on whether any ambiguity or unintended change in the
meaning may be created by removing this language from the definition.
We added a shorter definition of ``Real estate investment
activity'' meaning 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 and in Sec. 362.7 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
that would not be permissible for a national bank, itself. We invite
comment on this definition, including its meaning and clarity as well
as the underlying safety and soundness proposal in subpart B. We
specifically invite comment on the exclusion of real estate leasing
from the definition of real estate investment activity. The proposal
has eliminated real estate leasing from the definition of real estate
investment activity in order to assure that banks using the notice
procedure are not getting involved in a commercial business. The notice
procedures are designed for institutions that wish to hold parcels of
real estate for ultimate sale. If an institution wishes to hold the
property to lease it for ongoing business purposes, we believe the
proposal should be considered under the application process.
We deleted the definitions of ``Investment in department'' and
``Department'' because we thought they were no longer needed in the
revised regulation text. The core standards applicable to a department
of a bank are set out in detail in Sec. 362.3(c) and defining the term
``Department'' no longer seems to be necessary. Regarding the
definition of ``Investment in department,'' we also considered this
definition unnecessary. We believe that if a calculation of
``Investment in department'' needs to be made, we will defer to state
law on this issue. We invite comment on whether the readers view these
definitions as necessary to enhance clarity and readability on these
issues. We also request comment on whether deference to state law on
this investment issue would cause any unintended consequences that we
have not foreseen.
Similarly, we deleted the definition of ``Investment in
subsidiary'' because the definition is no longer needed in the revised
regulation text. The core standards applicable to an insured state bank
and its subsidiary make a
[[Page 47975]]
definition of ``Investment in subsidiary'' superfluous. The core
standards contained in Sec. 362.4(c) set out the requirements in
detail. Therefore, defining the term ``Investment in subsidiary'' no
longer seems to be necessary. We invite comment on whether the readers
view this definition or a similar definition as necessary to enhance
clarity and readability on these issues.
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). We thought that including these criteria as a part
of the substantive regulation text in that subsection, rather than as a
definition, makes reading the rule easier and the meaning clearer. We
invite comment on whether readers prefer to see this concept set forth
in the substantive section of the rule or the definition section and
whether readers believe any additional definition is necessary to
enhance clarity and readability.
The proposal 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'' as 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 definition ``Lower income'' is relevant for purposes of
applying the 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 would 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. We
note that the change will have the effect of expanding the housing
projects that qualify for the exception. We invite comment on this
change.
We have simplified the definition of the term ``Activity.'' As
modified the definition includes all investments. Where equity
investments are intended to be excluded, we expressly exclude those
investments in the regulation text. We invite comment on whether the
modification to the definition enhances clarity or whether the longer
definition found in the current regulation should be reinstated. In
particular, we invite comment on whether the definition should be
modified to take into account in some fashion a recent interpretation
by the agency under which it was determined that the act of making a
political campaign contribution does not constitute an ``activity'' for
purposes of part 362. The interpretation uses a three prong test 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. If at least two of the tests
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. 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 test 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 test 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 test 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 unto itself as it
simply is entered into in support of the ``activity'' of taking
deposits. We also invite any other comments that would make this
definition easier to understand and apply.
The proposal modifies the definition of ``Company'' to add limited
liability companies to the list of entities that will be considered a
company. This change in the definition is being proposed in recognition
of the creation of limited liability companies and their growing
prevalence in the market place. We invite comment on whether this
addition to the list of forms of business enterprise is appropriate and
whether we should add any more forms of business enterprise.
The FDIC has changed the definition of ``Significant risk to the
fund'' by adding 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. We invite comment on
whether the definition should be modified in some other manner and if
so how. Our interpretation of the definition remains unchanged.
Significant risk to the deposit insurance fund shall be 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 final indicated that the FDIC
recognized that no investment or activity may be said to be without
risk under all circumstances and that such 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 emphasis rather is on
whether there is a high degree of likelihood under all of the
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 will not be
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
risk to the fund only be found if a particular activity or investment
is expected to result in the imminent failure of a bank. The suggestion
was rejected as the FDIC determined at that time that it was
appropriate to approach the issue conservatively. We think that this
conservatism is more clearly articulated in this modification to the
definition. We invite comments on whether this
[[Page 47976]]
additional language is necessary and whether any other language should
be added.
We 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 appropriate Federal banking agency.
We decided that it would simplify the calculations for the various
state-chartered depository institutions if the capital definition
imported the definitions used by those institutions when they deal with
their appropriate Federal banking agency. We deleted the other terms
defined under Sec. 362.2(x) as unnecessary due to the changes in the
regulation text. We invite comment on whether we have missed an item
that still needs to be included in this definition.
We added definitions of the following terms: ``Change in control,''
``Institution,'' ``Majority-owned subsidiary,'' ``Security'' and
``State-chartered depository institution.''
Under section 24 of the FDI Act, the grandfather with respect to
common or preferred stock listed on a national securities exchange and
shares of registered investment companies ceases to apply if the bank
undergoes a change in control. The phrase ``Change in control'' is
defined for the purposes of part 362 in what is currently
Sec. 362.3(b)(4)(ii) of the regulation. Under the proposal, the
definition is relocated into the definitions section and modified.
Under the current regulation a ``Change in control'' that will
result in the loss of the grandfather is defined to mean a transaction
in which the bank converts its charter, 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 regulations
implementing section 7(j), 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, a transaction in which the bank is acquired
by or merged into a bank that is not eligible for the grandfather, or a
transaction in which control of the bank's parent company changes. The
proposal would narrow the definition of ``Change in control'' by
defining the phrase to only encompass transactions subject to section
7(j) of the FDI Act (except for transactions which trigger the
presumptions under FDIC's regulations implementing section 7(j) or the
FRB's regulations implementing section 7(j)) and transactions in which
the bank is acquired by or merged into a bank that is not eligible for
the grandfather. This definition change will narrow the instances in
which a bank may lose its grandfathered ability to invest in common or
preferred stock listed on a national securities exchange and shares of
registered investment companies. It is our belief that the revised
definition, if adopted, will more closely approximate when a true
change in control has occurred.
We added a definition of ``Institution'' and defined it to mean the
same as a ``state-chartered depository institution'' to shorten the
drafting of the rule, particularly for those items that are applicable
to both insured state banks and insured state savings associations.
This definition is intended to enhance readability. We invite comment
on whether this definition creates any confusion or ambiguity.
We added a definition of ``Majority-owned subsidiary'' and defined
it to mean any corporation in which the parent insured state bank owns
a majority of the outstanding voting stock. We added this definition to
clarify our intention that the expedited notice procedures only be
available when an insured state bank interposes an entity that gives
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 these entities in a
notice procedure. We have decided that there may have been an ambiguity
in the notice provisions we proposed for comment and published August
23, 1996, in the Federal Register at 61 FR 43486. We intended that an
entity eligible for the notice procedure be in corporate form and
implied that requirement by incorporating the bona fide subsidiary
requirements that included references to a board of directors. The
addition of this definition should make our intention clear that the
notice procedure requires a majority-owned subsidiary to take the
corporate form. We invite comment on this definition, our substantive
decision to require the corporate form for a majority-owned subsidiary
of an insured state bank using the notice procedures, and our decision
to exclude other limited liability business forms from the notice
procedure. We also invite comment on any ambiguities or questions that
this definition may create.
We adopted 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. We invite
comment on any ambiguities or questions that this definition may
create.
We defined ``State-chartered depository institution'' to mean any
state bank or state savings association insured by the FDIC to
eliminate confusion and ambiguity. We invite comment on any ambiguities
or questions that this definition may create.
We invite any general comment on the proposed definitions and
invite any suggestions for additional definitions that would be helpful
to the reader of the regulatory text.
Section 362.3 Activities of Insured State Banks
Equity Investment Prohibition
Section 362.3(a) of the proposal 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 (restated in the current regulation and carried forward in
the proposal) applies. The provision is being retained. The proposal
eliminates the reference to amount that is contained in the current
version of Sec. 362.3(a). We have reconsidered our interpretation of
the language of section 24 where 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
[[Page 47977]]
previously interpreted the language of paragraph (f) as controlling and
read that language into the entire statute. We reconsidered this
approach, decided that it was not the most reasonable construction of
this statute and determined that the language of paragraph (c) is
controlling. Thus, the language of paragraph (c) controls when any
other equity investment is being considered. Therefore, we deleted the
amount language from prohibition in the regulation. We request comment
on this change.
Exception for Majority-Owned Subsidiary
The FDIC proposes to retain the exception which allows investment
in majority-owned subsidiaries 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 is
affirmatively stating that an insured state chartered bank may acquire
or retain investments through a majority-owned subsidiary. 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. It is our understanding that national banks may own a
minority interest in certain types of subsidiaries. (See 12 CFR
5.34(1997)). Therefore, an insured state bank may hold a minority
interest in a subsidiary if a national bank could do so. Thus, the
statute 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 under the regulation. Only investments
that would not be permissible for a national bank must be held through
a majority-owned subsidiary.
The regulation defines the business form of a majority-owned
subsidiary to be a corporation. There may be other forms of business
organization that are suitable for the purposes of this exception such
as partnerships or limited liability companies. The FDIC does not wish
to give blanket authorization to a non-corporate form of organization
since these forms may not provide for the same separations the FDIC
believes to be necessary to protect the insured bank from assuming the
liabilities of its subsidiary. The proposal anticipates that the Board
will review alternate forms of organization to assure that appropriate
separation between the insured depository institution and the
subsidiary is in place. We are soliciting comment on other forms of
business organization which the FDIC may allow. Please provide a
discussion of the separations inherent in alternate forms of business
organization.
To qualify for this exception, the majority-owned subsidiary must
engage in activities that are described in Sec. 362.4(b). The allowable
activities include both statutory and regulatory exceptions to the
general prohibitions of the regulation.
Investments in Qualified Housing Projects
The FDIC proposes to combine the language found in two paragraphs
of the current regulation. The FDIC proposes to retain the combined
paragraphs of the regulation with substantially the same language as
currently in effect. The changes that have been made reflect practical
clarifications resulting from the implications of the technical way the
qualified housing rules work and are not intended to be substantive. In
addition, the FDIC has modified the language of the text to remove
negative inferences and make the text clearer. Section 362.3(a)(2)(ii)
of the proposal provides an exception for qualified housing projects.
Under the exception, an insured state bank is not prohibited from
investing 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 that banks use the figure reported on the bank's most
recent consolidated report of condition prior to making the investment
as the measure of their total assets. If an investment in a qualified
housing project does not exceed the limit at the time the investment
was 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. Comment is 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.'')
Grandfathered Investments in Listed Common or Preferred Stock and
Shares of Registered Investment Companies
The current regulation restates 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 that is available to certain
state banks if they meet the requirements to be eligible for the
grandfather. The statute 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 FDIC proposes to retain the regulatory language
as currently in effect without any substantive change. The exception is
found in Sec. 362.3(a)(2)(iii) of the proposal. Although there would be
no substantive change, the FDIC has modified the language of this
section to remove negative inferences and make the text clearer.
We deleted the reference in the current regulation describing the
notice content and procedure because we believe that most, if not all,
of the banks eligible for the grandfather already have filed notices
with the FDIC. Thus, we shortened the regulation by eliminating
language governing the specific content and processing of the notices.
Investment in common or preferred stock listed on a national securities
exchange or shares of an investment company is governed by the language
of the statute. Notices must conform to the statutory requirements
whether filed previously or filed in the future. Any bank that has
filed a notice need not file again. Comment is invited on whether the
regulatory filing requirements should be retained and eventually moved
into part 303 of this chapter.
Section 362.3(a)(2)(iii)(A) of the proposal implements the
grandfathered listed stock and registered shares provision found in
section 24(f)(2) of the FDI Act. Paragraph (B) of this section of the
proposal 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
[[Page 47978]]
grandfather rights terminate. State banks should continue to be aware
that, depending upon the circumstances, the exception may be considered
lost after a merger transaction in which an eligible bank is the
survivor. For example, if a state bank that is not eligible for the
exception is merged into a much smaller state bank that is eligible for
the exception, the FDIC may determine that in substance the eligible
bank has been acquired by a bank that is not eligible for the
exception.
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
regulation without any change except for the deletion of the citation
to specific authorities the FDIC may rely on to order divestiture.
Rather than containing specific citations, the proposal merely
references 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.
Finally, the FDIC has moved, simplified and shortened the limit on
the maximum permissible investment in listed stock and registered
shares. The proposal limits the investment in grandfathered listed
stock and registered shares to a maximum of one hundred percent (100
percent) of tier one capital as measured on the bank's most recent
consolidated report of condition. The FDIC continues to use book value
as the measure of compliance with this limitation. 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 is being deleted as is 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, we
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. At this time we believe that it is not necessary to
expressly state these presumptions in the regulation.
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) is 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.
Comment is invited on whether this grandfather exception for
investment in listed stock and registered shares should be applied by
the FDIC as an exception that is separate and distinct from any other
exception under the regulation that would allow a subsidiary of an
insured state bank to hold equity securities. In short, should we allow
this exception in addition to the exception for stock discussed below
or should the FDIC consider any listed stock held by a subsidiary of
the bank pursuant to an exception in the regulation toward the 100
percent of tier one capital limit under this exception? We note that
the statute does not itself impose any conditions or restrictions on a
bank that enjoys the grandfather in terms of per issuer limits. Comment
is sought on whether it is appropriate to impose restrictions under the
regulation that would, for example, limit a bank to investing in less
than a controlling interest in any given issuer. Is there some other
limit or restriction the FDIC should consider imposing by regulation
that is important to ensuring that the grandfathered investments do not
pose a risk? Should this be done, if at all, solely through the notice
and approval process?
Stock Investment in Insured Depository Institutions Owned Exclusively
by Other Banks and Savings Associations
The content of the proposed regulation reflects 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). Section 24(f)(3)(B) of the FDI
Act does not limit the exception to voting stock. We are not proposing
to eliminate the reference to ``voting'' in the current regulation when
referencing control of the insured depository institution. Any other
reference to voting stock has been eliminated in the exception to allow
holding of non-voting stock. The FDIC seeks comment concerning
retaining the reference to ``voting'' stock when calculating the 15
percent ownership limitation contained in the statute.
Stock Investments in Insurance Companies
Section 362.3(b)(2)(v) of the proposal contains exceptions that
permit state banks to hold equity investments in insurance companies.
The exceptions are provided by statute and implemented in the current
version of part 362. For the most part, we brought the exceptions
forward into this proposal with no substantive editing. The exceptions
are discussed separately below.
Directors and Officers Liability Insurance Corporations
The first statutory 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. 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, there is no
statutory or regulatory ``aggregate'' investment limit in all insurance
companies nor does the statute combine this equity investment 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. The
FDIC is not at this time proposing to impose aggregate investment
limits on equity investments which have specific statutory carve outs
nor are we proposing to combine those investments with other equity
investments made under the exceptions to the regulation for which
aggregate investments are being proposed. The FDIC would like to
receive comment, however, on whether there should be an ``aggregate''
investment limit for equity investments in insurance companies.
[[Page 47979]]
Stock of Savings Bank Life Insurance Company
The second statutory exception for equity investments in insurance
companies permits any insured state bank located in the states of New
York, Massachusetts and Connecticut to own stock in savings bank life
insurance companies provided that consumer disclosures are made. Again,
this regulatory provision mirrors the specific statutory carve out
found in Section 24 and is contained in the present regulation. We have
carried this provision forward into the proposal with some changes.
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.
The proposed language is shorter than the existing regulation and makes
a substantive change by clarifying what the required disclosures are
for insured banks selling these products. As was indicated above,
insured banks located in New York, Massachusetts and Connecticut are
permitted to invest in the stock of a savings bank life insurance
company as long as certain disclosure requirements are met. The FDIC
proposes to amend the regulatory language to specifically require
compliance with the Interagency Statement in lieu of the disclosures
presently set out in the regulation. Insured banks selling savings bank
life insurance policies, other insurance products and annuities will be
required to provide customers with written disclosures that are
consistent with the Interagency Statement which include a statement
that the products are not insured by the FDIC, are not guaranteed by
the bank, and may involve risk of loss. The last disclosure--that such
products may involve risk of loss--is not currently required under the
regulation.
The FDIC would like to request comment regarding the disclosure
obligations of insured banks. It is the FDIC's view that savings bank
life insurance, other insurance products and annuities are ``nondeposit
investment products'' as that term is used in the Interagency
Statement. The FDIC is aware that insurance companies typically offer
annuity products and that many states regulate annuities through their
insurance departments. However, the FDIC agrees with the Comptroller of
the Currency that annuities are financial products and not insurance.
Nevertheless, annuities are nondeposit investment products and are
therefore subject to the requirements found in the Interagency
Statement when sold to retail customers on bank premises as well as in
other instances. On this basis, all the requirements in the Interagency
Statement should apply to the marketing and sale of annuities by a
financial institution.
While the existing regulatory language is similar to the
Interagency Statement in what it requires to be disclosed, it is not
identical. The FDIC believes the proposed changes will clarify the
standards which are to be followed by insured state banks.
It could be argued that the regulatory language in this part
repeats existing guidance and is unnecessary. We note, however, that
the statute requires that disclosures be made in order for the
exception to be available. While the Interagency Statement is
enforceable in the sense that noncompliance may constitute an unsafe or
unsound banking practice that may give rise to a cease and desist
action, the Interagency Statement is not itself a regulation with the
force and effect of law.
We seek comments on whether it would be preferable for the
regulation to fully set out the disclosure requirements rather than
cross referencing the Interagency Statement. Commenters should address
these points, as well as discuss the differences between enforcing
specific regulatory language versus enforcing a policy statement. We
invite comments on the applicability of the Interagency Statement in
the absence of the language referencing it in this regulation. We
invite comment on whether using the Interagency Statement makes
compliance easier for banks as it provides uniform standards applicable
to multiple products. We also invite comment on any other issues that
are of concern to the industry or the public in using these particular
disclosures when selling insurance and annuity products.
Other Activities Prohibition
Section 362.3(b) of the proposal restates the statutory prohibition
on insured state banks directly or indirectly engaging as principal in
any activity that is not permissible for a national bank. Activity is
defined in this proposal as the conduct of business by a state-
chartered depository institution, including acquiring or retaining any
investment. Because acquiring or retaining an investment is an activity
by definition, language has been added to make clear that this
prohibition does not supersede the equity investment exception of
Sec. 362.3(b). 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 proposal) applies. The
FDIC has provided two regulatory exceptions to the prohibition on other
activities.
Consent Through Application
The limitation on activities contained in the statute 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 of the
FDI Act which grandfathers (1) an insured state bank 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 or before September 30, 1991, which was reinsured in whole
or in part by the Federal Crop Insurance Corporation; and (3) well-
capitalized banks engaged in insurance underwriting through a
department of a bank. The exception is carried over from the current
regulation with a number of proposed modifications.
To use the savings bank life insurance exception, an insured state
bank located in Massachusetts, New York or Connecticut must engage in
the activity through a department of the bank that meets core standards
discussed below. The standards for conducting this activity are taken
from the current regulation with the exception of disclosure standards
which are discussed below. We have moved the requirements for a
department from the definitions to the substantive portion of the
regulation text.
The exception for underwriting federal crop insurance reflects the
statutory exception. This exception 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 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, an insured
[[Page 47980]]
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 only may
underwrite the same type of insurance that was underwritten as of
November 21, 1991 and only may operate and have customers 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 standards. The core operating standards for
the department require the department to provide customers with written
disclosures that are consistent with those in the Interagency
Statement. Consistent with the disclosure requirements of the current
regulation, the proposed rule requires 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 obligated 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 FDIC views any financial product that is not a deposit and
entails some investment component to be a ``nondeposit investment
product'' subject to the Interagency Statement. Part 362 was
promulgated in 1992 before the Interagency Statement was issued in
February of 1994. While the disclosures currently required by part 362
are similar to the disclosures set out in the Interagency Statement,
they are not identical. Banks that engage in insurance underwriting are
thus covered by the Interagency Statement and part 362 and must comply
with similar but somewhat different requirements. We are proposing to
cross reference the Interagency Statement in part 362 to make
compliance clearer. We believe that using the uniform standards set
forth in the Interagency Statement will make compliance easier.
In the case of insurance underwriting activities conducted by a
department of the bank, the disclosure required by the Interagency
Statement that the product is not an obligation of the bank is not
correct as noted above, and the suggested language in the regulation
does not require this disclosure. This clarification is consistent with
other interpretations of the Interagency Statement which stated that
disclosures should be consistent with the types of products offered.
The FDIC would like to receive comment on whether such clarification is
necessary or whether the regulation language is seen as duplicating
other guidance.
The FDIC notes that the consumer disclosures are statutorily
required for savings bank life insurance. The Interagency Statement is
joint supervisory guidance issued by the Federal Banking Agencies, not
a regulation. The FDIC requests comment regarding the enforceability of
the Interagency Statement versus a regulation promulgated under the
rulemaking requirements of the Administrative Procedures Act.
The core separation standards restate the requirements currently
found in the definition of department. These standards require that the
department (1) be physically distinct from the remainder of the bank,
(2) maintain separate accounting and other records, (3) have assets,
liabilities, obligations and expenses that are separate and distinct
from those of the remainder of the bank; and (4) be subject to state
statutes that require the obligations, liabilities and expenses be
satisfied only with the assets of the department. The standards in the
proposed regulation are not changed from the current regulation, but
have been moved from the definitions section of the regulation to
ensure that requirements of the rule are shown in connection with the
appropriate regulatory exception.
Acquiring and Retaining Adjustable Rate and Money Market Preferred
Stock by the Bank
The proposal provides an exception that allows a state bank to
invest in up to 15 percent of the bank's tier one capital in adjustable
rate preferred stock and money market (auction rate) preferred stock
without filing an application with the FDIC. The exception was adopted
when the 1992 version of the regulation was adopted in final form. At
that time after reviewing comments, the FDIC found that adjustable rate
preferred stock and money market (auction rate) preferred stock were
essentially substitutes for money market investments such as commercial
paper and that their characteristics are closer to debt than to equity
securities. Therefore, money market preferred stock and adjustable rate
preferred stock were excluded from the definition of equity security.
As a result, these investments are not subject to the equity investment
prohibitions of the statute and of the regulation and are considered to
be an ``other activity'' for the purposes of this regulation.
This exception focuses on two categories of preferred stock. This
first category, adjustable rate preferred stock refers to shares where
dividends are established by contract through the use of a formula
based on Treasury rates or some other readily available interest rate
levels. Money market preferred stock refers to those issues where
dividends are established through a periodic auction process that
establishes yields in relation to short term rates paid on commercial
paper issued by the same or a similar company. The credit quality of
the issuer determines the value of the security, and money market
preferred shares are sold at auction.
We have modified the exception under the proposal by limiting the
15 percent measurement to tier one capital, rather than total capital.
Throughout the current proposal, we have measured capital-based
limitations against tier one capital. We changed the base in this
provision to increase uniformity within the regulation. We recognize
that this change may lower the permitted amount of these investments
held by institutions already engaged in the activity. An insured state
bank that has investments exceeding the proposed limit, but within the
total capital limit, may continue holding those investments until they
are redeemed or repurchased by the issuer. The 15 percent of tier one
capital limitation should be used in determining the allowable amount
of new purchases of money market preferred and adjustable rate
preferred stock. Of course, any institution that wants to increase its
holding of these securities may submit an application to the FDIC.
The FDIC seeks comment on whether this treatment of money market
preferred stock and adjustable rate preferred stock is still
appropriate. Comment is requested concerning whether other similar
types of investments should be given similar treatment. Comments also
are requested on whether the reduced capital base affects any
institution currently holding these investments or is likely to affect
the investment plans of any institution.
Activities That Are Closely Related to Banking Conducted by Bank or Its
Subsidiary
The proposed regulation continues the language found in the current
regulation titled, ``Activities that are
[[Page 47981]]
closely related to banking.'' This section permits an insured state
bank to engage as principal in any activity that is not permissible for
a national bank provided that the FRB by regulation or order has found
the activity 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)).
This exception is subject to the statutory prohibition that does not
allow the FDIC to permit the bank to directly hold equity securities
that a national bank may not hold and which are not otherwise
permissible investments for insured state banks pursuant to
Sec. 362.3(b).
Additional language has been added to clarify that this subsection
does not authorize an insured state bank engaged in real estate leasing
to hold the leased property for more than two years at the end of the
lease unless the property is re-leased. This language is added to
ensure that this provision does not allow an insured state bank to hold
an equity interest in real estate after the end of the lease period.
The FDIC has decided to provide a two-year period for the bank to
divest the property if the bank cannot lease the property again.
Comment is invited on the reasonableness of this approach. Should the
FDIC consider an alternative approach that a bank may not enter a non-
operating lease unless title reverts to the lessee at the end of the
lease period? Are there other standards that the FDIC should consider
in this matter?
As does the current regulation, these provisions allow a state bank
to directly engage in any ``as principal'' activity included on the
FRB's list of activities that are closely related to banking (found at
12 CFR 225.28) and ``as principal'' in any activity with respect to
which the FRB has issued an order finding that the activity is closely
related to banking.
However, the consent to engage in real estate leasing directly by
an insured state bank has been modified. Comment is requested on
whether there are any additional activities permitted under the
proposed language that should be modified. Comment is requested on the
effect of the proposed treatment of real estate leasing activities on
banks that may want to engage in this activity in the future. Comment
also is requested on the perceived risks of leasing activities and
whether we should impose standards to address those risks. Comment is
requested on whether we should consider any other approach, including
returning to the language in the current regulation or deleting the
references to the Bank Holding Company Act (12 U.S.C. 1843(c)(8) and
the activities that the FRB by regulation or order has found to be
closely related to banking for the purposes of section 4(c)(8).
Guarantee Activities by Banks
The current regulation contains a provision that permits a state
bank with a foreign branch to directly guarantee the obligations of its
customers as set out in Sec. 347.3(c)(1) of the FDIC's regulations
without filing any application under part 362. It also permits a state
bank to offer customer-sponsored credit card programs in which the bank
guarantees the obligations of its retail banking deposit customers.
This provision has been deleted as unnecessary since we understand that
these activities are permissible for a national bank. In its current
rule, the FDIC added this provision to clarify that part 362 does not
prohibit these activities; however to shorten the regulation, such
clarifying language has been deleted since the activity is permissible
for a national bank. The FDIC seeks comment as to whether the deletion
of this language has an adverse impact on insured state depository
institutions and if there are specific activities that this provision
allowed that are not permissible for a national bank.
In the FDIC's proposal regarding the consolidation and
simplification of its international banking regulations found in the
Federal Register on July 15, 1997, at 62 FR 37748, a technical
amendment to the current version of part 362 is found. This amendment
updates the reference to Sec. 347.103(a)(1) of this chapter in
Sec. 362.4(c)(3)(I)(A). This amendment may become final as a part of
the consolidation and simplification of the FDIC's international
banking regulations to reflect the correct citation in the current
version of part 362. Nevertheless, we propose to eliminate the
references to guarantee activities in this proposal because we consider
them unnecessary as they duplicate powers granted to national banks. As
previously stated, we invite comment on the necessity of including
specific language dealing with the power to guarantee customer
obligations in the regulatory text of part 362.
Section 362.4 Subsidiaries of Insured State Banks
General Prohibition
The regulatory language implementing the statutory prohibition on
``as principal'' activities that are not permissible for a subsidiary
of a national bank has been separated from the prohibition on
activities which are not permissible for a national bank conducted in
the bank. By separating bank and subsidiary activities, Sec. 362.4 now
deals exclusively with activities that may be conducted in a subsidiary
of an insured state bank. We believe that separating the activities
that may be conducted at the bank level from the activities that must
be conducted by a subsidiary makes it easier for the reader to
understand the intent of the regulation. We invite comment on whether
this structure is more useful to the reader. We also invite comment on
whether any additional changes would make it easier for the reader to
interpret the regulation text.
Exceptions
Prohibited activities may not be conducted unless one of the
exceptions in the regulation applies. This language is similar to the
current part 362 and results in no substantive change to the
prohibition.
Consent Obtained Through Application
The proposal continues to allow approval by individual application
provided that the insured state bank meets and continues to meet the
applicable capital standards and the FDIC finds there is no significant
risk to the fund. The proposal would delete the language expressly
providing that approval is necessary for each subsidiary even if the
bank received approval to engage in the same activity through another
subsidiary. Deleting this language will not automatically permit a
state bank to establish a second subsidiary to conduct the same
activity that was approved for another subsidiary of the same bank.
Deleting the language leaves the issue to be handled on a case-by-case
basis by the FDIC pursuant to order. For example, if the FDIC approves
an application by a state bank to establish a majority-owned subsidiary
to engage in real estate investment activities, the order may (in the
FDIC's discretion) be written to allow additional such subsidiaries or
to require that any additional real estate subsidiaries must be
individually approved.
The notice procedures described herein requires that the subsidiary
must take the corporate organizational form. Insured state banks that
organize subsidiaries in a form other than a corporation may make
application under this section. Any bank that does not meet the notice
criteria or that desires relief from a limit or restriction included in
the notice criteria may also file an application under this section and
are encouraged to do so.
[[Page 47982]]
Application instructions have been moved to subpart E.
Language has been eliminated that prohibited an insured state bank
from engaging in insurance underwriting through a subsidiary except to
the extent that such activities are permissible for a national bank.
Eliminating this language does not result in any substantive change as
section 24 of the FDI Act clearly provides that the FDIC may not
approve an application for a state bank to directly or indirectly
conduct insurance underwriting activities that are not permissible for
a national bank. We invite comment on whether the language should be
retained in the regulation to make it clear to state banks that
applications to conduct such activities will not be approved.
The current part 362 allows state banks that do not meet their
minimum capital requirements to gradually phase out otherwise
impermissible activities that were being conducted as of December 19,
1992. These provisions are eliminated under the proposal due to the
passage of time. The relevant outside dates to complete the phase out
of those activities have passed (December 19, 1996, for real estate
activities and December 8, 1994, for all other activities).
Grandfathered Insurance Underwriting
The proposed regulation provides for three statutory exceptions
that allow subsidiaries to engage in insurance underwriting.
Subsidiaries may engage in the same grandfathered insurance
underwriting as the bank if the bank or subsidiary was lawfully
providing insurance as principal on November 21, 1991.
The limitations under which this subsidiary may operate have been
changed. Under the current regulation, the bank must be well-
capitalized. Under the proposal, the bank must be well-capitalized
after deducting its investment in the insurance subsidiary. The FDIC
believes that the capital deduction is an important element in
separating the operations of the bank and the subsidiary. This
deduction clearly delineates the capital that is available to support
the bank and the capital that is available to support the subsidiary.
Capital standards for insurance companies are based on different
criteria from bank capital requirements. Most states have minimum
capital requirements for insurance companies. The FDIC believes that a
bank's investment in an insurance underwriting subsidiary is not
actually ``available'' to the bank in the event the bank experiences
losses and needs a cash infusion. As a result, the bank's investment in
the insurance subsidiary should not be considered when determining
whether the bank has sufficient capital to meet its needs. Comment is
invited on whether the capital deduction is appropriate or necessary.
If the FDIC requires a capital deduction, should it be required in the
case of any insurance underwriting subsidiary that is given a statutory
grandfather, e.g., should title insurance subsidiaries also be subject
to the capital deduction? Should the capital deduction treatment depend
upon what type of insurance is underwritten (if there is a greater risk
associated with the insurance, should the capital deduction be
required)? Is the phase-in period appropriate and clearly written?
The proposed regulation requires a subsidiary engaging in
grandfathered insurance underwriting to meet the standards for an
``eligible subsidiary'' discussed below. This standard replaces the
``bona fide'' subsidiary standard in the current regulation. The
``eligible subsidiary'' standard generally contains the same
requirements for corporate separateness as the ``bona fide'' subsidiary
definition but adds the following provisions: (1) the subsidiary has
only one business purpose; (2) the subsidiary has a current written
business plan that is appropriate to its type and scope of business;
(3) the subsidiary has adequate management for the type of activity
contemplated, including appropriate licenses and memberships, and
complies with industry standards; and (4) the subsidiary establishes
policies and procedures to ensure adequate computer, audit and
accounting systems, internal risk management controls, and the
subsidiary has the necessary operational and managerial infrastructure
to implement the business plan. The FDIC requests comment on the effect
of these additional requirements on banks engaged in insurance
underwriting. We invite comment on whether these requirements
appropriately separate the subsidiary from the bank. We request comment
on whether the restrictions are appropriate to the identified risks
being undertaken by these banks.
In lieu of the prescribed disclosures contained in the current
regulation, the proposal prescribes that disclosures consistent with
the Interagency Statement be made. The proposal also eliminates the
acceptance of disclosures that are required by state law. While the
current regulation requires disclosures, those disclosures are similar
but not identical to the disclosures required by the Interagency
Statement. Again, this proposed change is intended to make compliance
with the Interagency Statement and the regulation easier. Comment is
sought on whether the disclosure requirements in the regulation are
necessary now that the Interagency Statement has been adopted. Any
retail sale of nondeposit investment products to bank customers is
subject to the Interagency Statement. The FDIC recognizes that some
grandfathered insurance underwriting subsidiaries may have a line of
business and customer base which is completely separate from the bank's
operations. The Interagency Statement would not normally apply as the
Statement does not technically apply unless there is a ``retail sale''
to a ``bank customer.'' If the FDIC were to rely wholly upon the
Interagency Statement there would be a gap from the current coverage of
the disclosure requirements. Should that be of concern to the FDIC?
Banks with subsidiaries engaged in grandfathered insurance
underwriting activities are expected to meet the new requirements of
this proposal. Banks which are not in compliance with the requirements
should provide a notice to the FDIC pursuant to Sec. 362.5(b). The FDIC
will consider the notices on a case-by-case basis.
The regulation provides that a subsidiary may continue to
underwrite title insurance based on the specific statutory authority
from section 24. This provision is currently in part 362 and is carried
forward into the proposal with no substantive change. The insured state
bank is only permitted to retain the investment if the insured state
bank was required, before June 1, 1991, to provide title insurance as a
condition of the bank's initial chartering under state law. The
authority to retain the investment terminates if a change in control of
the grandfathered bank or its holding company occurs after June 1,
1991. There are no statutory or regulatory investment limits on banks
holding these types of grandfathered investments.
The exception for subsidiaries engaged in underwriting crop
insurance is continued. Under section 24, insured state banks and their
subsidiaries are permitted to continue underwriting crop insurance
under two conditions: (1) they were engaged in the business on or
before September 30, 1991, and (2) the crop insurance was reinsured in
whole or in part by the Federal Crop Insurance Corporation. While this
grandfathered insurance underwriting authority requires that the bank
or its subsidiary had to be engaged in the activity as of a certain
date, the authority does not
[[Page 47983]]
terminate upon a change in control of the bank or its parent holding
company.
Majority-owned Subsidiaries Which Own a Control Interest in Companies
Engaged in Permissible Activities
The FDIC has found that it is not a significant risk to the deposit
insurance funds if a majority-owned subsidiary holds stock of a company
that engages in (1) any activity permissible for a national bank; (2)
any activity permissible for the bank itself (except engaging in
insurance underwriting and holding grandfathered equity investments);
(3) activities that are not conducted ``as principal;'' or (4) activity
that is not permissible for a national bank provided the Federal
Reserve Board by regulation or order has found the activity to be
closely related to banking, if the majority-owned subsidiary exercises
control over the issuer of the stock purchased by the subsidiary. These
exceptions are found in the current regulation but do not contain the
provision that the majority-owned subsidiary must exercise
control.1 This change clarifies that this exception is
intended only for subsidiaries that are operating a business that is
either permissible for the bank itself or is considered to be operated
other than ``as principal.'' As rewritten, the proposal differentiates
between the types of stock held by a majority-owned subsidiary--having
a controlling interest and simply investing in the shares of a company.
The FDIC intends that this provision cover lower level subsidiaries
that are engaged in activities that the FDIC has found present no
significant risk to the fund. The FDIC expects lower level subsidiaries
that engage in other activities to conform to the application or notice
procedures of this regulation. The FDIC recognizes that changing the
level of ownership permissible for these activities may adversely
affect some insured state bank. We invite comment on the effect of this
change. The FDIC invites comment on whether this language change was
necessary, whether it should be concerned about lower level
subsidiaries, whether this approach is appropriate to the risks
inherent in the activities and whether any other approach, including
returning to the language in the current regulation should be
considered.
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\1\ The current regulatory exception for activities conducted
not as principal provides for a test of 50% or less of the stock of
a corporation which engages solely in activities which are not
considered to be as principal. The term ``corporation'' is being
changed to ``company'' to accommodate the other forms of business
enterprise listed in the definition. The reference to 50% or less is
being deleted in order to avoid the confusion generated by that
limitation.
---------------------------------------------------------------------------
We deleted one other form of stock ownership at the majority
subsidiary level from the current regulation by deleting the language
now found in Sec. 362.4(c)(3)(iv)(C) of the current regulation titled,
``Stock of a corporation that engages in activities permissible for a
bank service corporation.'' Through a majority-owned subsidiary, this
section of the current regulation allows an insured state bank to
invest in 50% or less of the stock of a corporation which engages
solely in any activity that is permissible for a bank service
corporation. Since bank service corporations may engage in any activity
that is closely related to banking, this exception also allowed
majority-owned subsidiaries to own stock in those entities that solely
engaged in activities that were closely related to banking. This
exception has been deleted in this proposal because the coverage of the
proposed exceptions in Sec. 362.4(b)(3) would duplicate the coverage of
the existing exception.
Comment is requested on whether the proposed language clearly sets
forth the coverage of these exceptions. Comment is requested on whether
the proposed language clearly allows the same activities that the
current exception allows by permitting majority-owned subsidiaries to
hold stock of a company engaged in activities permissible for a bank
service corporation. The FDIC seeks comment on whether any inadvertent
substantive change has been made by eliminating the specific references
permitting the ownership of bank service company stock. We seek comment
on the use of the control test for defining activities for lower level
subsidiaries. We invite comment on whether any other approach,
including returning to the language in the current regulation should be
reconsidered. Should the FDIC use a majority-owned test for defining
when a lower level subsidiary exists?
We added clarifying language to the exception governing activities
closely related to banking. The first exception states that this
section does not authorize a subsidiary engaged in real estate leasing
to hold the leased property for more than two years at the end of the
lease unless the property is re-leased. This provision is the same at
the bank level. The second provision is that this section does not
authorize a subsidiary to acquire or hold the stock of a savings
association other than as allowed in Sec. 362.4(b)(4). As is discussed
below, this subsection does not allow a majority-owned subsidiary to
have a control interest in a savings association. Comment is requested
concerning the effect of this change.
Majority-Owned Subsidiaries Ownership of Equity Securities That Do Not
Represent a Control Interest
The proposed regulation significantly changes the exception in the
current regulation involving the holding of equity securities that do
not represent a control interest. The FDIC has determined that the
activity of holding the equity securities at the majority-owned
subsidiary level, subject to certain limitations, does not present a
significant risk to the deposit insurance funds.
This provision replaces two exceptions contained in the current
regulation: (1) grandfathered investments in common or preferred stock
and shares of investment companies, and (2) stock of insured depository
institutions. The proposed regulation adds an expanded exception
allowing the holding of other corporate stock.
The current regulation provides that an insured state bank that has
obtained approval to hold listed common or preferred stock and/or
shares of registered investment companies under the statutory
grandfather (discussed above) may hold the stock and/or shares through
a majority-owned subsidiary provided that any conditions imposed in
connection with the approval are met. The FDIC previously determined
that a majority-owned subsidiary could be accorded the same treatment
under the grandfather provided for by section 24(f) of the FDI Act
without risk to the fund. Thus, the bank should be permitted to invest
in those securities and investment company shares through a majority-
owned subsidiary.
The current regulation requires that each bank file a notice with
the FDIC of the bank's intent to make such investments and that the
FDIC determine that such investments will not pose a significant risk
to the deposit insurance fund before any insured state bank may take
advantage of the ``grandfather'' allowing investments in common or
preferred stock listed on a national securities exchange and shares of
an investment company registered under the Investment Company Act of
1940 (15 U.S.C. 80a-1, et seq.). In no event may the bank's investments
in such securities and/or investment company shares, plus those of the
subsidiary, exceed one |
