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6000 - Bank Holding Company Act
§ 225.142 Statement of policy concerning bank holding companies
engaging in futures, forward and options contracts on U.S. Government
and agency securities and money market instruments.
(a) Purpose of financial contract positions. In
supervising the activities of bank holding companies, the Board has
adopted and continues to follow the principle that bank holding
companies should serve as a source of strength for their subsidiary
banks. Accordingly, the Board believes that any positions that bank
holding companies or their nonbank subsidiaries take in financial
contracts should reduce risk exposure, that is, not be speculative.
(b) Establishment of prudent written policies,
appropriate limitations and internal controls and audit
programs. If the parent organization or nonbank subsidiary is
taking or intends to take positions in financial contracts, that
company's board of directors should approve prudent written policies
and establish appropriate limitations to insure that financial
contract activities are performed in a safe and sound manner with
levels of activity reasonably related to the organization's business
needs and capacity to fulfill obligations. In addition, internal
controls and internal audit programs to monitor such activity should be
established. The board of directors, a duly authorized committee
thereof or the internal auditors should review periodically (at least
monthly) all financial contract positions to insure conformity with
such policies and limits. In order to determine the
company's
{{2-28-83 p.6155}}exposure, all open positions
should be reviewed and market values determined at least monthly, or
more often, depending on volume and magnitude of positions.
(c) Formulating policies and recording financial
contracts. In formulating its policies and procedures, the parent
holding company may consider the interest rate exposure of its nonbank
subsidiaries, but not that of its bank subsidiaries. As a matter of
policy, the Board believes that any financial contracts executed to
reduce the interest rate exposure of a bank affiliate of a holding
company should be reflected on the books and records of the bank
affiliate (to the extent required by the bank policy statements),
rather than on the books and records of the parent company. If a bank
has an interest rate exposure that management believes requires hedging
with financial contracts, the bank should be the direct beneficiary of
any effort to reduce that exposure. The Board also believes that final
responsibility for financial contract transactions for the account of
each affiliated bank should reside with the management of that bank.
(d) Accounting. The joint bank policy statements of
March 12, 1980 include accounting guidelines for banks that engage in
financial contract activities. Since the Financial Accounting Standards
Board is presently considering accounting standards for contract
activities, no specific accounting requirements for financial contracts
entered into by parent bank holding companies and nonbank subsidiaries
are being mandated at this time. The Board expects to review further
developments in this area.
(e) Board to monitor bank holding company transactions in
financial contracts. The Board intends to monitor closely bank
holding company transactions in financial contracts to ensure that any
such activity is consistent with maintaining a safe and sound banking
system. In any cases where bank holding companies are found to be
engaging in speculative practices, the Board is prepared to institute
appropriate action under the Financial Institutions Supervisory Act of
1966, as amended.
(f) Federal Reserve bank notification. Bank holding
companies should furnish written notification to their district Federal
reserve Bank within 10 days after financial contract activities are
begun by the parent or a nonbank subsidiary. Holding companies in which
the parent or a nonbank subsidiary currently engage in financial
contract activity should furnish notice by March 31, 1983.
[Codified to 12 C.F.R. § 225.142]
[Source: 45 Fed. Reg. 61595, September 17, 1980, effective August
21, 1980; amended at 48 Fed. Reg. 7720, February 24, 1983, effective
March 1, 1983]
§ 225.143 Policy statement on nonvoting equity investments by
bank holding companies.
(a) Introduction.
(1) In recent months, a number of bank holding companies have
made substantial equity investments in a bank or bank holding company
(the "acquiree") located in states other than the home state of
the investing company through acquisition of preferred stock or
nonvoting common shares of the acquiree. Because of the evident
interest in these types of investments and because they raise
substantial questions under the Bank Holding Company Act (the
"Act"), the Board believes it is appropriate to provide guidance
regarding the consistency of such arrangements with the Act.
(2) This statement sets out the Board's concerns with these
investments, the considerations the Board will take into account in
determining whether the investments are consistent with the Act, and
the general scope of arrangements to be avoided by bank holding
companies. The Board recognizes that the complexity of legitimate
business arrangements precludes rigid rules designed to cover all
situations and that decisions regarding the existence or absence of
control in any particular case must take into account the effect of the
combination of provisions and convenants in the agreement as a whole
and the particular facts and circumstances of each case. Nevertheless,
the Board believes that the factors outlined in this statement provide
a framework for guiding bank holding companies in complying with the
requirements of the Act.
(b) Statutory and Regulatory Provisions.
(1) Under section 3(a) of the Act, a bank holding company may not
acquire direct or indirect ownership or control of more than 5 percent
of the voting shares of a bank without
{{2-28-83 p.6156}}the
Board's prior approval. (12 U.S.C.
1842(a)(3)). In addition, this section of the Act provides that
a bank holding company may not, without the Board's prior approval,
acquire control of a bank: that is, in the words of the statute,
"for any action to be taken that causes a bank to become a
subsidiary of a bank holding company." (12 U.S.C. 1842(a)(2)). Under
the Act, a bank is a subsidiary of a bank holding company if:
(i) The company directly or indirectly owns, controls, or holds
with power to vote 25 percent or more of the voting shares of the bank;
(ii) The company controls in any manner the election of a
majority of the board of directors of the bank; or
(iii) The Board determines, after notice and opportunity for
hearing, that the company has the power, directly or indirectly, to
exercise a controlling influence over the management or policies of the
bank. (12 U.S.C. 1841(d)).
(2) In intrastate situations, the Board may approve bank holding
company acquisitions of additional banking subsidiaries. However, where
the acquiree is located outside the home state of the investing bank
holding company, section 3(d) of the Act prevents the Board from
approving any application that will permit a bank holding company to
"acquire, directly or indirectly, any voting shares of, interest in,
or all or substantially all of the assets of any additional bank."
(12 U.S.C. 1842(d)(1)).
(c) Review of Agreements.
(1) In apparent expectation of statutory changes that might make
interstate banking permissible, bank holding companies have sought to
make substantial equity investments in other bank holding companies
across state lines, but without obtaining more than 5 percent of the
voting shares or control of the acquiree. These investments involve a
combination of the following arrangements:
(i) Options on, warrants for, or rights to convert nonvoting
shares into substantial blocks of voting securities of the acquiree
bank holding company or its subsidiary bank(s);
(ii) Merger or asset acquisition agreements with the out-of-state
bank or bank holding company that are to be consummated in the event
interstate banking is permitted;
(iii) Provisions that limit or restrict major policies,
operations or decisions of the acquiree; and
(iv) Provisions that make acquisition of the acquiree or its
subsidiary bank(s) by a third party either impossible or economically
impracticable.
The various warrants, options, and rights are not exercisable by the
investing bank holding company unless interstate banking is permitted,
but may be transferred by the investor either immediately or after the
passage of a period of time or upon the occurrence of certain events.
(2) After a careful review of a number of these agreements, the
Board believes that investments in nonvoting stock, absent other
arrangements, can be consistent with the Act. Some of the agreements
reviewed appear consistent with the Act since they are limited to
investments of relatively moderate size in nonvoting equity that may
become voting equity only if interstate banking is authorized.
(3) However, other agreements reviewed by the Board raise
substantial problems of consistency with the control provisions of the
Act because the investors, uncertain whether or when interstate banking
may be authorized, have evidently sought to assure the soundness of
their investments, prevent takeovers by others, and allow for sale of
their options, warrants, or rights to a person of the investor's choice
in the event a third party obtains control of the acquiree or the
investor otherwise becomes dissatisfied with its investment. Since the
Act precludes the investors from protecting their investments through
ownership or use of voting shares or other exercise of control, the
investors have substituted contractual agreements for rights normally
achieved through voting shares.
(4) For example, various covenants in certain of the agreements
seek to assure the continuing soundness of the investment by
substantially limiting the discretion of the acquiree's management over
major policies and decisions, including restrictions on entering into
new banking activities without the investor's approval and requirements
for extensive consultations with the investor on financial matters. By
their terms, these covenants suggest control by the investing company
over the management and policies of the acquiree.
{{2-28-97 p.6157}}
(5) Similarly, certain of the agreements deprive the acquiree
bank holding company, by covenant or because of an option, of the right
to sell, transfer, or encumber a majority or all of the voting shares
of its subsidiary bank(s) with the aim of maintaining the integrity of
the investment and preventing takeovers by others. These long-term
restrictions on voting shares fall within the presumption in the
Board's Regulation Y that attributes control of shares to any company
that enters into any agreement placing long-term restrictions on the
rights of a holder of voting securities.
(12 CFR 225.2(b)(4)).
(6) Finally, investors wish to reserve the right to sell their
options, warrants or rights to a person of their choice to prevent
being locked into what may become an unwanted investment. The Board has
taken the position that the ability to control the ultimate disposition
of voting shares to a person of the investor's choice and to secure the
economic benefits therefrom indicates control of the shares under the
Act.{1}
{1 See Board letter dated March 18, 1982, to C. A. Cavendes,
Sociedad Financiera.}
Moreover, the ability to transfer rights to large blocks of voting
shares, even if nonvoting in the hands of the investing company, may
result in such a substantial position of leverage over the management
of the acquiree as to involve a structure that inevitably results in
control prohibited by the Act.
(d) Provisions That Avoid Control.
(1) In the context of any particular agreement, provisions of the
type described above may be acceptable if combined with other
provisions that serve to preclude control. The Board believes that such
agreements will not be consistent with the Act unless provisions are
included that will preserve management's discretion over the policies
and decisions of the acquiree and avoid control of voting shares.
(2) As a first step towards avoiding control, convenants in any
agreement should leave management free to conduct banking and
permissable nonbanking activities. Another step to avoid control is the
right of the acquiree to "call" the equity investment and options
or warrants to assure that covenants that may become inhibiting can be
avoided by the acquiree. This right makes such investments or
agreements more like a loan in which the borrower has a right to escape
covenants and avoid the lender's influence by prepaying the loan.
(3) A measure to avoid problems of control arising through the
investor's control over the ultimate disposition of rights to
substantial amounts of voting shares of the acquiree would be a
provision granting the acquiree a right of first refusal before
warrants, options or other rights may be sold and requiring a public
and dispersed distribution of these rights if the right of first
refusal is not exercised.
(4) In this connection, the Board believes that agreements that
involve rights to less than 25 percent of the voting shares, with a
requirement for a dispersed public distribution in the event of sale,
have a much greater prospect of achieving consistency with the Act than
agreements involving a greater percentage. This guideline is drawn by
analogy from the provision in the Act that ownership of 25 percent or
more of the voting securities of a bank constitutes control of the
bank.
(5) The Board expects that one effect of this guideline would be
to hold down the size of the nonvoting equity investment by the
investing company relative to the acquiree's total equity, thus
avoiding the potential for control because the investor holds a very
large proportion of the acquiree's total equity. Observance of the 25
percent guideline will also make provisions in agreements providing for
a right of first refusal or a public and widely dispersed offering of
rights to the acquiree's shares more practical and realistic.
(6) Finally, certain arrangements should clearly be avoided
regardless of other provisions in the agreement that are designed to
avoid control. These are:
(i) Agreements that enable the investing bank holding company (or
its designee) to direct in any manner the voting of more than 5 percent
of the voting shares of the acquiree;
(ii) Agreements whereby the investing company has the right to
direct the acquiree's use of the proceeds of an equity investment by
the investing company to effect certain actions, such as the purchase
and redemption of the acquiree's voting shares; and
{{2-28-97 p.6158}}
(iii) The acquisition of more than 5 percent of the voting shares
of the acquiree that "simultaneously" with their acquisition by
the investing company become nonvoting shares, remain nonvoting shares
while held by the investor, and revert to voting shares when
transferred to a third party.
(e) Review by the Board. This statement does not
constitute the exclusive scope of the Board's concerns, nor are the
considerations with respect to control outlined in this statement an
exhaustive catalog of permissible or impermissible arrangements. The
Board has instructed its staff to review agreements of the kind
discussed in this statement and to bring to the Board's attention those
that raise problems of consistency with the Act. In this regard,
companies are requested to notify the Board of the terms of such
proposed merger or asset acquisition agreements or nonvoting equity
investments prior to their execution or consummation.
[Codified to 12 C.F.R. § 225.143]
[Source: 47 Fed. Reg. 30966, July 16, 1982, effective July 8,
1982]
§ 225.144 [Removed]
§ 225.145 Limitations established by the Competitive Equality
Banking Act of 1987 on the activities and growth of nonbank banks.
(a) Introduction. Effective August 10, 1987, the
Competitive Equality Banking Act of 1987 ("CEBA") redefined the
term "bank" in the Bank Holding Company Act ("BHC Act" or
"Act") to include any bank the deposits of which are insured by
the Federal Deposit Insurance Corporation as well as any other
institution that accepts demand or checkable deposit accounts and is
engaged in the business of making commercial loans.
12 U.S.C. 1841(c). CEBA also
contained a grandfather provision for certain companies affected
by this redefinition. CEBA amended section 4 of the BHC Act to
permit a company that on March 5, 1987, controlled a nonbank bank (an
institution that became a bank as a result of enactment of CEBA) and
that was not a bank holding company on August 9, 1987, to retain
its nonbank bank and not be treated as a bank holding company for
purposes of the BHC Act if the company and its subsidiary nonbank bank
observe certain limitations imposed by
CEBA.{1}
{1 12 U.S.C. 1843(f).
Such a company is treated as a bank holding company, however, for
purposes of the anti-tying provisions in section 106 of the BHC Act
Amendments of 1970 (12 U.S.C.
1971 et seq.) and the insider lending limitations of
section 22(h) of the Federal Reserve Act
(12 U.S.C. 375b). The company is
also subject to certain examination and enforcement provisions to
assure compliance with CEBA.}
Certain of these limitations are codified in section 4(f)(3) of the BHC
Act and generally restrict nonbank banks from commencing new activities
or certain crossmarketing activities with affiliates after March
5, 1987, increasing their assets at an annual rate exceeding 7 percent
during any 12 month period after August 10, 1988, or permitting
overdrafts for affiliates or incurring overdrafts on behalf of
affiliates at a Federal Reserve bank, 12 U.S.C.
1843(f)(3).{2}
{2CEBA also prohibits, with certain limited exceptions, a
company controlling a grandfathered nonbank bank from acquiring control
of an additional bank or thrift institution or acquiring, directly or
indirectly after March 5, 1987, more than 5 percent of the assets or
shares of a bank or thrift institution, 12 U.S.C. 1843(f)(2).}
The Board's views regarding the meaning and scope of these limitations
are set forth below and in provisions of the Board's Regulation Y (12
CFR 225.51 and 52).
(b) Congressional findings. (1) At the outset, the
Board notes that the scope and application of the Act's limitations on
nonbank banks must be guided by the Congressional findings set out in
section 4(f)(3) of the BHC Act. Congress was aware that these nonbank
banks had been acquired by companies that engage in a wide range of
nonbanking activities, such as retailing and general securities
activities that are forbidden to bank holding companies under section 4
of the BHC Act. In section 4(f)(3), Congress found that nonbank banks
controlled by grandfathered nonbanking companies may, because of their
relationship with affiliates, be involved in conflicts of interest,
concentration of resources,
{{2-28-97 p.6159}}or other
effects adverse to bank safety and soundness. Congress also found that
nonbank banks may be able to compete unfairly against banks controlled
by bank holding companies by combining banking services with financial
services not permissible for bank holding companies. Section 4(f)(3)
states that the purpose of the nonbank bank limitations is to minimize
any such potential adverse effects or inequities by restricting the
activities of nonbank banks until further Congressional action in the
area of bank powers could be undertaken. Similarly, the Senate Report
accompanying CEBA states that the restrictions CEBA places on nonbank
banks "will help prevent existing nonbank banks from changing their
basic character * * * while Congress considers proposals for
comprehensive legislation; from drastically eroding the separation of
banking and commerce; and from increasing the potential for unfair
competition, conflicts of interest, undue concentration of resources,
and other adverse effects." S. Rep. No. 100--19, 100th Cong., 1st
Sess. 12 (1987). See also H. Rep. No. 100-261, 100th Cong.,
1st Sess. 124 (1987) (the "Conference Report").
(2) Thus, Congress explicitly recognized in the statute itself
that nonbanking companies controlling grandfathered nonbank banks,
which include the many of the nation's largest commercial and financial
organizations, were being accorded a significant competitive advantage
that could not be matched by bank holding companies because of the
general prohibition against nonbanking activities in section 4 of the
BHC Act. Congress recognized that this inequality in regulatory
approach could inflect serious competitive harm on regulated bank
holding companies as the grandfathered entities sought to exploit
potential synergies between banking and commercial products and
services. See Conference Report at 125--126. The basic and
stated purpose of the restrictions on grandfathered nonbank banks is to
minimize these potential anticompetitive effects.
(3) The Board believes that the specific CEBA limitations should
be implemented in light of these Congressional findings and the
legislative intent reflected in the plain meaning of the terms used in
the statute. In those instances when the language of the statute did
not provide clear guidance, legislative materials and the Congressional
intent manifested in the overall statutory structure were considered.
The Board also notes that prior precedent requires that grandfathered
exceptions in the BHC Act, such as the nonbank bank limitations and
particularly the exceptions thereto, are to be interpreted narrowly in
order to ensure the proper implementation of Congressional
intent.{3}
{3E.g., Maryland National Corporation, 73 Federal
Reserve Bulletin 310, 313--314 (1987). Cf., Spokane & Inland
Empire Railroad Co. v. United States, 241 U.S. 344, 350 (1915).}
(c) Activity limitation.--(1) Scope of
"activity". (i) The first limitation established under
section 4(f)(3) provides that a nonbank shall not "engage in any
activitiy in which such bank was not lawfully engaged as of March 5,
1987." The term "activity" as used in this provision of CEBA
is not defined. The structure and placement of the CEBA activity
restriction within seciton 4 of the BHC Act and its legislative history
do, however, provide direction as to certain transactions that Congress
intended to treat as separate activities, thereby providing guidance as
to the meaning Congress intended to ascribe to the term generally.
First, it is clear that the term "activity" was not meant to
refer to banking as a single activity. To the contrary, the term must
be viewed as distinguishing between deposit taking and lending
activities and treating demand deposit-taking as a separate activity
from general deposit-taking and commercial lending as separate from the
general lending category.
(ii) Under the activity limitation, a nonbank bank may engage
only in activities in which it was "lawfully engaged" as of March
5, 1987. As of that date, a nonbank bank could not have been engaged in
both demand deposit-taking and commercial lending activity without
placing it and its parent holding company in violation of the BHC Act.
Thus, under the activity limitations, a nonbank bank could not after
March 5, 1987, commence the demand deposit-taking or commercial lending
activity that it did not conduct as of March 5, 1987. The debates
and Senate and Conference Reports on CEBA confirm that Congress
intended the activity limitation to prevent a grandfathered
nonbank
{{2-28-97 p.6160}}bank from
converting itself into a full-service bank by both offering demand
deposits and engaging in the business of making commercial
loans.{4}
{4Conference Report at 124--25; S. Rep. No. 100--19 at 12, 32;
H. Rep. No. 99--175, 99th Cong., 1st Sess. 3 (1985) ("the activities
limitation is to prevent an institution engaged in a limited range of
functions from expanding into new areas and becoming, in essence, a
full-service bank"); 133 Cong. Rec. S4054 (daily ed. March 27,
1987); (Comments of Senator Proxmire).}
Thus, these types of transactions provide a clear guide as to the type
of banking transactions that would constitute activities under CEBA and
the degree of specificity intended by Congress in interpreting that
term.
(iii) It is also clear that the activity limitation was not
intended simply to prevent a nonbank bank from both accepting demand
deposits and making commercial loans; it has a broader scope and
purpose. If Congress had meant the term to refer to just these two
activities, it would have used the restriction it used in another
section of CEBA dealing with nonbank banks owned by bank holding
companies which has this result, i.e., the nonbank bank
could not engage in any activity that would have caused it to become a
bank under the prior bank definition in the Act. See 12
U.S.C. 1843(g)(1)(A). Indeed, an earlier version of CEBA under
consideration by the Senate Banking Committee contained such a
provision for nonbank banks owned by commercial holding companies,
which was deleted in favor of the broader activity limitation actually
enacted. Committee Print No. 1, (Feb. 17, 1987). In this regard, both
the Senate Report and Conference Report refer to demand deposit-taking
and commercial lending as examples of activities that could be affected
by the activity limitation, not as the sole activities to be limited by
the provision.{5}
{5Conference Report at 124--125; S. Rep. No. 100--19 at 32.}
(iv) Finally, additional guidance as to the meaning of the term
"activity" is provided by the statutory context in which the term
appears. The activity limitation is contained in section 4 of the BHC
Act, which regulates the investments and activities of bank holding
companies and their nonbank subsidiaries. The Board believes it
reasonable to conclude that by placing the CEBA activity limitation in
section 4 of the BHC Act, Congress meant that Board and judicial
decisions regarding the meaning of the term "activity" in that
section be looked to for guidance. This is particularly appropriate
given the fact that grandfathered nonbank banks, whether owned by bank
holding companies or unregulated holding companies, were treated as
nonbank companies and not banks before enactment of CEBA.
(v) This interpretation of the term activity draws support from
comments by Senator Proxmire during the Senate's consideration of the
provision that the term was not intended to apply "on a
product-by-product, customer-by-customer basis." 133 Cong. Rec.
S4054--5 (daily ed. March 27, 1987). This is the same manner in which
the Board has interpreted the term activity in the nonbanking provision
of section 4 as referring to generic categories of activities, not to
discrete products and services.
(vi) Accordingly, consistent with the terms and purposes of the
legislation and the Congressional intent to minimize unfair competition
and the other adverse effects set out in
[The page following this is 6163.]
{{10-31-88 p.6163}}
the CEBA findings, the Board concludes that the term "activity"
as used in section 4(f)(3) means any line of banking or nonbanking
business. This definition does not, however, envision a
product-by-product approach to the activity limitation. The Board
believes it would be helpful to describe the application of the
activity limitation in the context of the following major categories of
activities: deposit-taking, lending, trust, and other activities
engaged in the banks.
(2) Deposit-taking activities. (i) With respect to
deposit-taking, the Board believes that the activity limitation in
section 4(f)(3) generally refers to three types of activity: demand
deposit-taking; non-demand deposit-taking with a third party payment
capability; and time and savings deposit-taking without third party
payment powers. As previously discussed, it is clear from the terms and
intent of CEBA that the activity limitation would prevent, and was
designed to prevent, nonbank banks that prior to the enactment of CEBA
had refrained from accepting demand deposits in order to avoid coverage
as a "bank" under the BHC Act, from starting to take these
deposits after enactment of CEBA and thus becoming full-service banks.
Accordingly, CEBA requires that the taking of demand deposits be
treated as a separate activity.
(ii) The Board also considers nondemand deposits withdrawable by
check or other similar means for payment to third parties or others to
constitute a separate line of business for purposes of applying the
activity limitation. In this regard, the Board has previously
recognized that this line of business constitutes a permissible but
separate activity under section 4 of the BHC Act. Furthermore, the
offering of accounts with transaction capability requires different
expertise and systems than non-transaction deposit-taking and
represented a distinct new activity that traditionally separated banks
from thrift and similar institutions.
(iii) Support for this view may also be found in the House
Banking Committee report on proposed legislation prior to CEBA that
contained a similar prohibition on new activities for nonbank banks. In
discussing the activity limitation, the report recognized a distinction
between demand deposits and accounts with transaction capability and
those without transaction capability:
With respect to deposits, the Committee
recognizes that it is legitimate for an institution currently involved
in offering demand deposits or other third party transaction accounts
to make use of new technologies that are in the process of replacing
the existing check-based, paper payment system. Again, however, the
Committee does not believe that technology should be used as a lever
for an institution that was only incidentially involved in the payment
system to transform itself into a significant offeror of transaction
account capability.{6}
{6H. Rep. No. 99--175, 99th Cong., 1st Sess. 13 (1985).}
(iv) Finally, this distinction between demand and
nondemand checkable accounts and accounts not subject to withdrawal by
check was specifically recognized by Congress in the redefinition of
the term "bank" in CEBA to include an institution that takes
demand deposits or "deposits that the depositor may withdraw by
check or other means for payment to third parties or others" as well
as in various exemptions from that definition for trust companies,
credit card banks, and certain industrial
banks.{7}
{7 See 12 U.S.C.
1841(c)(2)(D), (F), (H), and (I).}
(v) Thus, an institution that as of March 5, 1987, offered only
time and savings accounts that were not withdrawable by check for
payment to third parties could not thereafter begin offering accounts
with transaction capability, for example, NOW accounts or other types
of transaction accounts.
(3) Lending. As noted, the CEBA activity limitation
does not treat lending as a single activity; it clearly
distinguishes between commerical and other types of lending. This
distinction is also reflected in the definition of "bank"
in the BHC Act in effect both prior to and after enactment of CEBA as
well as in various of the exceptions from this definition. In addition,
commercial lending is a specialized form of lending involving different
techniques and analysis from other types of lending. Based upon these
factors, the Board would view commercial lending as a separate and
distinct activity for purposes of the activity limitation in section
4(f)(3). The Board's decisions under section 4 of the BHC Act have not
generally differentiated between types of commercial lending, and thus
the Board would view
{{10-31-88 p.6164}}commercial lending as a single
activity for purposes of CEBA. Thus, a nonbank that made commercial
loans as of March 5, 1987, could make any type of commercial loan
thereafter.
(i) Commercial lending. For purposes of the activity
limitation, a commercial loan is defined in accordance with the Supreme
Court's decision in Board of Governors v. Dimension Financial
Corporation, 474 U.S. 361 (1986), as a direct loan to a business
customer for the purpose of providing funds for that customer's
business. In this regard, the Board notes that whether a particular
transaction is a commercial loan must be determined not from the face
of the instrument, but from the application of the definition of
commercial loan in the Dimension decision to that
transaction. Thus, certain transactions of the type mentioned in the
Board's ruling at issue in Dimension and in the Senate and
Conference Reports in the CEBA
legislation{8}
{8S. Rep. No. 100--19 at 31; Conference Report at 123.}
would be commercial loans if they meet the test for commercial loans
established in Dimension. Under this test, a commercial loan
would not include, for example, an open-market investment in a
commercial entity that does not involve a borrower-lender relationship
or negotiation of credit terms, such as a money market transaction.
(ii) Other lending. Based upon the guidance in the
Act as to the degree of specificity required in applying the activity
limitation with respect to lending, the Board believes that, in
addition to commercial lending, there are three other types of lending
activities: consumer mortgage lending, consumer credit card lending,
and other consumer lending. Mortgage lending and credit card lending
are recognized, discrete lines of banking and business activity,
involving techniques and processes that are different from and more
specialized than those required for general consumer lending. For
example, these activities are, in many cases, conducted by specialized
institutions, such as mortgage companies and credit card institutions,
or through separate organizational structures within an institution,
particularly in the case of mortgage lending. Additionally, the Board's
decisions under section 4 of the Act have recognized mortgage banking
and credit card lending as separate activities for bank holding
companies. The Board's Regulation Y reflects this specialization,
noting as examples of permissible lending activity: consumer finance,
credit card and mortgage lending. 12 CFR 225.25(b)(1). Finally, CEBA
itself recognizes the specialized nature of credit card lending by
exempting an institution specializing in that activity from the bank
definition. For purpose of the activity limitation, a consumer mortgage
loan will mean any loan to an individual that is secured by real estate
and that is not a commercial loan. A credit card loan would be any loan
made to an individual by means of a credit card that is not a
commercial loan.
(4) Trust activities. Under section 4 of the Act, the
Board has historically treated trust activities as a single activity
and has not differentiated the function on the basis of whether the
customer was an individual or a business. See
12 CFR 225.25(b)(3).
Similarly, the trust company exemption from the bank definition in CEBA
makes no distinction between various types of trust activities.
Accordingly, the Board would view trust activities as a separate
activity without additional differentiation for purposes of the
activity limitation in section 4(f)(3).
(5) Other activities. With respect to activities
other than the various traditional deposit-taking, lending or trust
activities, the Board believes it appropriate, for the reasons
discussed above, to apply the activity limitation in section 4(f)(3) as
the term "activity" generally applies in other provisions of
section 4 of the BHC Act. Thus, a grandfathered nonbank bank could not,
for example, commence after March 5, 1987, any of the following
activities (unless it was engaged in such an activity as of that date):
discount securities brokerage, full-service securities brokerage
investment advisory services, underwriting or dealing in government
securities as permissible for member banks, foreign exchange
transaction services, real or personal property leasing, courier
services, data processing for third parties, insurance agency
activities,{9}
{9In this area, section 4 of the Act does not treat all
insurance agency activities as a single activity.9Continued Thus, for example, the Act
treats the sale of credit-related life, accident and health insurance
as a separate activity from general insurance agency activities. See 12
U.S.C. 1843(c)(8). }
real estate development, real estate brokerage, real
{{10-31-88 p.6165}}estate
syndication, insurance underwriting, management consulting, futures
commission merchant, or activities of the general type listed in
§ 225.25(b) of Regulation Y.
(6) Meaning of "engaged in". In order
to be "engaged in" an activity, a nonbank bank must demonstrate
that it had a program in place to provide a particular product or
service included within the grandfathered activity to a customer and
that it was in fact offering the product or service to customers as of
March 5, 1987. Thus, a nonbank bank is not engaged in an activity as of
March 5, 1987, if the product or service in question was in a planning
state as of that date and had not been offered or delivered to a
customer. Consistent with prior Board interpretations of the term
activity in the grandfather provisions of section 4, the Board does not
believe that a company may be engaged in an activity on the basis of a
single isolated transaction that was not part of a program to offer the
particular product or to conduct in the activity on an ongoing basis.
For example, a nonbank bank that held an interest in a single real
estate project would not thereby be engaged in real estate development
for purposes of this provision, unless evidence was presented
indicating the interest was held under a program to commence a real
estate development business.
(7) Meaning of "as of". The Board
believes that the grandfather date "as of March 5, 1987" as used
throughout section 4(f)(3) should refer to activities engaged in on
March 5, 1987, or a reasonably short period proceding this date not
exceeding 13 months. 133 Cong. Rec. S3957 (daily ed. March 26, 1987).
(Remarks of Senators Dodd and Proxmire). Activities that the
institution had terminated prior to March 5, 1988, however, would not
be considered to have been conducted or engaged in "as of" March
5. For example, if within 13 months of March 5, 1987, the nonbank bank
had terminated its commercial lending activity in order to avoid the
"bank" definition in the Act, the nonbank bank could not
recommence that activity after enactment of CEBA.
(d) Cross-marketing limitation.--(1) In
general. Section 4(f)(3) also limits cross-marketing activities by
nonbank banks and their affiliates. Under this provision, a nonbank
bank may not offer or market a product or service of an affiliate
unless the product or service may be offered by bank holding companies
generally under section 4(c)(8)
of the BHC Act. In addition, a nonbank bank may not permit any of its
products or services to be offered or marketed by or through a nonbank
affiliate unless the affiliate engages only in activities permissible
for a bank holding company under section 4(c)(8). These limitations are
subject to an exception for products or services that were being so
offered or marketed as of March 5, 1987, but only in the same manner in
which they were being offered or marketed as of that date.
(2) Examples of impermissible
cross-marketing. The Conference Report illustrates the
application of this limitation to the following two covered
transactions: (i) products and services of an affiliate that bank
holding companies may not offer under the BHC Act, and (ii) products
and services of the nonbank bank. In the first case, the restrictions
would prohibit, for example, a company from marketing life insurance or
automotive supplies through its affiliate nonbank bank because these
products are not generally permissible under the BHC Act. Conference
Report at 126. In the second case, a nonbank bank may not permit its
products or services to be offered or marketed through a life insurance
affiliate or automobile parts retailer because these affiliates engage
in activities prohibited under the BHC Act. Id.
(3) Permissible cross-marketing. On the other
hand, a nonbank bank could offer to its customers consumer loans from
an affiliated mortgage banking or consumer finance company. These
affiliates could likewise offer their customers the nonbank bank's
products or services provided the affiliates engaged only in activities
permitted for bank holding companies under the
closely-releated-to-banking standard of section 4(c)(8) of the BHC Act.
If the affiliate is engaged in both permissible and impermissible
activities within the meaning
{{10-31-88 p.6166}}of
section 4(c)(8) of the BHC Act, however, the affiliate could not offer
or market the nonbank bank's products or services.
(4) Product approach to cross-marketing
restriction. (i) Unlike the activity restrictions, the
cross-marketing restrictions of CEBA apply by their terms to individual
products and services. Thus, an affiliate of a nonbank bank that was
engaged in activities that are not permissible for bank holding
companies and that was marketing a particular product or service of a
nonbank bank on the grandfather date could continue to market that
product and, as discussed below, could change the terms and conditions
of the loan. The nonbank affiliate could not, however, begin to offer
or market another product or service of the nonbank bank.
(ii) The Board believes that the term "product or service"
must be interpreted in light of its accepted ordinary commercial usage.
In some instances, commercial usage has identified a group of products
so closely related that they constitute a product line (e.g.,
certificates of deposit) and differences in versions of the
product (e.g., a one-year certificate of deposit) simply
represent a difference in the terms of the
product.{10}
{10American Bankers Association, Banking Terminology
(1981).}
This approach is consistent with the treatment of CEBA's legislative
history of certificates of deposit as a product line rather than each
particular type of CD as a separate
product.{11}
{11During the Senate debates on CEBA, Senator Proxmire in
response to a statement from Senator Cranston that the joint-marketing
restrictions do not lock into place the specific terms or conditions of
the particular grandfathered product or service, stated:
That is correct. For example, if a nonbank bank was
jointly marketing on March 5, 1987, a 3 year, $5,000 certificate of
deposit, this bill would not prohibit offering in the same manner a 1
year, $2,000 certificate of deposit with a different interest rate. 133
Cong. Rec. S3959 (daily ed. March 26, 1987).}
(iii) In the area of consumer lending, the Board believes the
following provide examples of different consumer loan products:
mortgage loans to finance the purchase of the borrower's residence,
unsecured consumer loans, consumer installment loans secured by the
personal property to be purchased (e.g. automobile, boat or
home appliance loans), or second mortgage
loans.{12}
{12In this regard, the Supreme Court in United States v.
Philadelphia National Bank, noted that "the principal banking
products are of course various types of credit, for example: unsecured
personal and business loans, mortgage loans, loans secured by
securities or accounts receivable, automobile installment and consumer
goods, installment loans, tuition financing, bank credit cards,
revolving credit funds." 374 U.S. 321, 326 n.5 (1963).}
Under this interpretation, a nonbank bank that offered automobile loans
through a nonbank affiliate on the grandfather date could market boat
loans, appliance loans or any type of secured consumer installment loan
through that affiliate. It could not, however, market unsecured
consumer loans, home mortgage loans or other types of consumer loans.
(iv) In other areas, the Board believes that the determination as
to what constitutes a product or service should be made on a
case-by-case basis consistent with the principles that the terms
"product or service" must be interpreted in accordance with their
ordinary commercial usage and must be narrower in scope than the
definition of activity. Essentially, the concept applies in this
analysis is one of permitting the continuation of the specific product
marketing activity that was undertaken as of March 5, 1987. Thus, for
example, while insurance underwriting may constitute a separate
activity under CEBA, a nonbank bank could not market a life insurance
policy issued by the affiliate if on the grandfather date it had only
marketed homeowners' policies issued by the affiliate.
(5) Change in terms and conditions permitted. (i)
The cross-marketing restrictions would not limit the ability of the
institution to change the specific terms and conditions of a particular
grandfathered product or service. The Conference Report indicates a
legislative intent not to lock into place the specific terms or
conditions of a grandfathered product or service. Conference Report at
126. For example, a nonbank bank marketing a three-year, $5,000
certificate of deposit through an affiliate under the exemption could
offer a one-year $2,000 certificate of deposit with a different
interest rate after the grandfather date. See footnote
11 above. Modifications that alter the type of product, however, are
not
{{2-29-00 p.6167}}permitted. Thus, a nonbank bank
that marketed through affiliates on March 5, 1987, only certificates of
deposit could not commence marketing MMDA's or NOW accounts after the
grandfather date.
(ii) General changes in the character of the product or service
as the result of market or technological innovation are similarly
permitted to the extent that they do not transform a grandfathered
product into a new product. Thus, an unsecured line of credit could not
be modified to include a lien on the borrower's residence without
becoming a new product.
(6) Meaning of "offer or market". In the
Board's opinion, the terms "offer or market" in the
cross-marketing restrictions refer to the presentation to a customer of
an institution's products or service through any type of program,
including telemarketing, advertising brochures, direct mailing,
personal solicitation, customer referrals, or joint-marketing
agreements or presentations. An institution must have offered or
actually marketed the product or service on March 5 or shortly before
that date (as discussed above) to qualify for the grandfather
privilege. Thus, if the cross-marketing program was in the planning
stage on March 5, 1987, the program would not qualify for grandfather
treatment under CEBA.
(7) Limitations on cross-marketing to "in the same
manner". (i) The cross-marketing restriction in section
4(f)(3) contains a grandfather provision that permits products or
services that would otherwise be prohibited from being offered or
marketed under the provision to continue to be offered or marketed by a
particular entity if the products or services were being so offered or
marketed as of March 5, 1987, but "only in the same manner in which
they were being offered or marketed as of that date." Thus, to
qualify for the grandfather provision, the manner of offering or
marketing the otherwise prohibited product or service must remain the
same as on the grandfather date.
(ii) In interpreting this provision, the Board notes that
Congress designed the joint-marketing restrictions to prevent the
significant risk to the public posed by the conduct of such activities
by insured banks affiliated with companies engaged in generarl
commerce, to ensure objectivity in the credit-granting process and to
"minimize the unfair competitive advantage that grandfathered
commercial companies owning nonbank banks might otherwise engage over
regulated bank holding companies and our competing commercial companies
that have no subsidiary bank." Conference Report at 125--126. The
Board believes that determinations regarding the manner of
cross-marketing of a particular product or service may best be
accomplished by applying the limitation to the particular facts in each
case consistent with the stated purpose of this provision of CEBA and
the general principle that grandfather restrictions and exceptions to
general prohibitions must be narrowly construed in order to prevent the
exception from nullifying the rule. Essentially, as in the scope of the
term "product or service", the guiding principle of Congressional
intent with respect to this term is to permit only the continuation of
the specific types of cross-marketing activity that were undertaken as
of March 5, 1987.
(8) Eligibility for cross-marketing grandfather
exemption. The Conference Report also clarifies that entitlement
to an exemption to continue to cross-market products and services
otherwise prohibited by the statute applies only to the specific
company that was engaged in the activity as of March 5, 1987.
Conference Report at 126. Thus, an affiliate that was not engaged in
cross-marketing products or services as of the grandfather date may not
commence these activities under the exemption even if such activities
were being conducted by another affiliate. Id.; see also S.
Rep. No. 100--19 at 33--34.
(e) Eligibility for grandfathered nonbank bank
status. In reviewing the reports required by CEBA, the Board
notes that a number of institutions that had not commenced business
operations on August 10, 1987, the date of enactment of CEBA, claimed
grandfather privileges under section 4(f)(3) of CEBA. To qualify for
grandfather privileges under section 4(f)(3), the institution must have
"bec[o]me a bank as a result of the enactment of [CEBA]" and
must have been controlled by a nonbanking company on March 5, 1987. 12
U.S.C. 1843(f)(1)(A). An institution that did not have FDIC insurance
on August 10, 1987, and that did not accept demand deposits or
transaction accounts or
{{2-29-00 p.6168}}engage in
the business of commercial lending on that date, would not have become
a "bank" as a result of enactment of CEBA. Thus, institutions
that had not commenced operations on August 10, 1987, could not qualify
for grandfather privileges under section 4(f)(3) of CEBA. This view is
supported by the activity limitations of section 4(f)(3), which, as
noted, limit the activities of grandfather nonbank banks to those in
which they were lawfully engaged as of March 5, 1987. A nonbank bank
that had not commenced conducting business activities on March 5, 1987,
could not after enactment of CEBA engage in any activities under this
provision.
[Codified to 12 C.F.R. § 225.145]
[Source: Section 225.145 added at 53 Fed. Reg. 37746, Septembe 28,
1988, effective October 28, 1988; 62 Fed. Reg. 9343, February 28, 1997,
effective April 21, 1997]
§ 225.200 Conditions to Board's section 20 orders.
(a) Introduction. Under section 20 of the Glass-Steagall
Act (12 U.S.C. 377) and section 4(c)(8) of the Bank Holding Company Act
(12 U.S.C. 1843(c)(8)), a
nonbank subsidiary of a bank holding company may to a limited extent
underwrite and deal in securities for which underwriting and dealing by
a member bank is prohibited. Pursuant to the Securities Act of 1933 and
the Securities Exchange Act of 1934, these so-called section 20
subsidiaries are required to register with the SEC as broker-dealers
and are subject to all the financial reporting, anti-fraud and
financial responsibility rules applicable to broker-dealers. In
addition, transactions between insured depository institutions and
their section 20 affiliates are restricted by sections 23A and 23B of
the Federal Reserve Act (12 U.S.C. 371c and 371c--1). The Board expects
a section 20 subsidiary, like any other subsidiary of a bank holding
company, to be operated prudently. Doing so would include observing
corporate formalities (such as the maintenance of separate accounting
and corporate records), and instituting appropriate risk management,
including independent trading and exposure limits consistent with
parent company guidelines.
(b) Conditions. As a condition of each order approving
establishment of a section 20 subsidiary, a bank holding company shall
comply with the following conditions.
(1) Capital. (i) A bank holding company shall
maintain adequate capital on a fully consolidated basis. If operating a
section 20 authorized to underwrite and deal in all types of debt and
equity securities, a bank holding company shall maintain strong capital
on a fully consolidated basis.
(ii) In the event that a bank or thrift affiliate of a section 20
subsidiary shall become less than well capitalized (as defined in
section 38 of the Federal Deposit Insurance Act, 12 U.S.C. 1831o), and
the bank holding company shall fail to restore it promptly to the well
capitalized level, the Board may, in its discretion, reimpose the
funding, credit extension and credit enhancement firewalls contained in
its 1989 order allowing underwriting and dealing in bank-ineligible
securities,{1}
{1Firewalls 5--8, 19, 21 and 22 of J.P. Morgan & Co., The
Chase Manhattan Corp., Bankers Trust New York Corp., Citicorp, and
Security Pacific Corp., 75 Federal Reserve Bulletin 192, 214--16
(1989).}
or order the bank holding company to divest the section 20 subsidiary.
(iii) A foreign bank that operates a branch or agency in the
United States shall maintain strong capital on a fully consolidated
basis at levels above the minimum levels required by the Basle Capital
Accord. In the event that the Board determines that the foreign bank's
capital has fallen below these levels and the foreign bank fails to
restore its capital position promptly, the Board may, in its
discretion, reimpose the funding, credit extension and credit
enhancement firewalls contained in its 1990 order allowing foreign
banks to underwrite and deal in bank-ineligible
securities,{2}
{2Firewalls 5--8, 19, 21 and 22 of Canadian Imperial Bank
of Commerce, The Royal Bank of Canada, Barclays PLC and Barclays Bank
PLC, 76 Federal Reserve Bulletin 158, (1990).}
or order the foreign bank to divest the section 20
subsidiary.
{{2-29-00 p.6169}}
(2) Internal controls. (i) Each bank holding company
or foreign bank shall cause it subsidiary banks, thrifts, branches or
agencies{3}
{3The terms "branch" and "agency" refer to a U.S.
branch and agency of a foreign bank.}
to adopt policies and procedures, including appropriate limits on
exposure, to govern their participation in transactions underwritten or
arranged by a section 20 affiliate.
(ii) Each bank holding company or foreign bank shall ensure that
an independent and thorough credit evaluation has been undertaken in
connection with participation by a bank, thrift, or branch or agency in
such transactions, and that adequate documentation of that evaluation
is maintained for review by examiners of the appropriate federal
banking agency and the Federal Reserve.
(3) Interlocks restriction. (i) Directors, officers
or employees of a bank or thrift subsidiary of a bank holding company,
or a bank or thrift subsidiary or branch or agency of a foreign bank,
shall not serve as a majority of the board of directors or the chief
executive officer of an affiliated section 20 subsidiary.
(ii) Directors, officers or employees of a section 20 subsidiary
shall not serve as a majority of the board of directors or the chief
executive officer of an affiliated bank or thrift subsidiary or branch
or agency, except that the manager of a branch or agency may act as a
director of the underwriting subsidiary.
(iii) For purposes of this standard, the manager of a branch or
agency of a foreign bank generally will be considered to be the chief
executive officer of the branch or agency.
(4) Customer disclosure--(i) Disclosure to
section 20 customers. A section 20 subsidiary shall provide, in
writing, to each of its retail
customers,{4}
{4For purposes of this operating standard, a retail customer is
any customer that is not an "accredited investor" as defined in
17 CFR 230.501(a).}
at the time an investment account is opened, the same minimum
disclosures, and obtain the same customer acknowledgement, described in
the Interagency Statement on Retail Sales of Nondeposit Investment
Products (Statement) as applicable in such situations. These
disclosures must be provided regardless of whether the section 20
subsidiary is itself engaged in activities through arrangements with a
bank that is covered by the Statement.
(ii) Disclosures accompanying investment advice. A
director, officer, or employee of a bank, thrift, branch or agency may
not express an opinion on the value or the advisability of the purchase
or the sale of a bank-ineligible security that he or she knows is being
underwritten or dealt in by a section 20 affiliate unless he or she
notifies the customer of the affiliate's role.
(5) Intra-day credit. Any intra-day extension of
credit to a section 20 subsidiary by an affiliated bank, thrift, branch
or agency shall be on market terms consistent with section 23B of the
Federal Reserve Act.
(6) Restriction on funding purchases of securities during
underwriting period. No bank, thrift, branch or agency shall
knowingly extend credit to a customer secured by, or for the purpose of
purchasing, any bank-ineligible security that a section 20 affiliate is
underwriting or has underwritten within the past 30 days, unless:
(i) The extension of credit is made pursuant to, and consistent
with any conditions imposed in a preexisting line of credit that was
not established in contemplation of the underwriting; or
(ii) The extension of credit is made in connection with clearing
transactions for the section 20 affiliate.
(7) Reporting requirement. (i) Each bank holding
company or foreign bank shall submit quarterly to the appropriate
Federal Reserve Bank any FOCUS report filed with the NASD or other
self-regulatory organizations, and any information required by the
Board to monitor compliance with these operating standards and section
20 of the Glass-Steagall Act, on forms provided by the Board.
(ii) In the event that a section 20 subsidiary is required to
furnish notice concerning its capitalization to the Securities and
Exchange Commission pursuant to 17 CFR 240.17a--11, a copy of the
notice shall be filed concurrently with the appropriate Federal Reserve
Bank.
{{2-29-00 p.6170}}
(8) Foreign banks. A foreign bank shall ensure that
any extension of credit by its branch or agency to a section 20
affiliate, and any purchase by such branch or agency, as principal or
fiduciary, of securities for which a section 20 affiliate is a
principal underwriter, conforms to sections 23A and 23B of the Federal
Reserve Act, and that its branches and agencies not advertise or
suggest that they are responsible for the obligations of a section 20
affiliate, consistent with section
23B(c) of the Federal Reserve Act.
[Section 225.200 added at 62 Fed. Reg. 45306, August 27, 1997,
effective October 27, 1997; amended at 63 Fed. Reg. 14804, March 27,
1998]
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