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2000 - FDIC Rules and Regulations
Preamble to Part
362 (October 27, 1992)
Description of Statute
The preamble accompanying the proposed regulation contained a
description of section 24. That description is republished below with
one or two notable changes based upon the comments. In several
instances the description has not changed despite comments that the
FDIC's reading of the statute is flawed. Our response to those
comments can be found elsewhere in this document. Insured state banks
should keep in mind when reading through the final regulation that it
focuses solely on equity investments. The remainder of section 24
(notably section 24(a) and 24(d)), 12 U.S.C. 1831a(a) and 1831(d))
which deals with "activities" of insured state banks and their
subsidiaries will be dealt with by the FDIC in a subsequent proposal.
The FDIC anticipates to publish that proposal in the very near future.
While much of section 24 (notably sections 24(a) and 24(d)) does not
become effective until December 19, 1992, the provisions of section 24
that deal with equity investments (section 24(c) and section 24(f))
were effective upon the date of enactment of FDICIA, December 19, 1991.
Paragraph (c) of section 24 (12 U.S.C. 1831a(c)), "Equity
Investments by Insured State Banks", provides that no insured state
bank may directly or indirectly acquire or retain any equity investment
of a type that is not permissible for a national bank. Several
exceptions to the general prohibition to making or retaining equity
investments are found in paragraph (c) itself and in subsequent
paragraphs of section 24. In addition, paragraph (c) provides a
"transition rule" that requires insured state banks to divest
prohibited equity investments as quickly as can be prudently done but
in no event later than December 19, 1996. The FDIC is given the
authority to establish conditions and restrictions governing the
retention of the prohibited investments during the divestiture period.
Paragraph (c) expressly provides for an exception for the retention or
acquisition of equity investments in majority owned subsidiaries and
equity investments in qualified low income housing.
Section 24(f) (12 U.S.C. 1831a(f)), "Common and Preferred Stock
Investment", also effective upon enactment of FDICIA, provides that
no insured state bank may directly or indirectly acquire or retain any
equity investment of a type, or in an amount, that is not permissible
for a national bank and is not otherwise permitted under section 24.
Like paragraph (c), paragraph (f) contains several exceptions to the
general prohibition.
Paragraph (f)(2) creates a limited exception for investments in
common or preferred stock listed on a national securities ex change or
shares of registered investment companies. The exception allows insured
state banks that (a) are located in a state that as of September 30,
1991 permitted banks to invest in common or preferred stock listed on a
national securities exchange (listed stock) or shares of an investment
company registered under the Investment Company Act of 1940 (15 U.S.C.
80a--1 et seq.) (registered shares), and (b) which made or maintained
investments in listed stock or registered shares during the period from
September 30, 1990 to November 26, 1991, to acquire and retain, subject
to the FDIC's approval, listed stock or registered shares up to a
maximum of 100 percent of the bank's capital. A bank must file a
written notice with the FDIC of its intent to take advantage of the
exception and must receive the FDIC's approval before it can lawfully
retain or acquire listed stock or registered shares pursuant to the
exception. If a bank made investments during the relevant period in
listed stock or registered shares that exceed in the aggregate 100
percent of the bank's capital as measured on December 19, 1991, the
bank must divest the excess over the three year period beginning on
December 19, 1991 at a rate of no less than 1/3 of the excess
each year.
Paragraph (d)(2)(B) provides an exception for the retention by a
well-capitalized insured state bank of an equity interest in a
subsidiary that was engaged "in a state" in insurance activities
"as principal" on November 21, 1991 so long as the subsidiary's
activities continue to be confined to offering the same type of
insurance to residents of the state, individuals employed in the state
and any other person to whom the subsid
{{4-28-06 p.3126}}iary provided insurance
as principal without interruption since such person resided in or was
employed in the state.
Paragraph (e) indicates that nothing in section 24 shall be
construed as prohibiting an insured state bank in Massachusetts, New
York or Connecticut from owning stock in a savings bank life insurance
company provided that consumer disclosures are made.
Section 24(g) grants the FDIC the authority to make determinations
under section 24 by regulation or order and section 24(i) indicates
that nothing in section 24 shall be construed as limiting the authority
of the FDIC to impose more stringent restrictions than those set out in
section 24.
Comment Summary
The FDIC received 279 comments in response to the proposed
regulation. Overall, the comments were critical of the restrictions
that would be imposed under the regulation on the ability of state
banks to make equity investments. These comments were critical despite
the fact that most of those who so commented recognized that the FDIC's
discretion in this matter was largely taken away by the statute.
The majority of the comments focused on nine areas, a brief summary
of which follows. The remainder of the comments, as well as a more
detailed discussion of the comments discussed immediately below, will
be addressed where appropriate in the context of the description of the
final rule and how it differs from the proposed regulation.
Of the total comments, 151 objected to the manner in which the
proposal grandfathered equity investments in what was universally
referred to as a "two basket" approach, i.e., treating
listed common and preferred stock separately from shares of registered
investment companies and limiting banks eligible for the exception
under section 24(f) of the FDI Act and § 362.3(b)(4) of the proposal
to the highest level of investment they had in each category during the
period from September 30, 1990 to November 26, 1991 (the window period,
or relevant period). Most if not all of these comments, and a number of
additional comments for a total of 180, objected to the proposal
limiting banks eligible to make and retain equity investments in listed
common or preferred stock and/or shares of registered investment
companies to the highest aggregate amount invested during the window
period.
Collectively these comments expressed the opinion that the statute
allows eligible banks to invest up to 100 percent of their capital in
listed common or preferred stock and/or shares of registered investment
companies. While many of the comments recognized that the FDIC does
have the authority under the statute to limit a bank's investments
under the exception, these same comments urged the FDIC not to limit
the investments across the board in the fashion proposed. The FDIC was
urged rather to tailor the regulation more to the individual
circumstances of any given bank. Likewise, the comments which addressed
the "two basket" approach pointed out that the proposal could
have an adverse affect on safety and soundness as it would prevent
banks from diversifying their securities portfolios and would eliminate
the flexibility necessary to the proper management of that portfolio.
Sixty-four comments requested that the FDIC simplify the notice
required to be filed in order for an eligible bank to take advantage of
the exception provided for by section 24(f) and § 362.3(b)(4) of the
proposal. These comments argued that it would be burdensome for a bank
to put the information together, that the FDIC should al-ready be
familiar with a bank's investment policies etc. based upon previous
examinations, and that the amount of information requested was not
justified in view of the fact that the FDIC has not previously objected
to the exercise of these investment powers by banks.
Seventy-five comments objected to the manner in which the proposal
defined "change in control" for the purposes of setting out what
events will result in the loss of the right to make investments in
listed common or preferred stock and/or shares of registered investment
companies. The comments universally stated that the proposal was too
broad in its definition and that events such as conversion from mutual
to stock form, the formation of a one bank holding company, the merger
of two eligible banks, and the acquisition of 10 percent of the stock
of an eligible bank should not be considered changes in control that
result in the loss of the exception under the proposal.
{{4-28-06 p.3126.01}}Several comments
indicated that the intent of the statute was that the grandfather would
only be lost if an eligible bank was acquired by an ineligible bank.
On the issue of what the FDIC should consider to be an equity
investment "permissible" for a national bank, 48 comments said
that the FDIC should treat state banks on a par with national banks and
recognize an investment as being "permissible" if a national bank
could make the investment regardless of whether a national bank looked
to statute, regulation, circular, bulletin, or staff interpretation for
authority to do so. Sixty-three comments urged the FDIC to at a minimum
recognize OCC Circular 220 which sets out the extent to which a
national bank may invest in shares of a mutual fund. Twelve comments
expressed concern that it will be extremely difficult for state banks
to determine what is and is not a permissible equity investment for a
national bank. These comments urged the FDIC to include a list of
permissible investments in the regulation or to establish a procedure
by which a state bank could go to the Office of the Comptroller
of the Currency for a determination. Some banks expressed concern
that a national bank has a mechanism to seek approval for an investment
that has not theretofore been
{{4-30-93 p.3127}}approved whereas a
state bank lacks the same avenue.
The proposal defined the term "equity investment" to include
certain interests in real estate. Thirteen of the comments objected to
the FDIC's intention to define the phrase "equity investment in real
estate" to include real estate acquisition, development or
construction arrangements which cause the bank to have "in substance
* * * virtually the same risks and potential rewards as an investor
in the borrower's real estate". According to the comments, the
definition is overly broad and the FDIC is not justified in going
beyond the Generally Accepted Accounting Principles (GAAP) in deciding
when an acquisition, development or construction loan (ADC loan) is an
investment. The comments particularly objected to discussion contained
in the preamble accompanying the proposed definition citing a portion
of the Federal Financial Institutions Examination Council Call Report
Instructions which identifies six direct and indirect investments that
will be included as real estate ventures. The last item is an ADC loan.
The preamble then goes on to set out several factors any one of which
may cause the FDIC to consider an ADC loan to be an investment if the
bank participates in the residual profits of the project. (57 FR
30438--30339). In the view of the comments, the FDIC's approach is ill
founded and will deter ADC lending.
Eleven of the comments objected to the definition of "significant
risk" contained in the proposal. The definition was found to be
overly broad because it focuses on whether there is any likelihood that
the fund may suffer a loss regardless of how small. The comments
pointed out that any investment has some risk and that by defining the
phrase "significant risk" as proposed the FDIC has totally read
the word "significant" out of the statute.
Fourteen comments strongly criticized the FDIC for indicating that
the exception contained in § 362.3(b)(7) of the proposal
(grandfathered investments in insurance subsidiaries) would only apply
in the state in which the bank is chartered and the state in which the
bank's insurance subsidiary was incorporated and doing business on
November 21, 1991. The comments indicated that
this construction of the phrase "in a state" as used
in section 24(d)(2)(B) of the statute is contrary to the provision's
clear language as well as its legislative history and that the
regulation would have the practical effect of eliminating the
grandfathered insurance activities due to the way in which the
insurance business operates. Two comments indicated that the FDIC's
proposed construction of the statute was correct. Eight of the comments
which addressed the exception for certain insurance subsidiaries
commented that the FDIC should broadly construe the phrase "type of
insurance" when applying the exception, i.e., to consider
different insurance products that fall within the same category of
insurance as being the "same type of insurance."
Finally, seventeen comments addressed the proposed definition of the
term "well-capitalized". Three comments indicated that the
regulation should define the term in the same way that it is defined
for the purposes of section 38 of the FDI Act (12 U.S.C. 1831(o))
dealing with prompt corrective action. Two comments indicated that the
definition should not be the same. Six comments objected to the
proposed definition requiring that a bank must meet the indicated
levels of capital after deducting its investment in any
subsidiary or department of the bank that is engaging in any activity
that is not permissible for a national bank. Four comments although not
objecting to the capital deduction suggested that the capital deduction
be imposed on a case-by-case basis, only be imposed for that portion of
any investment attributable to the impermissible activity in the case
of a subsidiary or department that conducts permissible as well as
impermissible activities, and/or suggested that a bank only be required
to be adequately capitalized after the capital deduction in order for
the bank to be considered "well-capitalized". One comment
suggested that the capital deduction be phased-in.
Description of Final Regulation
The following discussion contains a description of the final
regulation and how it differs from the proposed rule that was published
for comment.
{{4-30-93 p.3128}}
Definitions
1. Company
The proposed regulation defined the term "company" to mean any
corporation, partnership, business trust, association, joint venture,
pool, syndicate or other similar business organization. The preamble
accompanying the proposed regulation indicated that the term was
intended to include entities organized to conduct a specific business
or businesses but did not include sole proprietorships. The final
regulation adopts the definition as proposed without change.
2. Control
The proposed regulation defined the term "control" to have the
same meaning as set forth in § 303.13(a)(2) of the FDIC's
regulations. As defined therein, "control" means the power to
directly or indirectly vote 25 percent or more of the voting stock of a
bank or company, the ability to control in any manner the election of
directors or trustees, or the ability to exercise a controlling
influence over the management and policies of a bank or company. The
definition of "control" has been adopted in the final regulation
as proposed without any change.
3. Convert its Charter
The phrase "convert its charter" was defined in the proposed
regulation to refer to any instance in which a bank undergoes any
transaction which causes the bank to operate under a different form of
charter than that under which it operated as of December 19, 1991. The
preamble accompanying the proposed regulation indicated that the
definition was intended to encompass any transaction as a result of
which a bank will from that point forward conduct business pursuant to
a type of charter created by state statute that is new as to the
particular bank. For example, if a bank that is operating under a
savings bank charter begins to operate under a commercial bank charter,
the savings bank will be said to have converted its charter regardless
of how the transaction is accomplished.
In response to comments received during the comment period urging
the FDIC not to consider a change from mutual to stock
form to constitute a charter conversion, the final regulation as
adopted provides that a change from mutual to stock form shall not be
considered to constitute a charter conversion.
4. Depository Institution
The proposed regulation defined the term "depository
institution" to mean any bank or savings association, i.e.,
the same meaning as set out in section 3(c)(1) of the FDI Act (12
U.S.C. 1813(c)(1)). The definition has been adopted as proposed without
change.
5. Equity Interest in Real Estate
The term "equity interest in real estate" is defined under the
final regulation to mean any form of direct or indirect ownership of
any interest in real property, whether in the form of an equity
interest, partnership, joint venture or other form, which is accounted
for as an investment in real estate or a real estate joint venture
under generally accepted accounting principles or is otherwise
determined to be an investment in a real estate venture under Federal
Financial Institutions Examination Council Call Report Instructions.
These instructions require that the following be included as direct and
indirect investments in real estate ventures:
(1) Any real estate acquired, directly or indirectly, and held for
development, resale, or other investment purposes, but does not include
real estate acquired in any manner for debts previously contracted.
(2) Any equity investments by the bank in subsidiaries that have
not been consolidated, associated companies, corporate joint ventures,
unincorporated joint ventures, and general and limited partnerships
that are primarily engaged in the holding of real estate for
development, resale, or other investment purposes and any extensions of
credit to these entities.
(3) Real estate acquisition, development or construction
arrangements which are accounted for as direct investments in real
estate or as real estate joint ventures in accordance with guidance
prepared by the American Institute of Certified Public Accountants in
Notices to Practitioners issued in November 1983, November 1984, and
February 1986.
{{4-30-93 p.3129}}
(4) Real estate acquired and held for investment that has been sold
under contract and accounted for under the deposit method of accounting
in accordance with FASB Statement No. 66, "Accounting for Sales of
Real Estate".
(5) Receivables resulting from sales of real estate acquired and
held for investment accounted for under the installment, cost recovery,
reduced profit, or percentage-of-completion method of accounting in
accordance with FASB Statement No. 66, "Accounting for Sales of Real
Estate" when the buyer's initial investment is less than 10 percent
of the sales value of the real estate sold.
(6) Any other loans secured by real estate and advanced for real
estate acquisition, development, or investment purposes if the insured
depository institution has virtually the same risks and potential
rewards as an investor in the borrower's real estate venture.
Characterization as an investment under item 6 above might include
instances in which the insured depository institution has accounted for
a real estate acquisition, development or construction
arrangement as a loan but the FDIC, based on the facts and
circumstances surrounding the arrangement, has determined that the
arrangement should be accounted for as a direct investment in real
estate or as a real estate joint venture under generally accepted
accounting principles.
As discussed previously, thirteen comments were received which
objected to the FDIC's proposed definition of equity investment in real
estate as being overly broad in relation to acquisition, development
and construction loans primarily because of the language in the
proposal indicating that an ADC loan could be reclassified if the bank
had in substance virtually the same risks and potential rewards as an
investor. This language has been dropped from the final regulation. In
general, the FDIC intends to treat an acquisition, development or
construction loan as an equity interest in real estate on the basis of
item 6 when the depository institution is expected to participate in a
majority of the expected residual profit from the project or when the
depository institution participates in less than a
majority of the expected residual profit from the project and none of
the following characteristics of a loan is present: (a) The borrower
has an equity investment which is substantial in relation to the
project and which is not funded by the depository institution, (b) the
depository institution has recourse to substantial tangible saleable
assets of the borrower that have determinable sales value other than
the project itself that are not pledged as collateral for other loans,
(c) the borrower has provided the depository institution with an
irrevocable letter of credit from a creditworthy, independent third
party for a substantial amount of the loan over the entire term of the
loan, (d) a take-out commitment for the full amount of the loan has
been obtained from a creditworthy, independent third-party and the
conditions for the take-out are reasonable and their attainment
possible, (e) noncancelable sales contracts or lease commitments from
creditworthy, independent third parties are in effect that will provide
sufficient net cash flow on completion of the project to service normal
loan amortization and the conditions for the sales or leases are
probable of attainment, or (f) a personal guarantee for a substantial
amount of the loan has been provided to the depository institution by
the borrower and/or a third party and the substance of the guarantee
and the guarantor's ability to perform can be reliably measured.
As bank lending standards have evolved over the past several
years, in many cases bank assets which are carried as loans on the
bank's books have taken on more characteristics associated with
investments rather than loans. Accounting for income from real estate
loans and for real estate investment is substantially different and
the improper classification of these assets can distort an
institution's earnings picture. Accounting convention recognizes that,
depending upon the circumstances, there is little
substantive difference between certain loans and direct investments
in real estate and that in those instances the loans should in fact be
accounted for as direct real estate investments. The FDIC rejects the
concept that its approach will deter lending since the definition
is intended to cover only those transactions which would be considered
an equity investment in real estate under gen-
{{4-30-93 p.3130}}erally accepted
accounting rules. The discussion above is intended to clarify those
situations by specifying the characteristics of a loan which, if
absent, would cause the transaction to be classified as an equity
investment in real estate rather than a loan.
One comment asked if reverse annuity mortgages and shared
appreciation mortgages would be classified as equity investments in
real estate. The treatment of each of these transactions depends upon
the terms of the contract. The FDIC would have to look at the specific
facts and circumstances of a situation before making a determination of
the proper classification of these assets.
The final regulation contains three exclusions from the definition
of "equity interest in real estate": (1) real property used, or
intended to be used, as offices or related facilities for the conduct
of the bank's or its subsidiaries' business, (2) an interest in real
estate that arises out of a debt previously contracted provided that
the real estate is not held any longer than the shorter of the period
allowed for holding such real estate under state law or the time period
national banks may hold such property, and (3) interests that are
primarily in the nature of charitable contributions to community
development corporations provided contributions to any one community
development corporation do not exceed 2 percent of the bank's tier one
capital and total contributions to all such corporations do not exceed
10 percent of the bank's tier one capital (provided the bank's
appropriate federal banking agency has determined that an investment up
to 10 percent of tier one capital does not pose a significant risk to
the deposit insurance fund). These exclusions parallel §§ 7.3005,
7.3020, 7.3025 and 7.7480 of the Office of the Comptroller of the
Currency's regulations (12 CFR 7.3005, 7.3020, 7.3025, 7.7480), new
paragraph Eleventh of 12 U.S.C. 24, and recent amendments to section 9
of the Federal Reserve Act (12 U.S.C. 321--338) both of which were
enacted into law as part of H.R. 6050 which the President signed into
law on October 23, 1992.
The exceptions are the same as were contained in the proposal except
that the community development corporation exception has been amended
to conform with the statutory changes to 12 U.S.C. 24 (Eleventh) and
the Federal Reserve Act which allow national banks and state member
banks to make investments designed primarily to promote the public
welfare up to an aggregate of 5 percent of unimpaired capital and
surplus. Under those changes, a national bank and a state member bank
may make aggregate investments not to exceed 10 percent of unimpaired
capital and surplus if the Comptroller of the Currency (in the case of
a national bank) or the Board of Governors of the Federal Reserve
System (in the case of a state member bank) determines that the
additional investment will not pose a significant risk to the deposit
insurance fund. The final regulation provides that in the case of an
insured state nonmember bank the FDIC's Board of Directors has
determined that it will not pose a significant risk to the fund for a
bank to make community development corporation investments up to an
aggregate of 10 percent of the bank's tier one capital. Under the final
regulation, if the Board of Governors of the Federal Reserve System
determines that it does not present a significant risk to the fund for
a state member bank to make such investments up to an aggregate of 10
percent of the bank's tier one capital, such investments will not be
considered equity investments in real estate.
No comments were received concerning the exception for premises used
to conduct the bank's business. One comment was received concerning the
community development corporation exception as proposed which
questioned limiting the exclusion of investments in these corporations.
The limitation is based on a similar limitation for national banks. The
noted exclusion merely provides that insured state banks can hold
equity in such corporations on its books to the same extent that a
national bank may do so provided of course that state law so permits.
If the "investment" is completely charged off as a charitable
contribution, the interest does not appear on the bank's books and is
not considered an equity investment.
Ten comments were received concerning the exclusion for real estate
held for debts previously contracted. Some of the comments objected to
the time frames for holding DPC property citing state
laws
{{4-30-93 p.3131}}which are substantially
different from national bank law, i.e., in some cases provide for a
longer holding period. Limiting the holding period for this real estate
to the shorter of the period allowed for holding such real
estate under state law or the time period national banks may hold such
property, may put state banks at a disadvantage. A number of comments
indicated that national banks may request a five year extension of
time for holding DPC property beyond the five years otherwise
applicable and that state banks should likewise be able to obtain an
additional five year extension.
The FDIC is of the opinion that as a matter of law a state bank is
limited to the shorter of the state or federal period allotted for
holding DPC property. Since a national bank cannot hold equity in real
estate except in very limited circumstances, section 24 only allows a
state bank to hold an interest in real estate if a national bank could
do so. For the purposes of the final regulation, however, the FDIC
construes the applicable limit on holding of DPC property to be a
maximum of ten years. Thus, if the period for holding DPC property
under state law is longer than the basic five-year period allowed for
national banks and an extension of time is needed to dispose of the
property, the FDIC will recognize any such extension granted by the
insured state bank's chartering authority provided that such extension
does not purport to allow a state bank to hold the DPC property in
excess of ten years.
Several comments urged the FDIC to allow a state bank that had
acquired DPC property before December 19, 1991 to follow the state
holding period. As indicated above, the FDIC is of the opinion that the
shorter period must apply. Section 24 clearly not only affected the
future acquisitions of equity investments but also affected current
holdings in that banks were specifically directed to divest any
impermissible equity investments acquired before December 19, 1991. If,
for example, on December 19, 1991 a state bank held a piece of DPC
property and had held such property for three years and state law
allows the bank to hold that property for a total of fifteen years, the
bank may hold the property for ten years from December 19, 1991 without
that property being considered an equity investment. If the property is
not disposed of prior to that time, continued holding of the property
may be cited as in violation of the regulation.
6. Equity Investment
The proposed regulation defined the term "equity investment"
to mean any equity security, partnership interest, any equity interest
in real estate and any transaction which in substance falls within any
of these categories, even though it may be structured as some other
form of business transaction. The definition of equity investment as
proposed is the same as that which is used under § 303.13 of the
FDIC's regulations governing a prohibition for savings associations
found under section 28 of the FDI Act that is similar to section 24.
The definition is being adopted as proposed with one change. One
comment noted that the term "equity investment" did not contain
an exception for investments taken DPC whereas the terms "equity
investment in real estate" and "equity security" had such an
exclusion. The result of the omission is that a partnership interest
taken for a debt previously contracted ("DPC") is considered an
equity investment. In response to this comment, a DPC exclusion has
been added to the definition of equity investment.
Another comment expressed a concern with the possibility that the
definition of equity investment which includes "any transaction
which in substance falls within these categories even though it may be
structured as some other form of business transaction" may be read
to include loans to companies which by their nature are highly
leveraged and "start-up" loans to small businesses. The FDIC does
not intend for the definition to be interpreted in that manner. The
intention of the FDIC is to cover only those "in substance"
transactions in which there is a legal or accounting basis to consider
the transaction to be an equity investment.
7. Equity Security
"Equity security" was defined under the proposed regulation to
mean any stock, certificate of interest or participation in any
profit-sharing agreement, collateral trust certificate,
pre-organization certificate or
{{4-30-93 p.3132}}subscription,
transferable share, investment contract, or voting-trust certificate;
any security immediately convertible at the option of the holder
without payment of substantial additional consideration into such
security; any security carrying any warrant or right to subscribe to or
purchase any such security; and any certificate of interest or
participation in, temporary or interim certificate for, or receipt for
any of the foregoing unless it is acquired through foreclosure or
settlement in lieu of foreclosure. The definition is the same as that
used in § 303.13(a) of the FDIC's regulations.
The FDIC received 15 comments addressing the issue of whether the
regulation should exclude from the definition of equity security
investment grade preferred stock and other preferred stock issues that
are very debt like. The comments focused on two categories of preferred
stock, money market preferred stock and adjustable rate preferred
stock. Adjustable rate preferred stock refers to shares for which
dividends are established contractually by a formula in relation to
Treasury rates or other readily available interest rate levels. Money
market preferred stock refers to those issues in which 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. Dividends are not declared by the issuer's
board and the credit quality of the issuer determines the value of the
stock. Money market preferred shares are sold at auction rather than on
a national securities exchange.
The FDIC agrees after reviewing the comments that money market
(auction rate) preferred stock and adjustable preferred stock are
essentially substitutes for money market investments such as commercial
paper and are closer in their characteristics to debt than to equity.
The final regulation therefore has been amended to specifically exclude
money market preferred stock and adjustable preferred stock from the
definition of equity investment. As a result, such investments are not
subject to the provisions of § 362.3(a) of the final regulation.
Investing in such instruments will be an "activity" for the
purposes of section 24. Whether or not a state bank may continue to
make such investments after December 19, 1992 will depend, among other
things, on whether a national bank could make a similar investment.
The FDIC received one comment urging that the definition be amended
so as to not encompass any debt security that carries with it a warrant
to purchase equity. The FDIC has rejected this suggestion. If the
warrant is for an equity security in which a national bank could not
invest (and the equity security cannot be acquired pursuant to an
exception under the regulation), the bank would be prohibited from
exercising the warrant in any event.
8. Equity Investment Permissible for a National
Bank
The proposed regulation defined the phrase "equity investment
permissible for a national bank" to mean any equity investment
expressly authorized for national banks under the National Bank Act or
any other federal statute, regulations issued by the Office of the
Comptroller of the Currency, or any order or formal interpretation
issued by the Office of the Comptroller of the Currency.
The FDIC requested comment on the propriety of including equity
investments authorized by an order or formal interpretation of the
Office of the Comptroller of the Currency as "permissible" for
the purposes of the proposal and further sought comment on what the
FDIC should consider to constitute a formal interpretation if it is in
fact deemed appropriate to recognize formal interpretations. Insured
state banks were also advised that regardless of how the FDIC
defines "permissible for a national bank", they should be
prepared to document to the FDIC's satisfaction that their equity
investments are permissible for a national bank.
The FDIC received forty-eight comments which indicated that the
definition of permissible for a national bank as proposed was too
narrowly drawn. It was suggested that in order to avoid creating a
competitive disadvantage for state banks, the regulation should
recognize all directives and staff opinions of the Office of the
Comptroller of the Currency. In short, if a national bank can rely upon
an issuance of the Office of the Comptroller of the Currency then a
state bank should have the same advantage
{{4-30-93 p.3133}}regardless of how
informal the issuance may be.
In response to the comments, the final regulation modifies the
proposed regulation and defines a permissible equity investment by
reference to the underlying statutory authorities. It provides further
that any equity investment expressly authorized by statute or
recognized as permissible in official bulletins or circulars issued by
the OCC or in any interpretation issued in writing by the OCC will be
accepted as permissible for state banks under section 24. Written staff
opinions will be considered to evidence the position of the Office of
the Comptroller of the Currency so long as the opinion is considered to
be valid by the Office of the Comptroller of the Currency. Thus, an
opinion will not be recognized if it is not the current opinion of the
Comptroller's Office, i.e., it is no longer considered
valid, the opinion is overruled by the Office of the Comptroller of the
Currency, or the opinion is found by a court of law to be incorrect.
Even though staff opinions are not necessarily binding on the
Comptroller of the Currency, the FDIC is satisfied that they embody the
current opinion of the Office of Comptroller of the Currency and that
to not recognize them would in fact unnecessarily put state banks at a
disadvantage. State banks should note that the FDIC will generally
expect any conditions or restrictions set out in the Comptroller of the
Currency's regulations, bulletins, circulars, and staff opinions to be
met if the equity investment is to be considered permissible under Part
362 when made by a state bank.
In expanding the definition the FDIC also addressed the 63 comments
which stated that the regulation should recognize Banking Circular 220
issued by the Comptroller of the Currency on November 21, 1986 relating
to national bank investment in investment companies composed wholly of
bank eligible investments. This Circular offers the opinion that it is
permissible for a national bank to purchase for its own account shares
of investment companies as long as the portfolios of such companies
consist solely of obligations which are eligible for purchase by
national banks for their own account. By recognizing this circular and
similar bulletins or circulars, the FDIC is excluding from the coverage
of this regula-tion such investments,
i.e., any investments consistent with the Circular 220 would
be considered an equity investment permissible for a national bank.
Sixteen comments expressed concern that state banks do not have
access to the Office of the Comptroller of the Currency for
interpretive opinions and that these banks cannot make a determination
if an investment is allowed for a national bank. Several comments
suggested the establishment of a procedure in which state banks would
have direct access to the Office of the Comptroller of the Currency to
obtain interpretive opinions. The FDIC does not have authority to
establish such a procedure and the implementing statute does not
require such a response from the Office of the Comptroller of the
Currency. Information on what investments are permissible for national
banks is publicly available in a variety of sources, including various
banking law reporters, publications of the OCC Communications Division
("Interpretations and Actions" and the Quarterly Journal), and a
database on LEXIS. Recognizing that investments in addition to those
addressed to date in written interpretations of the OCC may be
permissible for national banks, the FDIC and the OCC are working
together to develop inter-agency procedures for resolving those
questions as they arise. In addition, to address the many questions
about permissible national bank powers that the FDIC has received since
FDICIA was enacted, the FDIC is working in conjunction with the OCC to
develop basic guidance to state banks on investments and powers of
national banks. It is intended that a financial institution letter
containing the guidance will be sent out to state banks.
9. Lower Income
One of the exceptions to the general prohibition on acquiring equity
investments not permissible for a national bank allows insured state
banks to become limited partners in partnerships that develop housing
projects designed to primarily benefit "lower income" persons.
The proposed regulation defined "lower income" to mean an income
that is less than or equal to the median income (as determined by state
or federal statistics) for the area in which the
{{4-30-93 p.3134}}housing project is
located. Under the proposed definition the "area" in which a
housing project is located referred to the relevant Metropolitan
Statistical Area (MSA) if the project is located within an MSA. If the
project is not located in an MSA, the median income of the "area"
referred to the median income of the state or territory as a whole
exclusive of the designated MSA's.
The FDIC invited comment generally on the issue of what state or
federal statistics the FDIC should recognize for the purposes of
applying this definition; how the term "area" should be construed
for the purposes of applying the definition; and what federal and state
statistics are readily available to insured state banks. Two comments
were received, both of which expressed concern relating to the
definition of "area" in rural parts of a state. These comments
felt that by using statewide statistics certain depressed rural areas
may be overlooked. In response to these concerns the definition as
adopted in the final regulations has been amended so that statistics
for the state or territory (exclusive of designated MSA's in the state)
would be used for a project not located in an MSA only when no
statistics for a local area are available.
10. National Securities Exchange
The term "national securities exchange" was defined under the
proposal to mean an exchange that is registered as a national
securities exchange by the Securities and Exchange Commission pursuant
to section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) and
the National Market System. "National Market System" referred to
the top tier of the three tiers of the over-the-counter securities
traded through the National Association of Securities Dealers Automated
Quotation system (NASDAQ). It was the stated opinion of the FDIC when
the proposal was published for comment that if a security is listed on
a registered exchange or is traded in the National Market System the
security will be more liquid due to a wide market, sufficient
information will be available about the security and the issuer to
enable the market to make informed pricing decisions about the
security, and the opportunities for fraud and manipulation of the
security are minimized.
Nine comments addressed this definition. Of the nine, seven
requested that the regulation give the same treatment to common or
preferred stock listed on a foreign exchange that is accorded stock
listed on a national exchange. One comment approved of defining
"national securities exchange" to take in the National Market
System and one comment indicated that any security traded on NASDAQ
should be considered to be listed on a national securities exchange.
The final regulation adopts the definition as proposed. Although
securities listed on foreign exchanges may have the same liquidity
characteristics of securities listed on a national securities exchange
as defined herein, the statute does not leave the FDIC the discretion
to extend the exception in § 362.3(b)(4) of the final regulation to
foreign exchanges. Lastly, the FDIC continues to believe that
securities traded on the bottom two tiers of NASDAQ do not have the
same assurance of liquidity and are more volatile. Thus, the FDIC has
rejected the comment to include all of NASDAQ.
11. Significant Risk to the Deposit Insurance Fund
The proposed regulation defined the phrase "significant risk to
the deposit insurance fund" so as to indicate that a significant
risk is to be understood to be present whenever it is likely that any
insurance fund administered by the FDIC may suffer any loss whatever.
Eleven comments objected to the proposed definition saying that it did
not take into account the plain meaning of the word significant.
Furthermore, as any investment by a bank can be said to pose the
possibility of some loss, and the definition can essentially be said to
create a standard of risklessness, no equity investment or activity
would ever pass the standard. Several of the comments objected to the
discussion in the preamble accompanying the proposed regulation which
indicated that, in the FDIC's opinion, it is not necessary that making
the equity investment will result in the failure of threatened failure
of a bank before a significant risk of loss to the fund is considered
to be present.
In response to the comments, the definition has been reworded
slightly as follows: "significant risk to the deposit
insurance
{{4-30-93 p.3135}}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
rewording has been done in an attempt to remove the implication that
because an investment or activity cannot be said to be "riskless"
under all circumstances the FDIC will determine that the investment or
activity will pose a significant risk of loss to the fund. The emphasis
is properly 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 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 definition as adopted in final is consistent with passages of
the legislative history of section 24. (See, S. Rep. No. 102--167, 102d
Cong., 1st Sess. 54 (1991)). Additionally this definition (actually the
definition precisely as set out in the proposal) has been applied to
other provisions of the FDIC's regulations for some time now. (See,
§ 303.13, 12 CFR 303.13). What is more, given the recent strains on
the resources of the deposit insurance funds, it is the agency's
position that it is appropriate to approach this issue conservatively.
For much the same reasons the FDIC is rejecting the comment that the
FDIC is being overly broad when it has announced its intention not to
require that an equity investment or activity be expected to result in
the imminent failure of a bank before the equity investment or activity
can be said to present a significant risk to the fund.
12. Subsidiary
The term "subsidiary" is defined under the final regulation to
mean any company directly or indirectly controlled by an insured state
bank. This term has the same meaning as found in § 337.4 of the
FDIC's regulations (12 CFR 337.4) and is the same meaning that was
contained in the proposed regulation. The FDIC received one comment
that the definition of subsidiary should be expanded to state, "For
the purposes of Section 362.4, subsidiary means any company directly or
indirectly controlled by more than one insured state bank
operating as a subsidiary consistent with state law." The FDIC has
not amended the definition as requested. It is the FDIC's reading of
section 24 that only a majority owned subsidiary is granted an
exception under paragraph (c) and that, furthermore, after December 19,
1992 the activities of such a subsidiary as principal must conform to
the activities permissible for a subsidiary of a national bank unless
the FDIC gives its approval. Activities in subsidiaries that are less
than majority-owned, even if control is present, must be consistent
with activities that are permissible for a national bank.
One comment inquired as to how a partnership that is controlled by a
state bank is to be treated under the regulation. Is the partnership
interest an equity investment or is the partnership treated as a
subsidiary since a subsidiary is defined to include among other things
a partnership controlled by a bank? If the bank holds the majority
interest in the partnership, it will be treated as a majority owned
subsidiary that falls within the exception contained in § 362.3(b)(1)
of the final regulation. If the bank controls the partnership but is
not the majority interest holder, the partnership interest is subject
to divestiture if the partnership conducts an activity that is not
permissible for a national bank unless one of the exceptions in the
regulation is applicable.
13. Tier One Capital
Under the final regulation, "tier one capital" has the
same meaning as found in Part 325 of the FDIC's regulations when that
term is used with reference to an insured state nonmember bank. The
term shall be understood to refer to "tier one capital" as
defined by the Board of Governors of the Federal Reserve System when
the term is used with reference to an insured state member bank. At
this time Part 325 defines "tier one capital" as common
stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, minus all intangible
assets other than mortgage servicing rights eligible for inclusion in
core capital and supervisory goodwill eligible for inclusion in core
capital. The Board of Governors of the Federal Reserve System defines
tier one capital in appendix A to 12
{{4-30-93 p.3136}}CFR Part 208. As
defined therein tier one capital generally means common stockholders'
equity, qualifying noncumulative perpetual preferred stock (including
related surplus) plus minority interests in the equity accounts of
consolidated subsidiaries minus goodwill. Only those capital elements
that technically meet the definition of tier one capital can be
included as tier one capital for the purposes of this proposal. No
comments were received pertaining to the definition of Tier 1 capital,
and the definition stands as proposed.
14. Well-Capitalized
The final regulation defines the term "well-capitalized" by
cross referencing § 325.103 of the FDIC's regulations which
implements the prompt corrective active provisions of the FDI Act. That
definition is as follows: A "well-capitalized" insured state bank
means an insured state bank that has a ratio of total capital to
risk-weighted assets of not less than 10.0 percent; a ratio of Tier 1
capital to risk-weighted assets of not less than 6.0 percent; a ratio
of Tier 1 capital to total book assets of not less than 5.0 percent;
and which is not subject to any order or final directive issued by its
appropriate federal banking agency requiring that it meet and maintain
a specific capital level for any capital measure. In order to be
considered well-capitalized for the purposes of § 362.3(b)(7) of the
final regulation, an insured state bank must meet the above
requirements before excluding the bank's investment in its insurance
underwriting subsidiary of the bank and the following capital levels
must be met after such investment is excluded. The bank's total
risk-based capital must equal or exceed 8.0 percent and the bank's tier
one risk-based capital must equal or exceed 4.0 percent and the bank's
leverage ratio must equal or exceed 4.0 percent; or 3.0 percent or
greater if the bank is rated composite 1 under the CAMEL rating system
and the bank is not experiencing or anticipating significant growth.
These requirements are the same as that which are necessary under the
FDIC's prompt corrective actions regulations for a bank to be
considered to be adequately capitalized. The bank's "investment"
in its subsidiary will be considered to equal the amount invested in
the subsidiary's equitysecurities plus any debt
issued by the subsidiary that is held by the bank. The bank's
investment in a department will be considered to equal the total of any
funds transferred to the department which is represented on the
department's accounts and records as an accounts payable, a liability,
or equity of the department except that transfers of funds to the
department in payment of services rendered by the department will
not be considered an investment in the department.
Although a number of changes have been made to the definition
from that which was contained in the proposed regulation, in many ways
the definition has been adopted essentially as proposed. The
requirement that a bank not be in a "troubled condition" in order
to be considered "well-capitalized" has been deleted in the final
regulation so that the definition as contained in Part 362 will be
consistent with § 325.103 of the FDIC's regulations. (Three comments
were received supporting using the same definition of
"well-capitalized" as used for the implementation of section 38
of the FDI Act and two comments opposed using the same definition. The
FDIC has decided to cross reference the prompt corrective action
regulations in order to ensure consistency.) In addition, in response
to comments that it was overly restrictive to require that a bank be
"well-capitalized" after deducting the bank's investment in an
insurance subsidiary, the regulation has been amended to indicate that
a bank need only be adequately capitalized after making the capital
deduction. It had been suggested that the FDIC make this change since
the FDIC should only be concerned with whether a bank could sustain a
total loss of its investment and still have sufficient capital to
safely conduct its operations. Several comments objected to defining
"well-capitalized" so as to require a capital deduction for a
bank's investment in any subsidiary or department that engages in
activities that are not permissible for a national bank. These comments
were concerned with the implication that the FDIC may, for the purposes
of section 24(d), require that a bank be "well-capitalized"
before the FDIC will grant approval for any of its subsidiaries to
conduct any activity as principal that a national bank subsidiary
could not con-
{{4-30-93 p.3137}}duct. The final
regulation makes clear that the capital deduction is only relevant for
the purposes of whether a bank is eligible for the exception contained
in § 362.3(b)(7), "Interests in insurance subsidiaries". The
FDIC will consider the issue of whether a capital deduction is
appropriate whenever a subsidiary engages in any activity as principal
that is not permissible for a national bank when the agency considers
regulations implementing section 24(d)(1) of the FDI Act which pertains
to "activities" of insured state banks and their majority owned
subsidiaries.
Eleven comments addressed excluding the bank's investment in an
insurance underwriting subsidiary from the bank's capital. Six of the
comments objected to the deduction. One comment suggested a phase-in of
the requirement. The FDIC continues to be of the belief that it is
appropriate for the regulation to contain the capital deduction. Taking
the deduction will provide assurance that the bank could lose its
entire investment in the subsidiary and still have enough capital left
to absorb other losses, should they arise, from more
"traditional" banking functions. Any bank which has an investment
subject to the capital deduction requirement will not be required to
consolidate the subsidiary for the regulatory capital requirements.
These entities would be consolidated, however, for the purposes of
preparing the bank's Report of Condition and Report of Income. The
final regulation does, however, provide for a phase-in of the capital
deduction on a case-by-case basis (see § 362.3(b)(7)(ii) of the final
regulation).
Those banks which hold stock in an insurance underwriting subsidiary
or have an insurance underwriting department and which would not be
adequately capitalized if they were to take the entire capital
deduction at once may apply to the FDIC for permission to retain their
investment in the subsidiary and/or continue to operate their insurance
department. The application cannot be granted unless the bank is
expected to meet the definition of "well-capitalized" no later
than three years from the effective date of the final regulation and
the FDIC determines that the retention of the subsidiary, or continued
operation of the department, in the interim will not posea
significant risk to the insurance fund. The bank would in effect be
asking for permission to stagger the capital deduction over a period of
time not to exceed three years at the end of which the bank could
absorb the entire capital hit and be adequately capitalized. The
application may be in letter form and should set out the bank's plan to
become well-capitalized taking into consideration the gradual deduction
of the bank's investment.
One comment suggested that a bank not be required to deduct its
entire investment if the subsidiary engages in permissible activities
in addition to impermissible activities. As the final regulation
clearly provides that the capital deduction only comes into play with
respect to insurance underwriting subsidiaries and departments (and
then only if the underwriting activities are ones that are not
permissible for a national bank) the FDIC does not anticipate that the
concern raised by the comment should be a problem.
15. Insured State Bank
The proposed regulation defines the term "insured state bank"
to mean any state bank, whether or not a member of the Federal Reserve
System, that is insured by the FDIC including any insured branch of a
foreign bank that is not a federal branch. The FDIC received one
comment which urged that the final regulation delete the reference to
foreign branches. The comment noted that subsection 7(h) of the
International Banking Act as amended by section 202 of FDICIA (12
U.S.C. 3105(h)) establishes a regulatory scheme governing the
activities of state branches of foreign banks that, while similar to
section 24 of the FDI Act, is somewhat different. It would not be
appropriate, according to the comment, to bring foreign branches within
the ambit of section 24 because a separate regulatory system was
contemplated by the Congress. In response to this comment the final
regulation has been amended so as to delete the reference to insured
branches of foreign banks.
General Prohibition on Acquiring or Retaining Equity
Investments That Are Not Permissible for a National Bank
{{4-30-93 p.3138}}
Section 362.3(a) of the proposed regulation contained a
restatement of the overall prohibition on making or retaining equity
investments of a type or in an amount that is not permissible for a
national bank. The FDIC received twelve comments which objected to
restricting state bank equity investments. Some of the comments
objected to restricting such investments at all (such investments were
described as beneficial for banks) and some of the comments
specifically objected to restricting state banks to investments that
are permissible for a national bank. Two comments expressed the opinion
that the FDIC had misread the statute insofar as it was the FDIC's
expressed opinion that section 24(c) of the FDI Act was immediately
effective upon enactment. The comments indicated that section 24(c)
should be read as not being effective until December 19, 1992 as
section 24(a) which governs "activities" is not effective until
that time and the statute defines "activity" to include making
any investment. According to the comments, since an "equity
investment" is an "investment", the FDIC is able to approve or
deny a state bank making an otherwise impermissible equity investment
if the bank meets its capital requirements and the FDIC determines that
the equity investment does not pose a significant risk to the fund. The
comments also stated that the FDIC was misguided in relying in part for
its opinion on how section 24 operates on section 28 of the FDI Act as
added by the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 (FIRREA, 12 U.S.C. 1831(e)). Five comments urged the FDIC
not to adopt its announced position on commitments to acquire equity
investments. The preamble accompanying the proposed regulation had
indicated that any state bank that had entered into a commitment prior
to December 19, 1991 to acquire what is now an impermissible equity
investment may not proceed with the acquisition. (57 FR
30436, July 9, 1992, column 3). Two comments urged the
FDIC to distinguish between commitments, capital calls and what was
referred to as phased construction.
Section 362.3(a) of the final regulation has been adopted as
proposed without any change. The statute leaves the FDIC no discretion
on the matter of whether equity investments of state banks should be
restricted and whether the restriction should be tied into the powers
of a national bank. The FDIC has rejected the construction of section
24(c) as urged by the above described comment. Unlike paragraph (a) of
section 24, paragraph (c) does not contain any language delaying its
effectiveness until December 19, 1992. We do not feel that this
omission was by oversight nor is it appropriate as a matter of law in
the agency's opinion to import the December 19, 1992 date from
paragraph (a) into paragraph (c). Paragraphs (a) and (c) draw a clear
distinction between investments that are equity investments and other
types of investments. It is a maxim of statutory construction that the
specific governs the general thus it would be inconsistent with that
tenet to ignore the treatment accorded equity investments in paragraph
(c) and paragraph (f). What is more, the reading of section 24 urged on
the FDIC by the comment would make paragraphs (c) and (f) superfluous.
If paragraph (a) were intended to govern all investments, there would
be no need for paragraph (c) or paragraph (f). Congress could simply
have stopped after drafting paragraph (a) but it did not. Lastly, the
FDIC's reading of section 24 is consistent with the reading Congress
stated should be given to section 28 of the FDI
Act. 1
The FDIC is justified in looking to section 28 for guidance in
construing section 24 even though section 28 dealt with savings
associations and may have been prompted by a set of circumstances not
entirely replicated in the banking industry. The two
statutes
{{4-30-93 p.3139}}are structurally very
similar. In many respects the language is similar if not identical and
the stated intent of both provisions is to ensure that the activities
and equity investments of federally insured depository institutions do
not present a risk to the deposit insurance funds. In fact, the
legislative history of section 24 references the losses experienced by
thrifts and Congress's legislative response to those losses (section 28
of the FDI Act) and describes section 24 as being similar to the rules
previously adopted for thrifts in FIRREA. (S. Rep. 102--167
accompanying S. 543, October 1, 1991, p. 5).
As to commitments, the FDIC has again reviewed the case law and
continues to be of the opinion that a state bank may not proceed under
a preexisting commitment to acquire an equity investment that a
national bank could not acquire. We are confident that such an
institution will have a defense to a breach of contract claim on the
basis of impossibility of performance. The agency does not consider
this position to be tantamount to retroactive rulemaking. Congress has
the authority to nullify outstanding contracts by subsequent
legislation and did so by enacting section 24. The statute clearly
prohibits acquisitions after December 19, 1991 and just as clearly
requires divestiture of existing investments, that although lawful when
made, are no longer lawful.
The FDIC is willing to take a case-by-case approach in applying the
final regulation to phased construction arrangements and capital calls.
As was indicated in the preamble accompanying the proposal, partially
performed contracts will need to be reviewed on the facts in order
to determine whether it can be said that an equity investment was
"acquired" before December 19, 1991 and that such investment is
eligible to be retained over the divestiture period set out in the
final regulation. The issue with respect to capital calls and phased
construction is whether a capital infusion, or construction done in
stages, gives rise under the facts to an additional equity investment.
A number of state banks expressed concern about equity investments
that may have been made after December 19, 1991 under the mistaken
understanding that the equity investment restrictions of section 24
would not take effect until December 19, 1992. The FDIC recognizes that
many state banks may have not been aware of the equity investment
restrictions until only recently and that many banks may have been
operating under the assumption that the restrictions were not yet
effective. It is not the FDIC's intent to take enforcement action
against these banks for a violation of section 24, however, banks that
did acquire impermissible investments after December 19, 1991 must
divest those assets. Such banks should file a divestiture plan as
provided by § 362.3(c)(2) of the final regulation. Although the
agency could conclude that the investments are not eligible to be
divested over the five year period as the assets were not held by the
bank on December 19, 1991, the FDIC has determined that it is more
prudent to handle the timing of divestiture on a case-by-case basis
under the regulation rather than to force immediate divestiture which
could have an adverse impact on the affected banks.
Exceptions to General Prohibition on Acquiring or
Retaining Prohibited Equity Investments
The statute contains several exceptions to the general prohibition
on acquiring or retaining equity investments that are not permissible
for a national bank. Those exceptions are set out in the final
regulation in § 362.3(b). A description of the exceptions and a
discussion of the comments which addressed those exceptions follows.
1. Majority Owned Subsidiary
Section 362.3(b)(1) of the proposal provided that an insured state
bank is not prohibited from acquiring or retaining a majority stock
interest in a subsidiary even if the stock investment in that
subsidiary is one which would not be permissible for a national
bank. 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. 2
{{4-30-93 p.3140}}Majority ownership for
the exception is understood to mean ownership of greater than 50% of
the outstanding voting stock of the subsidiary.
The proposal also indicated that an insured state bank that is a
member of SAIF will not be permitted to retain its majority interest in
a subsidiary pursuant to the exception if the bank was required under
§ 333.3 of the FDIC's regulations to request the FDIC's permission to
retain the investment and the application was denied. In such case, the
SAIF member state bank must divest the interest in the subsidiary in
accordance with whatever conditions were previously established by the
FDIC.
Section 333.3 applies to state banks that are members of SAIF. Under
§ 333.3 a SAIF member state bank may not acquire or retain an equity
investment that is not permissible for a federal savings association.
An association that meets its capital requirements may apply for
permission to retain an interest in a subsidiary that would otherwise
be prohibited. In order for the application to be approved the FDIC
must determine that retaining the equity investment in the subsidiary
will not pose a significant risk to SAIF. The preamble accompanying the
proposed regulation indicated that, although FDIC proposed to delete
the above described portion of § 333.3, (see 57 FR 30433) it is the
FDIC's belief that any denial previously made by the FDIC pursuant to
§ 333.3 would operate to limit the exception because the FDIC had
already determined that retaining the investment will pose a
significant risk to SAIF. It was the expressed opinion of the FDIC that
it would jeopardize SAIF to hold otherwise as to do so would in effect
allow the bank to retain an investment expected to adversely affect the
fund only to require the bank to seek the FDIC's permission to retain
the investment pursuant to whatever procedures the FDIC adopts to
implement the portion of section 24 dealing with activities of
subsidiaries.
Approximately twelve comments addressed § 362.3(b)(1) of the
proposal. The comments did not raise any objections to the provision as
drafted. The comments almost exclusively raised questions regarding
what activities the FDIC will determine that a majority owned
subsidiary may engage in without posing a significant risk to the fund.
Those issues will be addressed by the FDIC in another rulemaking in the
near future. As no objections to the exception were received,
§ 362.3(b)(1) is being adopted in final as proposed.
Insured state banks are reminded that the exception for majority
owned subsidiaries is itself limited. Section 24(d) provides that no
subsidiary of an insured state bank may engage as principal,
after December 19, 1992, in any activity that is prohibited to a
subsidiary of a national bank unless the bank meets its applicable
capital requirements and the FDIC determines that the conduct of the
activity in question will not pose a significant risk to the deposit
insurance fund. As already stated, the FDIC will consider further
proposed rulemaking to implement the requirement that activities by
majority owned subsidiaries be approved by the FDIC. That rulemaking
will consider such things as whether certain activities should be
prohibited by regulation, whether certain activities should be listed
as having been found not to present a significant risk to the fund, and
whether the FDIC should establish parameters for operations of majority
owned subsidiaries, e.g., structural and/or operational
restrictions to ensure that the conduct of the activity in question
will not present a significant risk to the insurance fund.
2. Qualified Housing Projects
Section 362.3(b)(2) of the proposed regulation set out 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
{{4-30-93 p.3141}}any existing investment
in such a partnership or partnerships, may not exceed 2% of the bank's
total assets. The proposed regulation indicated that banks are to take
as the measure of their total assets the figure reported on the bank's
most recent consolidated report of condition. The FDIC chose the most
recent report of condition as the comparison point in an attempt to
provide a more stable asset base against which the bank's investments
can be measured. 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. In that event, however, no
further investments in qualified housing projects would be permissible
until the bank's total assets increase.
Comment was requested on how the FDIC should construe the terms
"primarily" and "residential" as used in this exception
(i.e., how much commercial activity can go on in a building
before it is no longer residential or no longer is intended to
primarily benefit lower income persons); whether or not the FDIC should
include unfunded commitments as part of the bank's investment in
partnerships under this exception; and what problems, if any, the
exception as written poses for bank's meeting their Community
Reinvestment Act obligations.
The preamble accompanying the proposed regulation also reminded
state banks that as the proposed definition of equity investment did
not include an interest in community development corporations up to an
aggregate of 5% of a bank's tier 1 capital (see discussion of
"equity investment in real estate" definition) insured state
banks may invest in qualified housing projects excepted by
§ 362.3(b)(2) up to 2% of their total assets in addition to
investing in community development corporations up to an aggregate
maximum of 5% of their tier 1 capital. With the exception of the
changes discussed below, § 362.3(b)(2) is being adopted in final as
proposed.
In response to comments, the final regulation indicates that a
qualified housing project includes, but is not necessarily limited to,
projects eligible for federal low income housing tax credits under
section 42 of the Internal Revenue Code (26 U.S.C. 42). Inclusion of
such projects was suggested by three of the comments. A review of the
information available regarding projects which qualify for such tax
credit indicates that they should be available for the exemption. Under
the Internal Revenue Code, to be a "qualified low-income housing
project" the project must meet one or the other of the following two
tests; 20 percent or more of the residential units are rent restricted
and are occupied by individuals whose income is 50 percent or less of
the area median gross income, or 40 percent or more of the residential
units are rent restricted and occupied by individuals whose income is
60 percent or less of the area median gross income. Part of the
building in which the qualified low-income housing project is located
may be used for purposes other than residential rental purposes without
the project losing its eligibility for the tax credit.
Specific comment was requested regarding the meaning to be given
"primarily" and "residential" as used in the final
regulation. Four comments addressed this area. In each case, the
comment indicated the opinion that projects should not be disqualified
from the exception if they are not 100% residential properties. Two of
the comments indicated that if a project does not qualify for the low
income housing tax credit under federal law the project should be
considered a qualified low income housing project if at least 50% of
the available residential properties are available to lower income
individuals and that such projects should still qualify provided no
more than 20% of the total square footage of such projects is
available for commercial usage. The remaining comment indicated that
51% of the project should be required to be residential and any
commercial development should be found to be incidental to the
qualified housing. If the commercial development is wholly unrelated to
qualified housing, then 71% of the available space should be
residential.
The FDIC agrees that some commercial development may be both
incidental and beneficial to a housing development. Therefore, the
final regulation provides that a residential real estate project which
does not qualify for tax credits under section 42
{{4-30-93 p.3142}}of the Internal Revenue
Code may be considered primarily for the benefit of lower income
persons if 50% or more of the housing units are to be occupied by
lower income persons. Additionally, a project will be considered
primarily residential despite the fact that some portion of the total
square footage is utilized for commercial purposes provided such
commercial use is not the primary purpose of the project. Therefore,
any project with less than 50% of the total available square footage
dedicated to housing would not qualify for the exemption.
The two comments addressed counting unfunded commitments as part of
the bank's investment in partnerships under the exception had opposing
viewpoints. One comment indicated that, by analogy to a national bank's
lending limit, it would be appropriate to exclude unfunded commitments
to encourage qualified housing investment. The other comment felt
including legally binding, unfunded commitments as part of the bank's
investment in a partnership is appropriate. Another comment indicated
that investments in qualified housing projects should be based on
capital and not asset size.
The final rule adopts the position that legally binding commitments
are to be included as part of the bank's investment under the exception
in § 362.3(b)(2). Such investments are not analogous to lending
relationships (any excess investment cannot be sold as easily as a loan
can be participated out if the bank's asset base does not grow in an
amount which offsets the additional funding of the commitment).
3. Savings Bank Life Insurance
Section 362.3(b)(3) of the proposed regulation provided that an
insured state bank located in Massachusetts, New York, or Connecticut
may own stock in a savings bank life insurance company provided that
the insurance company prominently disclosed to purchasers of life
insurance policies, annuities, and other insurance products that the
policies, annuities and other products offered to the public are not
insured by the FDIC, are not obligations of, and are not guaranteed by,
any insured state bank. The proposal indicated that the following
or a similar statement will satisfy the
disclosure requirement: "This [policy, annuity, insurance product]
is not a federally insured deposit and is not an obligation of, nor is
it guaranteed by, any federally insured bank."
The agency received eleven comments on this section of the proposal.
Several of the comments argued that the FDIC is attempting to require
disclosure provisions in the absence of any statutory authority.
According to these comments, while section 24(e)(1)(B) of the FDI Act
provides that, in order for the savings bank life exception to be
available, the consumer disclosure provisions of section 18(k) of the
FDI Act (12 U.S.C. 1828(k)) must be met, since section 18(k) of the FDI
Act does not contain any consumer disclosure provisions Congress
clearly did not intend that disclosure be required. The comments also
argued that to require disclosure is unnecessary as the relevant state
laws already require that a similar type of disclosure appear on the
face of the instruments that are sold. The comments further pointed out
that since the inception of savings bank life insurance there have been
no reports of consumers confusing savings bank life insurance with an
insured deposit. These comments suggested delaying the effectiveness of
the disclosure requirement for a waiting period ranging from six months
to a year (if disclosure is in fact imposed) in order to allow the
banks an opportunity to produce the documentation necessary. Some of
the comments indicated that they were not opposed to the inclusion of a
disclosure statement on the face of an instrument sold by a savings
bank life insurance company, as many already include a similar type of
disclosure on the instrument, or in their promotional materials.
The FDIC also sought comment on the timing of any disclosure and
whether the regulation should require that any disclosure be signed.
The comments which addressed these areas all indicated that to require
the consumer to acknowledge receipt of the disclosure, either at the
time of the application or at some later date, would be extremely
burdensome to banks and that it would lead to potentially higher costs
in production and postage. Those higher costs would be passed on to the
customers.
{{4-30-93 p.3143}}
The final regulation retains the requirement for disclosure. The
FDIC continues to believe that Congress intended some type of
disclosure and that the absence of a consumer disclosure provision in
section 18(k) of the FDI Act does not negate the intent of Congress
that disclosure be made. The regulation does not require that the
disclosure appear on the face of an instrument sold through a savings
bank life insurance company nor does it require a signature
acknowledgement by a consumer. Under the final regulation the
disclosure must appear, however, in a separate document that is clearly
labeled "consumer disclosure" if the disclosure does not appear
on the face of the instrument. The disclosure must be prominent, made
prior to the time the purchase of any savings bank life insurance
policy or other product is made, and must read substantially as
follows: "This [policy, annuity, insurance product] is not a
federally insured deposit and is not an obligation of, nor is it
guaranteed by, any federally insured bank." If state law or
regulation provides for substantially similar disclosure (including the
timing of disclosure), compliance with the state imposed disclosure
requirements will satisfy the requirements of the final regulation.
Allowing a bank to follow state law should in many, if not all cases,
remove the concern that the regulation will create additional costs.
4. Director and Officer Liability Insurance
The proposed exception for owning stock of a company that provides
director and officer liability insurance (proposed § 362.3(b)(5)) is
being adopted in final without any modification. Under the final
regulation, an insured state bank is not prohibited from acquiring up
to 10% of the voting stock of a company that solely provides or
reinsures directors', trustees', and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions. Any shares in excess of this limit that were
purchased before December 19, 1991 must be divested as quickly as
prudently possible but in no event later than December 19, 1996 unless
another exception applies.
The term "provides" shall be understood to mean underwriting
or assuming the insurance risk rather than acting in the capacity of an
agent. As the proposal to amend § 333.3 was adopted in final without
any amendments, insured state banks that are members of SAIF and which
were not permitted to acquire or retain voting stock in a directors and
officers liability insurance company unless that company insured the
bank's officers and directors are no longer under those constraints.
One comment requested clarification as to whether a state bank could
own stock in a directors and officers (D&O) liability insurer which
engages in other activities. The exception does not extend to such
situations as section 24(f)(3) of the FDI Act specifically limits the
exception to companies that "only" provide D&O insurance or
reinsure such risks. Ownership of such stock may be permitted, however,
under § 362.3(b)(4) of the regulation if the bank is eligible for use
of that exception and the voting stock of the company is listed on a
national securities exchange. Another comment requested clarification
as to whether an insurance underwriter may write bonds that benefit
securities firms (i.e., bonds guaranteeing the authenticity
of a customer's signature) and still qualify for the exception in
§ 362.3(b)(5). Again, the answer is no.
5. Shares of Depository Institutions
Section 362.3(b)(6) of the proposal provided that an insured state
bank is not prohibited from acquiring or retaining the voting shares of
a depository institution if the institution engages only in activities
permissible for national banks; the institution is subject to
examination and regulation by a state bank supervisor; 20 or more
depository institutions own voting shares of the institution but no one
institution owns more than 15% of the voting shares; and the voting
shares are only held 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). The section
is being adopted in final without any changes.
Two comments were received in response to this section of the
proposal. Both requested clarification on whether a bank may invest in
a "banker's bank". Such investment is allowable if the above
criteria are met, some other exception in the regulation
{{4-30-93 p.3144}}is available, or the
investment is permissible for a national bank.
6. Interests in Insurance Subsidiaries
Section 362.3(b)(7) of the proposed regulation set out an exception
for a well-capitalized bank to retain an equity investment in a
majority owned subsidiary that was lawfully providing insurance as
principal on November 21, 1991 provided that the activities of the
subsidiary continue to be limited to underwriting insurance of the same
type as provided by the subsidiary as of November 21, 1991 to residents
of the state, individuals employed in the state, and any other person
to whom the subsidiary provided insurance as principal without
interruption since such person resided in or was employed in the state.
The preamble accompanying the proposal indicated that "principal"
would be understood to mean underwriting or assuming the risk of
insurance rather than acting in the capacity of an agent; "in a
state" would be construed to except insurance underwriting
activities by an insured state bank only in the state in which the bank
was chartered as of November 21, 1991 and by a subsidiary of an insured
state bank only in the state in which the subsidiary was incorporated
and doing business as of November 21, 1991; "lawfully providing
insurance as principal" as of November 21, 1991 would be construed
as requiring that the bank and/or subsidiary must have actually
underwritten policies and/or other insurance products that were
outstanding as of November 21, 1991; and that "type" of insurance
should be understood to encompass whatever type of insurance policies
and/or products that the bank and/or its subsidiary were authorized by
state law to issue as of November 21, 1991 and were in fact providing
to the public.
Fourteen comments, several of which were from members of Congress,
criticized the proposed rule because of the interpretation of the
phrase "in a state" which excepted insurance underwriting
activities by an insured state bank only in the state in which the bank
was chartered as of November 21, 1991 and the insurance underwriting
activities of a subsidiary of the bank only in the state in which the
subsidiary was incorporated and doing business as of November 21, 1991.
These comments urged the FDIC to be guided by the clear, unambiguous
language of section 24(d)(2)(B) which did not limit the exception as
the FDIC had indicated. In short, "a state" did not mean "in
the home state". The comments pointed out that if the FDIC felt
compelled to review the legislative history of the provision, a careful
reading of that legislative history demonstrates that Congress
specifically rejected the approach the FDIC is now advocating by
regulation. According to these comments, there was a managers'
amendment to the bill on the Senate floor which changed the language in
the proposed bill limiting insurance underwriting activities of a state
bank from "in that State" to "in a
State" (emphasis added) (See, 137 Cong. Rec. S16.683--85 (daily
ed. Nov. 14, 1991)). Only two changes of note were subsequently made:
the insertion of the requirement that the bank be well-capitalized and
the elimination of a transition rule that was designed to allow banks
and their subsidiaries to phase-out activities that would no longer be
permissible. The latter was pointed to as evidence that Congress
anticipated that all existing insurance underwriting activities would
be grandfathered and that there was therefore no need for a transition
rule. Senator Roth described the provision as enacted on the Senate
floor as grandfathering all existing activities of state banks and
their subsidiaries. "Apparently, the grandfather clause, which was
drafted originally to exclude Delaware, did not and does not limit its
protection to the home State, so to speak, but rather covers any State
in which the bank was providing insurance it underwrites. Thus, when
Delaware was included within the grandfather clause, its banks obtained
the same rights as others.
Those rights are described as the "continuation of existing
activities" in the head note preceding the text in the Senate bill
* * * [T]he conference agreement preserves the rights of State
banks authorized to underwrite insurance to continue to underwrite
the same type of insurance in any State in which they provided such
insurance as of November 21, 1991." (Cong. Rec. S18626, November 27,
1991, remarks of Senator Roth). Lastly, it was pointed out that the
exchange between Senator Graham and Senator Garn cited
by
{{4-30-93 p.3145}}the FDIC in the
preamble accompanying the proposed regulation pertained to interstate
insurance sales restrictions that had been contained in the Senate bill
and that the FDIC had taken from those remarks an incorrect inference.
After carefully reviewing the comments and reexamining the
legislative history of section 24(d)(2)(B), the FDIC is persuaded that
its initial reading of the provision was flawed. In response to the
comments, the final regulation expands the FDIC's interpretation of the
phrase "in a state" as excepting insurance underwriting
activities by an insured state bank in a state where it was lawfully
underwriting insurance as of November 21, 1991 and excepting the
insurance underwriting activities of a bank's subsidiary of the bank to
insurance underwriting activities in the state where the subsidiary was
lawfully engaged in that activity as of November 21, 1991. Section
362.3(b)(7) has also been modified to make clear that the exception is
only necessary when the insurance subsidiary is engaging in insurance
underwriting activities that are not permissible for a national bank.
A discussion of the final regulation's treatment of "type of
insurance" is found below under the heading "Notification of
Exempt Insurance Underwriting Activities".
The provision in the proposed regulation indicating that a bank may
retain its equity investment in a majority owned title insurance
underwriting subsidiary if the bank was required before June 1, 1991 to
provide title insurance as a condition of its charter is carried into
the final regulation with one change. The exception as proposed
indicated that it did not apply if the bank had converted its charter
since June 1, 1991 or any transaction that is described in
§ 362.3(b)(4)(ii) occurs after June 1, 1991. The final regulation
provides that the exception does not apply if any transaction that is
described in § 362.3(b)(4)(ii) occurs except for a charter
conversion. Upon closer review of section 24, the FDIC realized that
the statute provides for loss of the exception only in the case of a
change in control and not in the event of a charter conversion. The
change in the final regulation corrects what had been an overly broad
cross reference to § 362.3(b)(4)(ii) in that that provision not only
encompasses a change incontrol but also takes
in a charter conversion.
7. Common or Preferred Stock: Shares of
Investment Companies
Section 362.3(b)(4)(i) of the final regulation provides that to the
extent permitted by the FDIC, and subject to the limitations of
§ 362.3(d) of the final regulation, an insured state bank that is
located in a state which as of September 30, 1991 authorized banks to
invest in common or preferred stock listed on a national securities
exchange or shares of an investment company registered under the
Investment Company Act of 1940 (15 U.S.C. 80a--1) and which during any
time in the period beginning on September 30, 1990 and ending on
November 26, 1991 made or maintained an investment in such stock or
registered shares, may retain the listed stock or registered shares
that it lawfully acquired or held prior to December 19, 1991 and may
continue to acquire listed stock or registered shares. This language
tracks the language found in section 24(f)(2) of the FDI Act.
The FDIC received five comments on this provision. One comment
criticized the wording of the exception because, in the commentor's
opinion, section 24(f)(2) of the FDI Act permits state banks to invest
in any type of equity investment that is not permissible for a national
bank and is not limited to permitting state banks to invest in listed
stock or registered shares. Four comments objected to the requirement
that common or preferred stock be "listed" in order for the stock
to be eligible under the exception. (A large number of comments focused
on § 362.3(d) of the proposal which set out limits on the permissible
investments that can be made pursuant to the exception. Those comments
are discussed below under the heading, "Notice and Approval of
Intent to Invest in Listed Common or Preferred Stock or Shares of
Investment Company: Divestiture of Stock or Shares in Excess of 100%
of Capital".)
The FDIC is of the opinion that to read section 24(f)(2) as broadly
as suggested by the commentor who opined that section 24(f)(2) goes to
any impermissible equity investment is neither consistent with the
language of the provision nor the provi-
{{4-30-93 p.3146}}sion's legislative
history. If the exception were intended to be as expansive as
suggested, there would be no need for the provision to require that the
bank actually have made or maintained investments during the indicated
time period in listed stock or registered shares and the heading of
paragraph (f) of section 24 would not read "Common and Preferred
Stock Investment". What is more, the legislative history of section
24(f) reveals an intent by the drafters to create an exception for
banks that had invested in listed common and preferred stock and
registered shares. There is no indication that the exception was to
extend beyond those types of securities. In view of the above,
§ 362.3(b)(4)(i) of the proposed regulation has been adopted in final
as proposed.
The final regulation retains the reference to common or
preferred stock "listed" on a national securities exchange. It is
the FDIC's opinion that the FDIC is bound to give full recognition to
the word "listed" in section 24(f)(2). Nothing in the legislative
history of the provision provides any basis upon which to construe the
language in any other fashion than to simply require that the stock in
question be listed. In short, the FDIC is of the opinion that it lacks
the discretion to deviate from the standard set out in the statute that
the common or preferred stock must be "listed". The FDIC has
therefore rejected the comments urging the FDIC to allow unlisted
preferred stock to be eligible under the exception provided that the
company which issued the stock is listed and the comment urging the
FDIC to allow the acquisition of privately placed stock pursuant to the
exception.
Paragraph (4)(ii) of § 362.3(b) of the proposal provided
that the exception for listed stock and registered shares ceases to
apply in the event that the bank converts its charter or the bank
undergoes four types of transactions. Those transactions were: any time
a bank undergoes a transaction for which a notice is required to be
filed under section 7(j) of the FDI Act; any time a bank undergoes a
transaction subject to section 3 of the Bank Holding Company Act (12
U.S.C. 1842); any time control of the bank's parent company changes;
and any time the bank is merged into another depository institution.
This provision of theproposal is based upon section
24(f)(5) of the FDI Act which indicates that the exception created by
section 24(f)(2) would cease to operate if the bank converts its
charter or undergoes a change in control.
The FDIC received 75 comments on this aspect of the proposal. In
every case the comments expressed the opinion that the proposal was
overly broad in what it considered to be a change in control that would
terminate the ability to take advantage of the exception. Some of these
comments indicated that section 24(f)(5), "Loss of Exception Upon
Acquisition", should only be construed as coming into play when a
true acquisition occurs. Specifically, the FDIC was urged only to
consider a transaction to be a change in control that would terminate
the operation of the exception if the transaction brought about an
actual, substantive change. The FDIC was urged to amend the proposal so
as to not encompass one bank holding company formations, acquisitions
of 10 percent of a bank's stock, and mergers between two banks each of
which are eligible to make investments under the exception.
Based upon the comments, the final regulation has been modified as
follows: A transaction subject to section 3 of the Bank Holding Company
Act will not result in the loss of the exception if the transaction is
a one bank holding company formation in which all or substantially all
of the shares of the holding company will be owned by persons who were
shareholders of the bank; a transaction that is presumed to be an
acquisition of control under section 303.4(a) of the FDIC's regulations
thus triggering a change in bank control notice pursuant to section
7(j) of the FDI Act (12 U.S.C. 1817(j)), will not result in the loss of
the exception; and the exception will not be lost if the bank is
acquired by or merged into a depository institution that is itself
eligible for the exception. Thus, an acquisition of 10 percent of the
voting stock of an eligible bank will not cause the loss of the
exception nor will a one bank holding company formation.
State banks should be aware that, depending upon the circumstances,
the exception will be considered lost after a merger transaction in
which an eligible bank is the survivor. For example, if a state bank
that is
{{4-30-93 p.3147}}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.
Lastly, the final regulation provides that in the event an eligible
bank undergoes any of the transactions which result 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's safety and soundness and the FDIC
orders the bank to divest the stock and/or shares. This provision has
been adopted in the final regulation without any changes from the
proposal inasmuch as no comments were received. State banks should be
aware that the fact that the FDIC has not taken action to order
divestiture does 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.
Divestiture of Prohibited Equity Investments
1. Requirement To Divest
Section 362.3(c)(1) of the proposed rule indicated that any insured
state bank which acquired prior to December 19, 1991 any equity
investment that is not of a type, or in an amount, that is permissible
for a national bank must divest the equity investment as quickly as
prudently possible but in no event later than December 19, 1996 unless
one of the exceptions of the proposed rule applies. The preamble
accompanying the final regulation indicated that, although the FDIC is
required by statute to see that a bank divests any prohibited equity
investment as quickly as prudently possible, it is not the FDIC's
responsibility to determine exactly how a bank will accomplish the
divestiture. The FDIC is the final arbiter, however, of when
divestiture can be prudently accomplished. Banks were advised that in
the FDIC's opinion it would not be prudent to arbitrarily hold equity
investments that are subject to divestiture until the final divestiture
date without adequate documentation as to the reasons why prolonging
the divestiture program is prudent. Lastly, it was the FDIC's stated
intent to review a bank's plan for divestiture and take such
action as may be appropriate if the plan does not allow for divestiture
as quickly as prudently possible.
Several comments were received which expressed some concern over the
level of involvement by the FDIC in the divestiture process. These
comments expressed the opinion that the FDIC's involvement should be
very limited so as not to usurp management of the bank. Some comments
stated that a divestiture plan presented by a bank for approval would
reflect a clearer understanding of the overall impact of the timing of
the divestiture on the bank's performance than the FDIC could derive
and that rejection of the plan by the FDIC could result in the FDIC
requiring divestiture when to do so would be inconsistent with the
prudent management of the bank.
The FDIC takes note of this criticism and wishes to emphasize
that the agency does not intend to become involved in the bank's
management. However, in order to fulfill its statutory responsibility
to ensure that prohibited equity investments are divested in a timely
and prudent manner, the FDIC may require divestiture in a more timely
fashion than the bank has planned if it is the FDIC's judgment that it
can be done prudently.
One comment asked that the FDIC waive the prohibitions of section
23A of the Federal Reserve Act (12 U.S.C. 371c) if a bank wishes to
accomplish divestiture by transferring the equity investment to an
affiliate. The FDIC cannot waive any applicable prohibition under
section 23A. That provision of federal law should not be a problem,
however, as the sale of an asset to a nonbank affiliate does not
usually trigger section 23A.
Section 362.3(c)(1) of the proposed regulation also indicated that
any SAIF member state bank which holds an equity investment that is
subject to divestiture pursuant to § 333.3 of the FDIC's regulations
and which is also subject to divestiture under the proposal are not
allowed until 1996 to complete divestiture. In such a case, the equity
investment must be divested as quickly as prudently possible but in no
event later than July 4, 1994 or any earlier date established by a
divestiture plan that was filed with and approved by the FDIC pursuant
to § 333.3. The preamble accom-
{{4-30-93 p.3148}}panying the proposed
regulation stated that it was the FDIC's belief that it is
inappropriate to allow such institutions a longer time to accomplish
divestiture as it has been established that the institution can
prudently accomplish divestiture in advance of December 19, 1996. It
was also the FDIC's opinion that it would be an inappropriate diversion
of the FDIC's resources to revisit the question of divestiture of these
assets. No comments were received with respect to this aspect of
§ 362.3(c)(1).
Section 362.3(c)(1) is being adopted as proposed with one technical
change. It has come to the FDIC's attention that § 362.3(c)(1) as
proposed inadvertently contained the date July 4 rather than July 1.
The operative divestiture date under § 333.3 of the FDIC's
regulations is July 1, 1994. The final regulation corrects this error.
2. Divestiture Plan
The preamble accompanying the proposed rule states that any insured
state bank that is required to divest an equity investment must submit
a divestiture plan with the regional director for the Division of
Supervision for the region in which the bank's principal office is
located not later than 60 days from the effective date of the
regulation. The divestiture plan must describe the obligor, type,
amount, book and market values (estimated or known) of the equity
investments subject to divestiture as of the bank's most recent call
report date prior to the filing; set forth the bank's plan to comply
with the divestiture period; describe the anticipated gain or loss, if
any, from the divestiture of the investment(s) and the impact on the
bank's capital; and include a copy of the resolution by the bank's
board of directors or board of trustees authorizing the filing of the
divestiture plan. The regional director may request additional
information as deemed appropriate. The preamble indicated that it was
the FDIC's intent to review each plan for the purpose of determining
whether or not the insured state bank that filed the plan can prudently
divest the equity investments in question in a more expeditious fashion
than that contemplated under the plan filed with the regional office.
The proposal also specifically provides that an insured state bank that
has filed a divesti-ture plan may act in
accordance with its plan until such time as the bank is informed in
writing by the appropriate FDIC official that the plan is unacceptable.
None of the comments objected to the content of the divestiture plan
as set out in § 362.3(c)(3) of the proposal. That provision is being
adopted without change. As stated above, numerous comments were
received which questioned the FDIC's need to closely scrutinize
divestiture plans that had been provided by the bank's management and
approved by the bank's board of directors. The commentors felt that as
long as the plan provides for a divestiture by the December 19, 1996
date the FDIC should not be overly concerned with the manner in which
the divestiture is accomplished. The FDIC believes, however, that the
statute requires the FDIC to ensure that not only are the impermissible
equity investments divested by the December 19, 1996 date but that
divestiture is accomplished prior to that date if divestiture can be
accomplished sooner in a prudent manner given the nature and type of
the equity investments.
3. Retention of Equity Investment During
Divestiture Period
Section 362.3(c)(4) of the proposed regulation indicated that the
FDIC may impose such conditions and restrictions on the retention of
the equity investments as the FDIC deems appropriate including
requiring divestiture in advance of December 19, 1996. No comments were
received in response to this provision and it is being adopted in final
without any change.
It is contemplated that the FDIC will communicate in writing its
objection or non-objection to the bank's divestiture plan. The FDIC's
decision concerning the adequacy of the divestiture plan will be based
on the information presented. As subsequent events may alter the
continued validity of the FDIC's original determination, any
non-objection on the part of the FDIC will typically be conditioned
upon the continued validity of any assumptions upon which the plan is
based, the continued vitality of the bank in question, and the
continuation of facts and circumstances existing at the time the
non-objection was communicated.
{{4-30-93 p.3149}}
Notice and Approval of Intent to Invest in Listed Common or
Preferred Stock or Shares of Investment Company; Divestiture of Stock
or Shares in Excess of 100% of Capital
1. Requirement to File Notice and Receive FDIC
Approval
Paragraph (1) of § 362.3(d) of the proposed regulation provided
that an insured state bank could only acquire or retain listed stock or
registered shares pursuant to the exception contained in
§ 362.3(b)(4) of the proposal, "Common or preferred stock; shares
of investment companies", if the bank filed a one-time notice with
the FDIC setting forth the bank's intention to acquire and retain such
securities and the FDIC determined that acquiring or retaining such
securities would not pose a significant risk to the insurance fund. The
proposal directed that the notice be submitted to the regional director
for the Division of Supervision for the region in which the bank's
principal office is located. The preamble accompanying the proposal
further indicated that a bank may retain the listed stock or registered
shares that it lawfully held on December 19, 1991 while the notice is
pending (provided that those investments do not exceed 100 percent of
the bank's tier one capital), but that they may not make any new
investments in listed stock or registered shares until the bank
receives the FDIC's approval. It was further FDIC's expressed opinion
that a bank could not take advantage of the exception in
§ 362.3(b)(4) until the FDIC responded to the notice even
if the FDIC did not do so prior to the elapse
of 60 days from the date on which the notice was filed with the FDIC.
The following text, which discusses the timing of FDIC's response to
the notice, appeared in the preamble accompanying the proposed
regulation.
The FDIC recognizes that section 24 contemplates that notices will
normally be reviewed and a determination be made within 60 days. It is
therefore the FDIC's intention to respond to the notices within 60 days
to the extent practicable. However, the FDIC has concluded that the
60-day period in paragraph (f)(6)(B) of section 24 does not allow a
bank to make additional investments if the FDIC does not respond before
expiration of the 60-day period from the FDIC's receipt of the notice.
Paragraph (f)(6) which is captioned, "Notice and
Approval" [emphasis added] contemplates affirmative approval
by the FDIC. 3
In addition, paragraph (f)(6) does not expressly indicate that the bank
may proceed in the absence of a determination by the FDIC within the
60-day period, 4
nor does it require that the FDIC "shall" or "must" make a
determination within the 60-day period. 5
Neither the earlier provision found in H.R. Rep. No. 102--330 nor
the statute as enacted expressly specifies a consequence for any
failure by the FDIC to act within the 60-day period. A well-recognized
rule uniformly applied by the courts holds that:
A statutory time period is not mandatory unless it both expressly
requires an agency or public official to act within a
particular
{{4-30-93 p.3150}}time period and
specifies a consequence for failure to comply with the
provision. 6
The FDIC Board of Directors has followed this
rule. 7
The FDIC has therefore concluded that section 24(f)(6) does not
require the FDIC to act within the 60-day period. Although the FDIC is
not required by law to do so, it is the FDIC's intent to respond to
notices filed pursuant to § 362.3(d) within 60 days of receipt of the
notice.
The FDIC received one comment which objected to the proposal
requiring that a bank file a notice in order to take advantage of the
exception in § 362.3(b)(4). Three comments objected to the FDIC
effectively eliminating the 60-day time period in the statute. One of
the three comments suggested that the FDIC consider allowing a bank
that has filed a notice to proceed to make investments under the
exception unless the FDIC affirmatively objects.
The FDIC is adopting § 362.3(d)(1) as proposed without any
changes. It is the FDIC's considered opinion that section 24(f) does
not provide the FDIC any discretion in this matter, i.e.,
section 24(f) requires that the FDIC receive prior notice and that
the FDIC must affirmatively respond to the notice before a bank can
proceed to make investments. Likewise, the FDIC continues to be of the
opinion, for the reasons set forth above, that the failure of the FDIC
to respond to a notice before 60 days has elapsed does not operate as
an approval under the statute. The FDIC is hopeful that notices can be
processed in advance of 60 days and will do everything possible to do
so.
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