Federal Deposit
Insurance Corporation

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.