America's Community Bankers
May 3, 2004
Robert E. Feldman, Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th
Street, N.W.
Washington, D.C. 20429
Re: Filing Procedures; Transactions with Affiliates RIN 3064-AC78;
69 FR 12571 (March 17, 2004)
Dear Mr. Feldman:
America's
Community Bankers ("ACB")1 is pleased to
comment on the proposed rule issued by the Federal Deposit Insurance
Corporation ("FDIC")
to implement for state nonmember banks the restrictions on affiliate
transactions contained in sections 23A and 23B of the Federal
Reserve Act (the "TWA Laws")2 and Regulation W.3 Section
18(j)(1) of the Federal Deposit Insurance Act ("FDI
Act") provides that the TWA Laws apply to a nonmember insured
bank in the same manner and to the same extent as if the nonmember
insured bank were a member bank.4 The Board of Governors of the
Federal Reserve System ("Federal Reserve") adopted
Regulation W in December 2002 to implement the TWA Laws for state
member banks. Prior to the passage of Regulation W, a depository
institution had to look to the TWA Laws and various Federal Reserve
interpretations and exemptions to understand the scope of affiliate
transaction restrictions. In light of promulgation of Regulation
W, the FDIC has proposed regulations that would provide certain
exemptions from affiliate transaction restrictions and guidance
on procedural matters for state nonmember banks.
ACB Position
ACB supports
the FDIC's initiative to provide exemptions from the TWA Laws
and Regulation
W for certain state nonmember bank
subsidiaries that have been engaging in activities pursuant to
section 24 of the FDI Act.5 We
also support the expansion of the application of the exemption
to all state nonmember bank
subsidiaries that engage in activities in the future permissible
under section 24 of the FDI Act, particularly agency activities,
other than those subsidiaries engaged in principal activities
that are specifically addressed by Congress in the Gramm-Leach-Bliley
Act (the "GLB Act").6 However, we question whether
the FDIC has the statutory authority to issue a regulation providing
exemptions from coverage of TWA Laws for state nonmember banks.
ACB is concerned about the regulatory burden on state nonmember
banks that seek to rely on the exemptions provided by the FDIC.
We believe that unless the jurisdictional disagreement between
the FDIC and the Federal Reserve is resolved, that any final
regulation will result in increased regulatory burden and uncertainty
for state nonmember banks.
The Federal Reserve has taken the position that the FDIC does
not have the authority to provide exemptions from the TWA Laws.
Until that dispute is resolved, a nonmember bank that is in a
holding company structure will not be able to take full advantage
of the exemptions provided in the rule. In addition, for stand-alone
state nonmember banks that previously looked to the
Federal Reserve for exemption relief, there will be confusion
over whether past relief from the Federal Reserve is, or future
relief from the FDIC is the controlling rule. Resolution of the
dispute should result in an exemption for state nonmember bank
subsidiaries engaging in activities permissible under section
24 of the FDI Act, other than those activities as principal that
can only be engaged in by a national bank financial subsidiary.
To the extent that the FDIC has the authority to issue exemptions
and interpretations and make controlling influence determinations
under the TWA Laws, the procedural provisions in the proposed
rule should contain timeframes or deadlines within which the
FDIC must act.
Background
Prior to
passage of the GLB Act, bank subsidiaries were generally exempt
from the
TWA Laws. The GLB Act extended the reach of the
TWA Laws to "financial subsidiaries." This was done
to bring under the TWA Laws' coverage those national bank subsidiaries
that would engage in the expanded financial activities that were
now permissible under federal law. The GLB Act also specifically
extended the reach of the TWA Laws to state banks that engaged
in activities as principal that would only be permissible for
a national bank to conduct through a financial subsidiary.7
In adopting
Regulation W, the Federal Reserve took an expansive view of
the term "financial subsidiary" for
state member banks by defining the term as a subsidiary that
engages in an
activity that national banks are not permitted to engage in directly
(or that is conducted under terms and conditions that
differ from those that govern the conduct of the activity by
a national bank) and is not a subsidiary that a national bank
is specifically authorized to own or control by a federal statute
other than the GLB Act.8 The Federal Reserve excluded from the
definition three types of state bank subsidiaries: insurance
agent subsidiaries; subsidiaries engaging in an activity that
the parent state bank could engage in directly; and subsidiaries
engaging in certain activities that they were authorized by law
to engage in prior to December 12, 2002.
Exemptions from Regulation W
Grandfathered
Subsidiaries. The FDIC has proposed exempting any subsidiary
relationship
that predates March 17, 2004 from
the requirements and restrictions of the TWA Laws and Regulation
W if the relationship would not have been subject to the TWA
Laws prior to December 12, 2002. We support this exemption. During
the comment period on Regulation W, ACB, the FDIC and others
asked the Federal Reserve to exclude subsidiaries of state-chartered
banks from the definition of "financial subsidiary," other
than those subsidiaries specifically referred to in section 121(d)
of the GLB Act (i.e., subsidiaries engaging as principal in activities
that would only be permissible for a national bank to conduct
through a financial subsidiary). We felt, as did others, that
the statutory language in the GLB Act as well as congressional
intent would support that result. Neither the well-established
and long-authorized subsidiaries of state-chartered institutions
nor their activities raise safety and soundness concerns. Most
of the activities of these subsidiaries are subject to extensive
review by the FDIC and the FDIC, either by regulation or order,
establishes prudential conditions to ensure that the subsidiaries
do not pose a threat to the state-chartered institution.
In Regulation W, the Federal Reserve chose to cover as affiliates
of state member banks those subsidiaries that engage in activities
permissible for a national bank financial subsidiary as well
as those engaged in activities that were not permissible. The
Federal Reserve did grant certain exemptions that would apply
to some, but not all, of these subsidiaries. To the extent that
the FDIC has the authority to grant exemptions, we support exempting
all state member bank subsidiaries from the requirements and
restrictions of the TWA Laws and Regulation W, other than those
subsidiaries engaging in activities specifically mentioned in
section 121(d) of the GLB Act. The activities of these subsidiaries,
while not authorized for national banks to perform directly,
have been conducted safely and prudently for some time. The activities
are authorized by state law and must comply with the requirements
of the FDI Act, the FDIC's Part 362 regulations, and prudential
conditions in any FDIC approval order. Nothing in the history
of these subsidiaries' operations suggests safety and soundness
concerns that would warrant wholesale application of the TWA
Laws.
It would
be helpful if the FDIC clears up the ambiguity that is present
in the
preamble of the proposal. After discussing
the grandfathering exception, the preamble states that all transactions
with affiliates, regardless of when entered into, are governed
by Regulation W and the phase-in
periods adopted by the Federal Reserve.9 It
is not clear that the grandfathered subsidiaries are not "affiliates" for
purposes of this language. To clear up any confusion, the FDIC
should revise the preamble and provide specifically in the text
of section 324.2(b) that the exception covers both past and future
transactions between the bank and the grandfathered subsidiaries.
Subsidiaries
Engaged in Agency Activities. If expansion of the
proposed exemption to also cover future subsidiaries engaging
in activities under section 24 of the FDI Act, other than those
covered by section 121(d) of the GLB Act, is too broad, then
the FDIC should at least extend the exemption from the TWA Laws
and Regulation W to state bank subsidiaries that engage only
in agency activities. We believe this is permissible as section
121(d) of the GLB Act applies the TWA Laws only to state bank
subsidiaries engaged in activities as principal. Agency activities
typically do not require the same level of capital investment
as other subsidiaries, and generally do not pose significant
risks to their parent depository institutions. As a result, the
regulatory burden associated with applying the TWA Laws to these
types of subsidiaries is not justified by any incremental supervisory
benefits that might result from such an application. Granting
an exemption to these subsidiaries would help reduce the regulatory
burdens associated with Regulation W compliance without raising
additional safety and soundness concerns.
FDIC
Authority.
We understand that the Federal Reserve has raised questions
regarding
the FDIC's authority to grant exemptions
from the requirements of the TWA Laws and Regulation W to state
nonmember banks.10 From the perspective of our state nonmember
banks, particularly those in a holding company structure, if
the dispute is not resolved, any exemptions granted by the FDIC
will have limited value. The Federal Reserve indicates in its
letter to the FDIC that it could take enforcement action against
a bank holding company if a state nonmember bank subsidiary relies
on an FDIC interpretation or exemption that contradicts the Federal
Reserve's position on an issue. While state nonmember banks not
in a holding company structure would not have this type of concern,
the validity of any exemption or interpretation issued by the
FDIC could always be in question if the dispute is not resolved.
Also, the validity of previous exemptions given by the Federal
Reserve to a state nonmember bank could be in doubt and these
banks may feel the need to resubmit a request for the same exemption
from the FDIC if the proposal is adopted without resolution of
this issue.
What would be most helpful to state nonmember banks would be
a resolution with the Federal Reserve that grants to all state
banks the exemptions proposed by the FDIC for grandfathered subsidiaries
and grants exemptions on a going forward basis to subsidiaries
engaged in activities other than those activities specifically
mentioned in section 121(d) of the GLB Act. As indicated above,
we believe that such exemptions are supportable under the language
and intent of the GLB Act.
Procedural Issues
It appears that one of the benefits of having the FDIC as the
agency to grant interpretations and exemptions under the TWA
Laws for state nonmember banks would be that the requests could
be handled in an expedited manner. We applaud any effort to handle
requests more quickly. Oftentimes, these requests are submitted
in light of a business opportunity or strategic objective that
should be acted on fairly quickly. We are concerned, however,
with the absence of timeframes for the FDIC to act on exemption
requests and to schedule controlling influence determinations.
The rule should provide that exemption requests will be acted
upon and controlling influence determination hearings will be
scheduled within 60 days from the date of the request.
The same
transition period that the Federal Reserve provided to state
member banks should be provided to state nonmember banks.
When Regulation W was adopted, there may have been onfusion
among tate nonmember banks about how the proposal would apply
to them. Therefore, a three-month transition period would be
appropriate.
Conclusion
ACB supports the FDIC proposal and believes that the proposed
exemption for certain subsidiaries should be expanded to cover
all state nonmember bank subsidiaries other than those specifically
mentioned in section 121(d) of the GLB Act. However, any jurisdictional
issues with the Federal Reserve must be resolved so that any
FDIC exemptions will have the maximum utility.
ACB appreciates the opportunity to comment on this important
matter. If you have any questions, please contact the undersigned
at (202) 857-3121 or via e-mail at cbahin@acbankers.org, or Diane
Koonjy at (202) 857-3144 or via e-mail at dkoonjy@acbankers.org.
Sincerely,
Charlotte M. Bahin
Senior Vice President, Regulatory Affairs
_____________________________
1 ACB represents the nation's community banks. ACB members,
whose aggregate assets total more than $1 trillion, pursue
progressive, entrepreneurial and service-oriented strategies
in providing financial services to benefit their customers
and communities.
2 12
U.S.C. §§ 371c
and 371c-1.
3 12 C.F.R. Part 223.
4
12 U.S.C. § 1828(1)(1).
5
12 U.S.C. § 1831a.
6 Pub. L. 106-102.
7
Section 121(d) of the GLB Act, codified at 12 U.S.C. § 1831w.
8
12 C.F.R. § 223.3(p).
9 69 Fed. Reg. at 12574.
10 See Letter to William F. Kroener III, Esq., General Counsel
of the FDIC, from J. Virgil Mattingly, Jr., General Counsel of
the Federal Reserve, dated February 6, 2004.
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