Investment Securities
Federal RegisterDec 21, 1995
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
proposing to clarify and update its rules that prescribe the standards
under which national banks may purchase, sell, deal in, and underwrite
securities. This proposal is part of the OCC's Regulation Review
Program, a project designed to review comprehensively, modernize and
simplify OCC regulations and reduce unnecessary regulatory burdens. The
proposed revisions reorganize the regulation by placing related
subjects together, clarify areas where the rules are unclear and
confusing, and update various provisions to address market developments
and to incorporate significant OCC interpretations, judicial decisions
and statutory amendments.
DATES: Comments must be received by February 20, 1996.
ADDRESSES: Comments should be directed to: Communications Division, 250
E Street, SW., Washington, DC 20219, Attention: Docket No. 95-34.
Comments will be available for public inspection and photocopying at
the same location. In addition, comments may be sent by facsimile
transmission to FAX number 202/874-5274 or by electronic mail to
[email protected]
FOR FURTHER INFORMATION CONTACT: Kay Bondehagen, Special Assistant to
the Deputy Chief Counsel (202) 874-5200; Stuart Feldstein, Senior
Attorney, Legislative and Regulatory Activities Division (202) 874-
5090; Lee Walzer, Senior Attorney, Securities and Corporate Practices
Division, (202) 874-5210; Lisa Lintecum, Director, Fiduciary
Activities, (202) 874-5419.
SUPPLEMENTARY INFORMATION:
Background
OCC Regulation Review Program
The OCC is proposing to revise 12 CFR part 1 pursuant to its
Regulation Review Program. Pursuant to this Program, the OCC is
reviewing all its rules. Rules that are not necessary to protect
against unacceptable risks, that do not support equitable access to
banking services for all consumers or that are not needed to accomplish
other statutory responsibilities of the OCC will be revised or
eliminated.
Where risks are meaningful and regulation is appropriate, rules
will be examined to determine if they achieve their purpose at the
least possible cost. The OCC also recognizes that one source of
regulatory cost is the failure of regulations to provide clear guidance
because they are difficult to follow and understand. Therefore, an
important component of the Regulation Review Program is to revise
regulations, where appropriate, to improve clarity and better
communicate the standards that the rules are intended to convey.
Investment Securities Limitations
Most of the limitations on the ability of national banks to
purchase, sell, deal in, and underwrite securities trace to the Banking
Act of 1933, Section 16, Public Law 73-66, 48 Stat. 184 (codified as
amended at 12 U.S.C. 24 (Seventh) (1933)). More recently, the Secondary
Mortgage Market Enhancement Act of 1984 (SMMEA) 1 and the Riegle
Community Development and Regulatory Improvement Act of 1994 (RCDRI
Act) 2 removed quantitative limits on national banks' purchases of
certain types of mortgage- and small business-related securities,
subject to any regulations prescribed by the OCC.
\1\ Sec. 105(c), Pub. L. 98-440, Title I, 98 Stat. 1691
(codified as amended at 12 U.S.C. 24 (Seventh) (1984)).
\2\ Pub. L. 103-325, 108 Stat. 2160 (1994).
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Although the OCC has revised part 1 a number of times since the
early 1960s, the current version still contains many provisions dating
from 1963. See 28 FR 9916 (1963). The OCC revised part 1 in 1971,
adding the distinctions among ``Type I security,'' ``Type II security''
and ``Type III security.'' See 36 FR 6737 (1971). Guidelines were added
to the part in 1982. See 47 FR 5701 (1982). The OCC revised part 1
again in 1989 principally to reflect amendments to 12 U.S.C. 24
(Seventh) by adding obligations of the African Development Bank and
Inter-American Investment Corporation to the description of Type II
securities. See 54 FR 1333 (1989). To reduce regulatory burden, the OCC
also amended part 1 in 1993 to eliminate a requirement that a national
bank maintain certain information for a specified period of time to
demonstrate prudence in making determinations and carrying out
securities transactions. See 58 FR 27443 (1993). The OCC tended to
graft these changes onto the previous regulatory framework, resulting
in a sometimes confusing combination of definitions and restrictions.
The OCC did not amend part 1 to reflect the statutory change
resulting from the enactment of SMMEA in 1984. Nor have changes been
made to the rule to reflect significant judicial decisions and
interpretations of the OCC.
Proposal
This proposal modernizes the rules in part 1 and furthers the goals
of the OCC's Regulation Review Program. In order to make part 1 more
accessible and comprehensive, the proposal restructures many sections
of the rule. The proposal also updates the rule to incorporate
statutory changes to 12 U.S.C. 24 (Seventh), judicial decisions and
long-standing OCC interpretations. The following discussion identifies
and explains the significant proposed changes. The OCC requests
comments on all aspects of this proposal, and, in addition, requests
specific comments on certain changes that are highlighted. The OCC also
welcomes any additional comments relevant to this proposal. A table
summarizing the areas where changes are proposed is set forth at the
end of this preamble.
Authority, purpose, and scope (section 1.1)
The proposal consolidates the current ``Scope and application''
section (Sec. 1.2) with the ``Authority'' section (Sec. 1.1). The
sections are substantially condensed to eliminate redundant and
unnecessary language.
The limitations set forth in part 1 apply to national banks,
Federal branches of foreign banks, District of
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Columbia banks and state banks that are members of the Federal Reserve
System.3 This section further clarifies that foreign branches of
national banks may be authorized to conduct additional international
activities pursuant to 12 CFR part 211.
\3\ State banks that are members of the Federal Reserve System
are subject to the same limitations and conditions with respect to
the purchasing, selling, underwriting and holding of investment
securities and stock applicable to national banks under 12 U.S.C. 24
(Seventh). 12 U.S.C. 335.
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Definitions (section 1.2)
The proposal substantially revises the definitions section to add
several definitions, updates others, and brings the definitions that
currently appear in various places in the regulation into a single
section. The following definitions have been added: ``investment
company,'' ``Type IV security,'' and ``Type V security.'' The
definitions of Type I, II, and III securities also have been
substantially revised so that these types of securities are defined by
their characteristics, not by the statutory limitations on the extent
to which national banks may deal in, underwrite, purchase, or sell
them. No substantive change in the authority of a national bank results
from these revisions. In addition, as indicated with various individual
definitions below, many definitions are revised to clarify their
meaning and to incorporate the results of statutory changes, judicial
decisions, and established OCC interpretations. Of particular note are
the following proposed revisions:
Capital and surplus (section 1.2(a))
The proposal defines ``capital and surplus'' as Tier 1 and Tier 2
capital includable in risk-based capital under the Minimum Capital
Ratios in 12 CFR part 3, plus the balance of a bank's allowance for
loan and lease losses that is not included in Tier 2 capital. This is
the same standard used in the OCC's recent revisions to its lending
limit regulation. See 60 FR 8526 (February 15, 1995). As stated in the
Preamble to the new lending limit rule, 60 FR 8528, the OCC's reasons
for revising the definition of ``capital and surplus'' are to reduce
the different definitions of capital currently used for various
regulatory purposes and to use a well-recognized standard that banks
are already required to calculate.
Investment grade (section 1.2(d))
``Investment grade'' means that a security is rated in one of the
top four rating categories by each nationally recognized statistical
rating organization that has rated the security. For example, if two
nationally recognized statistical rating organizations rate the
security in one of their top four categories, the security would
qualify as ``investment grade'' even if other nationally recognized
statistical rating organizations had not rated the security. However,
if one of the two organizations rating the security did not rate the
security in one of the top four categories, the security would not
qualify as ``investment grade.'' Thus, when a security is given
different ratings by different nationally recognized rating
organizations, the lowest rating governs for purposes of this
definition.
Investment security (section 1.2(e))
To be an ``investment security'' under the proposed definition, a
security must be an investment grade marketable debt obligation or, if
the security is not rated, it must be the credit equivalent of an
investment grade marketable debt obligation. These standards reflect
current OCC guidance and practice.
The OCC requests comments on whether the regulation should describe
more specifically the characteristics of securities that are the
``credit equivalent of investment grade'' securities, and, if so, what
description would be appropriate.
Commenters also are requested to address whether other securities
with characteristics functionally equivalent to a debt obligation might
be classified as an ``investment security.''
Marketable (section 1.2(f))
This proposed definition attempts to rely on more objective
standards than the current definition of ``marketable.'' Currently, a
marketable security is defined in Sec. 1.5(a) as one that ``may be sold
with reasonable promptness at a price which corresponds reasonably to
its fair value.'' The proposed definition places more emphasis on
indicators of a ready market for a security rather than a prediction of
whether the security can be sold quickly at a particular price. As
proposed, marketable securities include: (1) Securities registered
under the Securities Act of 1933 (the Securities Act), 15 U.S.C. 77a et
seq.; (2) certain government securities and municipal revenue bonds not
required to be registered under the Securities Act; and (3) investment
grade securities sold pursuant to SEC Rule 144A, 17 CFR 230.144A.
SEC Rule 144A provides a ``safe harbor'' exemption from the
registration requirements of the Securities Act for resales of
privately offered or ``restricted'' securities to qualified
institutional buyers. The rationale for treating securities that
qualify under SEC Rule 144A as readily marketable is that they may be
sold without the need to prepare and receive SEC clearance of a
registration statement used in connection with the sale. There may be a
situation, however, based upon the particular security, when the
security is not necessarily immediately sellable.
The OCC requests comments regarding whether this definition of
``marketable'' is sufficiently inclusive, particularly regarding other
exemptions under the Securities Act, such as the statutory nonpublic
offering exemption, that enable a seller to sell a security promptly at
market or fair value, and whether the definition is appropriately
inclusive of foreign sovereign debt.
The OCC also welcomes comments regarding alternative definitions of
``marketable'' that would address the OCC's concerns about liquidity.
Commenters may suggest adopting a more general standard, or retaining
the current standard whereby a security sold with reasonable promptness
for a price that reasonably corresponds to its fair value is
marketable. Commenters are asked to address how the OCC might
objectively measure such a standard.
Type I security (section 1.2(h))
As in the current rule, the proposal defines a ``Type I'' security
to mean specified government securities. The proposal also incorporates
into the definition the key elements of the interpretation now found in
Sec. 1.110 regarding securities backed by the full faith and credit of
the U.S. Government. The proposed definition is consistent with 12
U.S.C. 24 (Seventh), which does not require that government securities
be ``marketable'' or otherwise qualify as ``investment securities.''
Type II security (section 1.2(i))
The proposal redefines a ``Type II'' security to mean an investment
security that is issued by certain state, international or multilateral
organizations, or that is otherwise listed or described in the statute.
The definition differs from the current rule, which describes a Type II
security both by the investment limits that apply to it, and by
examples of qualifying types of issuers. The proposed definition also
includes the statutory requirement that this type of security must
qualify as an ``investment security,'' in addition to being issued by a
qualifying type of issuer.
Type III security (section 1.2(j))
Part 1 currently defines a ``Type III'' security to mean a security
that ``a bank may purchase and sell for its own
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account, subject to a 10 percent limitation, but may neither deal in
nor underwrite.'' Sec. 1.3(e). Instead of defining a Type III security
in this manner, the proposal redefines a Type III security as an
investment security that does not qualify as a Type I, II, IV, or V
security. Examples of Type III securities include corporate bonds and
municipal revenue bonds.
Commenters are asked to address whether other examples of Type III
securities also should be specifically referenced in the regulation. In
particular, commenters are asked to address whether foreign securities
that are currently eligible for investment by foreign branches of U.S.
banks should be included as Type III securities.
Type IV security (section 1.2(k))
The substance of a ``Type IV'' security was established, although
not named ``Type IV,'' by amendments made to 12 U.S.C. 24 (Seventh) in
1984 by SMMEA and in 1994 by the RCDRI Act. The proposed definition
tracks the statutory changes. SMMEA amended 12 U.S.C. 24 (Seventh) to
permit national banks to purchase without limitation certain
residential and commercial mortgage-related securities offered and sold
pursuant to section 4(5) of the Securities Act, 15 U.S.C. 77d(5), or
residential mortgage-related securities as defined in section 3(a)(41)
of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C.
78c(a)(41). As previously noted, part 1 was never amended to
incorporate this 1984 statutory revision. The RCDRI Act defined a new
type of small business-related security in section 3(a)(53)(A) of the
Exchange Act, 15 U.S.C. 78c(a)(53)(A), and added a class of commercial
mortgage-related securities to section 3(a)(41) of the Exchange Act, 15
U.S.C. 78c(a)(41).
The amendments to 12 U.S.C. 24 (Seventh) made by the RCDRI Act
removed limitations on purchases by national banks of certain small
business-related and commercial mortgage-related securities. The
amendments provide the OCC authority to prescribe regulations to ensure
that acquisitions of such securities are conducted in a manner
consistent with safe and sound banking practices. The OCC has concerns
that undue concentration of risk could arise if a bank invested in a
security backed by a small number of loans or where one or a small
number of loans represented a large percentage of the assets in the
pool. This type of concentration of risk is more likely to arise with
respect to commercial mortgage- and small business-related securities
than with respect to residential mortgage-related securities. For this
reason, the proposal requires a Type IV security that is small
business- or commercial mortgage-related be fully secured by interests
in a pool of homogeneous loans of numerous obligors. The definitions of
a Type IV small business-related security and a commercial mortgage-
related security also require that the aggregate amount of collateral
from loans of any one obligor not exceed 5 percent of the total amount
of collateral for the security when the security is issued, in order to
assure diversification.
In some instances, such as the prepayment of underlying loans, an
issuer or trustee may have the legal right to substitute collateral. If
the issuer or trustee has the legal right to substitute collateral, the
diversification requirement applies whenever the issuer or trustee
substitutes collateral throughout the term of an issue, rather than
merely at issuance.
Where the issuer or trustee does not have the legal right to
substitute collateral or elects not to exercise the right, the
diversification requirement applies only at issuance. If the
diversification requirement applied throughout the term of an issue
without ongoing substitution of collateral, prepayment of loans in the
pool would reduce the number of loans that serve as collateral for the
security and, at some point, the aggregate amount of collateral from
loans of one obligor could exceed the proposed 5 percent limit and
result in a violation of the regulation. Such a result would have the
unintended consequence of deterring potential issuers from securitizing
existing collateral.
The OCC requests comments on whether the term ``homogeneous loans''
should be specifically defined. The OCC also welcomes comments on
whether the proposed requirement for certain Type IV and all Type V
securities, that the aggregate amount of collateral from loans of any
one obligor may not exceed 5 percent of the total amount of collateral
for that security, or some other standard, would be appropriate to
assure adequate diversification of the collateral.
Type V security (Section 1.2(l))
The proposal adds a definition of ``Type V security'' in order to
address separately investment grade securities that represent interests
in assets a national bank may invest in directly. The definition
reflects the OCC's long-standing interpretations that in addition to
the investments specifically described in 12 U.S.C. 24 (Seventh),
national banks may hold securitized forms of assets in which they may
invest directly.4 In order to assure the high quality of this type
of asset-backed security, however, the definition requires that Type V
securities be rated investment grade. The practical effect of the
definition is that Type V securities are recognized as high quality
indirect interests in assets in which a national bank could invest
directly.
\4\ Interpretive Letter No. 362 (May 22, 1986), reprinted in
[1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,532
(bonds collateralized by mortgages); Interpretive Letter No. 388
(June 16, 1987), reprinted in [1988-1989 Transfer Binder] Fed.
Banking L. Rep. (CCH) para. 85,612 (mortgage-backed pass-through
certificates); Interpretive Letter No. 416 (February 16, 1988),
reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH)
para. 85,640 (securitized automobile loans); Investment Securities
Letter No. 29 (August 3, 1988), reprinted in [1988-1989 Transfer
Binder] Fed. Banking L. Rep. (CCH) para. 85,899 (investment limits
for asset-backed securities consisting of GMAC receivables);
Interpretive Letter No. 514 (May 5, 1990), reprinted in [1990-1991
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,218
(securitized mortgages); Interpretive Letter No. 540 (December 12,
1990), reprinted in [1990-1991 Transfer Binder] Fed. Banking L. Rep.
(CCH) para. 83,252 (securitized credit card receivables); Security
Pacific v. Clarke, 885 F.2d 1034 (2d Cir. 1989), cert. denied, 493
U.S. 1070 (1990) (national bank authority to securitize assets).
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A Type V security also must be fully secured by interests in a pool
of homogeneous loans to numerous obligors. The definition requires a
pool of loans homogeneous as to type of loan, term of loan, or other
distinguishing characteristics, in order to facilitate performance
projections based on the common features of loans in the pool. As an
added safeguard to assure diversification of the collateral supporting
the security, the definition requires that the aggregate amount of
collateral from loans of any one obligor not exceed 5 percent of the
total amount of collateral for the security. Like the similar
requirement for Type IV securities, this diversification requirement
applies throughout the term of the issue only if the issuer exercises a
legal right to substitute collateral.
Commenters are invited to address whether these standards, which
also apply to certain Type IV securities, are appropriate.
Limitations on dealing in, underwriting, and purchasing and selling
securities (Section 1.3)
The proposal consolidates into one section the provisions regarding
limitations on dealing in, underwriting, purchasing, and selling
different types of securities. Proposed Sec. 1.3 incorporates portions
of current Secs. 1.4, ``Type I securities; standards for authorized
transactions;'' 1.5(b), ``Judgment based predominantly upon
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reliable estimates;'' 1.6, ``Type II securities; authority to deal in
and underwrite;'' and 1.7, ``Types II and III securities; limitations
on holdings.'' Current Sec. 1.7(c), ``Limitations prescribed in
eligibility rulings,'' has been removed as unnecessary. Current
references to ``prudent banking judgment'' have been changed to ``safe
and sound banking practices.'' The latter change is consistent with the
OCC's implementation of this requirement and is not intended to change
the applicable standard. Most of the limitations on Type I, II, III,
and IV securities reflected in this section are derived from 12 U.S.C.
24 (Seventh).
In the proposal, the limitations with respect to Types II, III, and
V securities are expressed in terms of ``the aggregate par value of the
obligations of any one obligor,'' which is essentially the current
approach. The OCC requests comments on whether this is an appropriate
measure and, if not, whether alternative measures would be preferable.
Type II and III securities; other investment securities limitations
(Section 1.3(d))
As in current Sec. 1.7, the proposal provides that a national bank
may not hold Type II and III securities of any one obligor that have a
combined aggregate par value exceeding 10 percent of the bank's capital
and surplus. However, aggregation is not required with respect to
industrial development bonds. Instead, the 10 percent limitation
applies separately to each security issue of a single obligor when the
proceeds of that issuance are to be used to acquire and lease real
estate and related facilities to economically and legally separate
industrial tenants, and the issuance is payable solely from and secured
by a first lien on the revenues to be derived from rentals paid by the
lessee under net noncancellable leases. This provision incorporates the
substance of the interpretation that currently appears at 12 CFR
7.7570. The OCC proposes to remove Sec. 7.7570 in conjunction with this
change.
Type IV securities (Section 1.3.(e))
The new section describing eligible Type IV securities confirms the
authority granted to national banks by SMMEA and the RCDRI Act to
purchase and sell certain mortgage- and small business-related
securities. The section also reflects OCC interpretations concerning
the authority of a national bank to deal in obligations that are fully
secured by Type I securities, in which national banks may deal.5
These interpretations reflect the OCC's consistent approach of looking
to the substance of an instrument, and not just its form, to determine
the activities a bank may conduct in connection with the instrument. In
the case of Type IV securities that are fully secured by Type I
securities, the ultimate source of repayment is Type I securities. The
proposal does not limit the categories of Type IV securities in which
banks may deal, provided that the securities are collateralized by Type
I securities. Thus, a bank's authority to deal in the securities under
this part would be determined with reference to the standards that
apply to Type I securities. (The ability of a bank to securitize and
sell its loans, including loans that qualify as collateral for Type IV
securities, is addressed in Sec. 1.3(g).)
\5\ See Interpretive Letter No. 514 (May 5, 1990), reprinted in
[1990-1991 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,218;
Interpretive Letter No. 362 (May 22, 1986), reprinted in [1985-1987
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,532.
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Type V securities (Section 1.3(f))
The proposal establishes a quantitative concentration limitation of
15 percent of a bank's capital and surplus for purchases and sales of
Type V securities of any one obligor (or certain related obligors),
rather than the 10 percent limit that the OCC currently applies to
asset-backed securities that qualify as Type III securities. The OCC
believes this approach is appropriate because: (1) The 15 percent
standard is the same level used for the basic lending limit threshold;
(2) the qualitative standards for a Type V security have been
tightened, so that Type V securities are a high quality type of asset-
backed security; and (3) under certain circumstances set forth in
Sec. 1.4(c), holdings of Type V securities of different issuers will be
aggregated for purposes of calculating compliance with the 15 percent
limitation. Therefore, the OCC believes an investment limitation of 15
percent of a bank's capital and surplus should not present undue
investment or concentration risk.
The OCC solicits comments on whether a higher investment
limitation, such as 25 percent of a bank's capital and surplus, would
be sufficient to prevent excessive concentration.
Asset securitization (Section 1.3(g))
This new section reflects the OCC's established position that
national banks may securitize and sell their loan assets. The ability
of banks to sell conventional bank assets through the issuance and sale
of certificates evidencing interests in pools of the assets provides
flexibility that can enhance banks' safety and soundness.6 Asset
securitization provides an important source of liquidity by allowing
banks to convert relatively illiquid assets into instruments with
maturities and other features that investors are readily willing to
purchase. Another important benefit is the increased credit available,
due to the fact that a bank may make more loans with a given level of
capital (when the assets are removed from the bank's balance sheet) and
may diversify its lending into new markets without incurring undue
risk. Also, a bank is less dependent on deposits to fund its loans,
improving bank profitability, with positive implications for reducing
bank failure rates and minimizing draws on the deposit insurance funds.
The treatment described in the proposal reflects the OCC's long-
standing treatment of national banks' asset sales activities as
affirmed by case law.7
6 See, e.g., Remarks by Alan Greenspan, Chairman, Board of
Governors of the Federal Reserve System before the American Bankers
Association (October 8, 1994). See also Statement by Donald G.
Coonley, Chief National Bank Examiner, OCC, Asset Securitization and
Secondary Markets: Hearings Before the Subcomm. on Policy, Research,
and Insurance of the Comm. on Banking, Finance and Urban Affairs,
102d Cong., 1st Sess. 2-4 (1991), reprinted in OCC Quarterly Journal
(December 1991); and Joint Statement by Richard Spillenkothen,
Director, Division of Banking Supervision and Regulation, Board of
Governors of the Federal Reserve System, and Donald H. Wilson,
Financial Markets Officer, Federal Reserve Bank of Chicago,
Secondary Market for Commercial Real Estate Loans: Hearings Before
the Subcomm. on Policy, Research, and Insurance of the Comm. on
Banking, Finance and Urban Affairs, 102d Cong., 2d Sess. 16-19
(1992), reprinted in 78 Fed. Res. Bull. 492 (1992).
7 See, e.g., Interpretive Letter No. 585 (June 8, 1992),
reprinted in [1992-1993 Transfer Binder] Fed. Banking L. Rep. (CCH)
para. 83,406 (securitized motor vehicle retail installment sales
contracts purchased from automobile dealers); Interpretive Letter
No. 540 (December 12, 1990), reprinted in [1990-1991 Transfer
Binder] Fed. Banking L. Rep. (CCH) para. 83,252 (securitized credit
card receivables originated by bank or purchased from others);
Interpretive Letter No. 514 (May 5, 1990), reprinted in [1990-1991
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,218
(securitized mortgages); Interpretive Letter No. 416 (February 16,
1988), reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep.
(CCH) para. 85,640 (securitized automobile loans); Interpretive
Letter No. 388 (June 16, 1987), reprinted in [1988-1989 Transfer
Binder] Fed. Banking L. Rep. (CCH) para. 85,612 (sale of mortgage-
backed pass-through certificates); No Objection Letter No. 87-9
(December 16, 1987), reprinted in [1988-1989 Transfer Binder] Fed.
Banking L. Rep. (CCH) para. 84,038(securitization of commercial
loans originated by the bank); Interpretive Letter No. 362 (May 22,
1986), reprinted in [1985-1987 Transfer Binder] Fed. Banking L. Rep.
(CCH) para. 85,532 (sales of bonds collateralized by mortgages).
Regarding sales of participations in pools of loans, see Letter from
Billy C. Wood, Deputy Comptroller, Multinational Banking (May 29,
1981), reprinted in [1981-82 Transfer Binder] Fed. Banking L. Rep.
(CCH) para. 85,275; Letter from Paul M. Homan, Senior Deputy
Comptroller for Bank Supervision (February 1, 1980), reprinted in
[1981-82 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,213;
Letter from John M. Miller, Deputy Chief Counsel (July 31, 1979),
reprinted in [1978-79 Transfer Binder] Fed. Banking L. Rep. (CCH)
para. 85,182; Letter from Paul M. Homan, Senior Deputy Comptroller
for Bank Supervision (April 20, 1979), reprinted in [1978-79
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,167; Letter
from H. Joe Selby, Deputy Comptroller for Operations (October 17,
1978), reprinted in [1978-79 Transfer Binder] Fed. Banking L. Rep.
(CCH) para. 85,144; Letter from John G. Heimann, Comptroller of the
Currency (May 18, 1978), reprinted in [1978-79 Transfer Binder] Fed.
Banking L. Rep. (CCH) para. 85,116; Letter from Charles B. Hall,
Deputy Comptroller for Banking Operations (February 14, 1978),
reprinted in [1978-79 Transfer Binder] Fed. Banking L. Rep. (CCH)
para. 85,100; Letter from Robert Bloom, Acting Comptroller of the
Currency (March 30, 1977), reprinted in [1973-78 Transfer Binder]
Fed. Banking L. Rep. (CCH) para. 97,093. Regarding national bank
authority to securitize assets, see Security Pacific v. Clarke, 885
F.2d 1034 (2d Cir. 1989), cert. denied, 493 U.S. 1070 (1990).
[[Page 66156]]
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Investment company shares (Section 1.3(h))
The proposal permits a national bank to purchase and sell for its
own account shares of a registered investment company, subject to two
requirements: First, the investment company's portfolio must be
comprised entirely of assets in which the bank could invest directly.
Second, the amount of the bank's investment in shares of any one
investment company is subject to the most stringent investment
limitations applicable to the underlying securities and loans that
comprise that investment company's portfolio. This provision
incorporates OCC interpretations concerning the authority of a national
bank to hold instruments representing indirect interests in assets that
the bank could invest in directly. See Banking Circular 220 (November
21, 1986); An Examiner's Guide to Investment Products and Practices at
23 (December 1992).8
8 The Federal Reserve Board has adopted a similar
interpretation relating to state member banks' investments in mutual
funds that invest only in eligible securities. See 12 CFR 208.124.
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The OCC seeks comments on whether the definition of ``investment
company'' should be revised to include limited partnerships with
fewer than 100 investors, i.e., a partnership that would not qualify
as an investment company within the meaning of section 3(c)(1) of
the Investment Company Act of 1940, 15 U.S.C. 80a-3(c)(1), provided
that the partnerships' portfolios consist solely of Type I
securities that the bank may purchase and sell for its own account.
Securities held based on estimates of obligor's performance (Section
1.3(i))
Notwithstanding the general definition of an investment security
(Sec. 1.2(e)), the proposal retains the flexibility contained in the
current rule, for a bank to treat certain debt securities as investment
securities when the bank concludes, on the basis of estimates that the
bank reasonably believes are reliable, that the obligor will be able to
meet its obligations under that security. The bank may not hold
securities classified as investment securities solely in reliance on
projections of an obligor's future performance that in the aggregate
exceed 5 percent of the bank's capital and surplus. The bank must also
believe that the security may be sold with reasonable promptness at a
price which corresponds reasonably to its fair value. This approach is
modeled upon the OCC's current rule, which allows banks an additional
degree of flexibility to determine the quality of debt obligations, for
a limited portion of the bank's investment portfolio. The OCC notes
that securities representing interests in loans made for community
development purposes are one type of security that could, depending
upon their characteristics, be eligible for investment by national
banks under this standard.
The OCC requests comments as to whether it should provide further
clarification of the standards applicable to securities held based on
estimates of obligor's performance and, if so, in what respects
clarification is needed.
Calculation of limits (Section1.4)
Proposed Sec. 1.4 is new. Paragraphs (a) and (b), relating to the
calculation date and authority to require more frequent calculations,
are modeled on provisions contained in the OCC's new lending limit
regulation. As explained in connection with the lending limit rule, the
provision reduces regulatory burden by allowing banks to rely on
information they already collect for their Call Reports to calculate
compliance with their lending limits. The same reasoning applies to
calculating limits of banks' securities holdings, and the proposal
achieves a consistent approach in those two areas.
Calculation of Type III and Type V securities holdings (Section 1.4(c))
This proposed paragraph is a new approach to investment securities
limitations designed to address situations where a bank's investments
in securities of different issuers present similar sources of risk,
and, therefore, warrant aggregation. In calculating the amount of its
investment in Type III or Type V securities, the proposal requires a
bank to combine obligations of issuers that are related directly or
indirectly through common control and securities that are credit-
enhanced by the same entity. These aggregation rules, which result in a
bank being treated as if it has a greater investment in the securities
of one obligor than would otherwise be the case, apply separately to
Type III and Type V securities held by a bank. Current OCC policies
already apply comparable standards for aggregation of Type III
securities. As applied to Type V securities, the aggregation rules
provide important safeguards in connection with the 15 percent limit
provided for investments in Type V securities. Thus, banks are given
more investment flexibility with Type V securities, but the increased
investment authority is subject to explicit safeguards to address risk
concentrations.
Comment is invited regarding other bases upon which a bank should
combine its holdings when calculating its investment in Type III or
Type V securities of any one obligor. Specifically, the OCC seeks
comments as to whether a bank should combine obligations that are
predominately collateralized by loans made by the same originator or by
originators that are related directly or indirectly through common
control. In addition, commenters are asked to address whether and under
what circumstances an issuer or affiliate of the issuer would provide a
guarantee or other form of credit enhancement for Type V securities
that could be a source of credit exposure of the investing bank to the
issuer or its affiliate. Comment is also invited on whether the 15
percent investment limitation or a lower limitation is appropriate
under these circumstances.
The OCC is not at this time proposing to apply an aggregate limit
to a bank's combined holdings of Type III and Type V securities, but
requests commenters to address whether some form of an aggregate
limitation should apply to a bank's exposure to a single obligor,
regardless of the type of the obligation. For example, under the
proposal, a bank could invest in Type V securities of any one obligor
in an amount not exceeding 15 percent of the bank's capital and
surplus, and Type III securities of the same obligor in an amount not
exceeding 10 percent of the bank's capital and surplus. In addition,
under the lending limit rules, the bank could also make loans to the
same obligor in an amount up to 15 percent--or 25 percent depending
upon the collateral--of the bank's capital and surplus. Of course, the
OCC retains the ability to take action in connection with
concentrations inconsistent with safe and sound banking practices.
[[Page 66157]]
Calculation of investment company holdings (section 1.4(d))
In calculating the amount of its investment in investment company
shares under this proposal, a bank must use reasonable efforts to
calculate and combine its pro rata share of a particular security in
the portfolios of each investment company with the bank's direct
holdings of securities of that issuer.
Safe and sound banking practices; credit information required (Section
1.5)
The requirement of ``prudent banking judgment'' in current Sec. 1.8
is moved to Sec. 1.5 and changed to require banks to adhere to ``safe
and sound banking practices,'' in addition to any specific requirements
of part 1. The OCC will continue its supervision of national bank
investment securities activities, including those activities covered by
the changes to part 1, to ensure that these investments are effected in
a safe and sound manner. In recognition of the different types of risks
that may affect the quality of a security, the proposal reflects the
OCC position that safe and sound banking practices entail appropriate
consideration of the market, interest rate, liquidity, legal, and
operations and systems risks, as well as credit risk, posed by certain
types of securities investments.9 These standards are made clearly
applicable to all types of permissible securities activities and
holdings described in Sec. 1.3. This change also makes the language of
part 1 consistent with the authority of a federal banking agency to
institute a cease-and-desist proceeding against an insured depository
institution that has engaged or is about to engage in an ``unsafe and
unsound practice.'' 12 U.S.C. 1818(b). The ``unsafe and unsound
practice'' standard is well recognized by the courts. See, e.g.,
Northwest National Bank, Fayetteville, Arkansas v. U.S. Department of
the Treasury, Office of the Comptroller of the Currency, 917 F.2d 1111
(8th Cir. 1990); Gulf Federal Savings and Loan v. Federal Home Loan
Bank Board, 651 F.2d 259 (5th Cir.. 1981), cert. denied, 458 U.S. 1121
(1982); Groos National Bank v. Comptroller of the Currency, 573 F.2d
889 (5th Cir. 1978). The proposed section also gives banks additional
flexibility in maintenance of records for examination purposes.
9 See OCC Banking Circular 277, reprinted in 5 Fed.
Banking L. Rep. (CCH) para. 58,717 (October 27, 1993).
---------------------------------------------------------------------------
Convertible securities (section 1.6)
Proposed Sec. 1.6 revises current Sec. 1.9 to clarify the
restrictions on investment in certain convertible securities and how
banks must account for securities that are convertible into stock or
have stock purchase warrants attached.
Securities held in satisfaction of debts previously contracted; holding
period; disposal; accounting treatment; non-speculative purpose
(section 1.7)
Proposed Sec. 1.7 contains new information in paragraphs (b)
``holding period,'' (c) ``accounting treatment,'' and (d) ``non-
speculative purpose,'' which embody standards consistent with OCC's
Other Real Estate Owned regulation, see 58 FR 46529 (September 2,
1993), and the OCC's related interpretation, see Interpretive Letter
No. 604 (October 8, 1992). A national bank holding securities in
satisfaction of debts previously contracted may do so for a period of
five years from the date that ownership of the securities was
originally transferred to the bank, plus an additional five years, if
permitted by the OCC.
Nonconforming investments (section 1.8)
This new section clarifies that a bank does not violate an
applicable investment limitation when an investment in securities that
was legal when made becomes nonconforming as a result of any of certain
enumerated events, provided the bank exercises reasonable efforts to
bring the investment into conformity with applicable limitations. The
events included in the regulation are: A decline in the bank's capital;
a merger of obligors, issuers, or credit-enhancers; issuers becoming
related directly or indirectly related through common control;
deterioration in the quality of a security so that the security is no
longer an investment security; the substitution of collateral by an
issuer or trustee that causes a Type IV or Type V security no longer to
conform to the diversification requirements of Secs. 1.2(k)(1) and (2)
and 1.2(l); a change in the investment securities limitations rules; or
other events identified by the OCC. This approach to nonconforming
holdings is based upon the approach contained in the OCC's new lending
limit regulation.
Commenters are specifically asked to address whether: (1) The
phrase ``reasonable efforts'' needs additional clarification, and if
so, how it might be defined or should be documented for the purposes of
this section; (2) the OCC should require a bank to make ``reasonable
efforts'' to bring into conformity an investment where the quality of a
security deteriorates so that the security is no longer an investment
security; and (3) any other events should be added to the list of
circumstances that may cause an investment in securities to become
nonconforming.
Amortization of premiums (current section 1.10)
Current Sec. 1.10 is removed. The OCC believes the section is no
longer necessary because generally accepted accounting principles
(GAAP) appropriately govern the treatment of premiums. GAAP requires
that a bank defer recognition of a premium paid for an investment
security and amortize the premium over the period to maturity of the
security. In contrast, current Sec. 1.10 permits a bank to charge off
the entire premium at the time of purchase or to amortize the premium
in any manner the bank considers appropriate as long as the premium is
extinguished entirely at or before the maturity of the security.
Interpretations
Indirect general obligations (section 1.100)
Proposed Sec. 1.100 is derived from current Sec. 1.120, but
clarifies and shortens the text. Current paragraphs (f) ``Tax
anticipation notes,'' and (g) ``Bond anticipation notes'' of Sec. 1.120
are removed as unnecessary.
Eligibility of securities for purchase, dealing in, and underwriting by
national banks; general guidelines (current section 1.100)
The proposal removes current Sec. 1.100, which contains
introductory and explanatory comments that the OCC believes are
unnecessary in light of other proposed changes to part 1.
Taxing powers of a State or a political subdivision (section 1.110)
Section 1.110 is a shortened version of current Sec. 1.130, with
portions removed that are no longer necessary. New text is added to
provide standards for determining when obligations that are expressly
or implicitly dependent upon voter or legislative authorization of
appropriations are considered supported by the full faith and credit of
a State or political subdivision.
Prerefunded or escrowed bonds and obligations secured by Type I
securities (section 1.120)
Proposed Sec. 1.120 is derived from current Sec. 1.120(e).
Type II securities; guidelines for obligations issued for university
and housing purposes (section 1.130)
Proposed Sec. 1.130 is a streamlined version of current Sec. 1.140,
and also clarifies the types of issuers whose
[[Page 66158]]
obligations qualify as Type II securities. Current Sec. 1.140(c)(1) and
portions of (c)(2) have been removed. See Proposed Sec. 1.130(c).
The OCC welcomes comments on any aspect of the proposed regulation,
particularly, those issues specifically noted in this preamble.
Derivation Table
[Only Substantive Modifications, Additions and Changes are Indicated]
------------------------------------------------------------------------
Revised provision Original provision Comments
------------------------------------------------------------------------
Sec. 1.1................. Secs. 1.1, 1.2...... Modified.
Sec. 1.2(a).............. ................... Added.
Sec. 1.2(b).............. Sec. 1.3(g)......... Modified.
Sec. 1.2(c).............. ................... Added.
Sec. 1.2(d).............. ................... Added.
Sec. 1.2(e).............. Sec. 1.3(b)......... Modified.
Sec. 1.2(f).............. Sec. 1.5(a)......... Significant change.
Sec. 1.2(g).............. Sec. 1.3(f).........
Sec. 1.2(h).............. Secs. 1.3(c), 1.110. Modified.
Sec. 1.2(i).............. 1.3(d)............... Modified.
Sec. 1.2(j).............. Sec. 1.3(e)......... Modified.
Sec. 1.2(k).............. ................... Added.
Sec. 1.2(l).............. ................... Added.
Sec. 1.3(a)......... Removed.
Sec. 1.3(a).............. Sec. 1.4............ Modified.
Sec. 1.3(b).............. Secs. 1.3(d), 1.6, Modified.
1.7(a).
Sec. 1.3(c).............. Secs. 1.3(e), 1.7(a) Modified.
Sec. 1.3(d).............. Sec. 1.7(a), 12 CFR Modified.
7.7570.
Sec. 1.3(e).............. ................... Added.
Sec. 1.3(f).............. ................... Added.
Sec. 1.3(g).............. ................... Added.
Sec. 1.3(h).............. ................... Added.
Sec. 1.3(i).............. Secs. 1.5(b), 1.7(b) Modified.
Sec. 1.4................. ................... Added.
Sec. 1.5................. Sec. 1.8............ Significant change.
Sec. 1.6................. Sec. 1.9............ Modified.
Sec. 1.7(a).............. Sec. 1.11...........
Sec. 1.7(b).............. ................... Added.
Sec. 1.7(c)......... Removed.
Sec. 1.7(d)......... Added.
Sec. 1.7(c).............. ................... Added.
Sec. 1.8................. ................... Added.
Sec. 1.10........... Removed.
Sec. 1.100.......... Removed.
Sec. 1.100(a)............ Sec. 1.120..........
Sec. 1.100(b)(1)......... Sec. 1.120(a).......
Sec. 1.100(b)(2)......... Sec. 1.120(b).......
Sec. 1.100(b)(3)......... Sec. 1.120(c).......
Sec. 1.100(b)(4)......... Sec. 1.120(d).......
Sec. 1.110............... Sec. 1.130.......... Modified.
Sec. 1.120(f)....... Removed.
Sec. 1.120(g)....... Removed.
Sec. 1.120............... Sec. 1.120(e).......
Sec. 1.130(a)............ Sec. 1.140(a)....... Modified.
Sec. 1.130(b)............ Sec. 1.140(b).......
Sec. 1.130(c)............ Sec. 1.140(c)....... Modified.
------------------------------------------------------------------------
Regulatory Flexibility Act
It is hereby certified that this regulation will not have a
significant economic impact on a substantial number of small entities.
Accordingly, a regulatory flexibility analysis is not required. This
regulation will reduce the regulatory burden on national banks,
regardless of size, by simplifying and clarifying existing regulatory
requirements.
Paperwork Reduction Act of 1995
The OCC invites comment on:
(1) Whether the proposed collection of information contained in
this notice of proposed rulemaking is necessary for the proper
performance of OCC functions, including whether the information has
practical utility;
(2) The accuracy of the estimate of the burden of the proposed
information collection;
(3) Ways to enhance the quality, utility, and clarity of the
information to be collected; and
(4) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology.
Respondents/recordkeepers are not required to respond to this
collection of information unless it displays a currently valid OMB
control number.
The collection of information requirements contained in this notice
of proposed rulemaking have been submitted to the Office of Management
and Budget for review in accordance with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)). Comments on
[[Page 66159]]
the collections of information should be sent to the Office of
Management and Budget, Paperwork Reduction Project (1557), Washington,
DC 20503, with copies to the Legislative and Regulatory Activities
Division (1557), Office of the Comptroller of the Currency, 250 E
Street, SW., Washington, DC 20219.
The collection of information requirements in this proposed rule
are found in 12 CFR 1.6 and 1.7. This information is required to
evidence compliance with statutory limitations on the quantity and type
of investments by national banks. The likely respondents/recordkeepers
are national banks.
Estimated average annual burden hours per respondent/recordkeeper:
2 hours.
Estimated number of respondents and/or recordkeepers: 3,000.
Estimated total annual reporting and recordkeeping burden: 6,000
hours.
Start-up costs to respondents: None.
Records are to be maintained for life of the investment.
Executive Order 12866
The OCC has determined that this proposal is not a significant
regulatory action.
Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded
Mandates Act) (signed into law on March 22, 1995) requires that an
agency prepare a budgetary impact statement before promulgating a rule
that includes a Federal mandate that may result in the expenditure by
State, local, and tribal governments, in the aggregate, or by the
private sector, of $100 million or more in any one year. If a budgetary
impact statement is required, Section 205 of the Unfunded Mandates Act
also requires an agency to identify and consider a reasonable number of
regulatory alternatives before promulgating a rule. Because the OCC has
determined that the proposed rule will not result in expenditures by
State, local, and tribal governments or by the private sector of $100
million or more in any one year, the OCC has not prepared a budgetary
impact statement or specifically addressed the regulatory alternatives
considered. Nevertheless, as discussed in the preamble, the rule has
the effect of reducing burden and increasing the discretion of national
banks regarding their sound investment activities.
List of Subjects
12 CFR Part 1
Banks, banking, National banks, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 7
Credit, Insurance, Investments, National banks, Reporting and
recordkeeping requirements, Securities, Surety bonds.
Authority and Issuance
For the reasons set out in the preamble, chapter I of title 12 of
the Code of Federal Regulations is proposed to be amended as set forth
below:
1. Part 1 is revised to read as follows:
PART 1--INVESTMENT SECURITIES REGULATION
Sec.
1.1 Authority, purpose, and scope.
1.2 Definitions.
1.3 Limitations on dealing in, underwriting, and purchase and sale
of securities.
1.4 Calculation of limits.
1.5 Safe and sound banking practices; credit information required.
1.6 Convertible securities.
1.7 Securities held in satisfaction of debts previously contracted;
holding period; disposal; accounting treatment; non-speculative
purpose.
1.8 Nonconforming investments.
Interpretations
1.100 Indirect general obligations.
1.110 Taxing powers of a State or political subdivision.
1.120 Prerefunded or escrowed bonds and obligations secured by Type
I securities.
1.130 Type II securities; guidelines for obligations issued for
university and housing purposes.
Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a.
Sec. 1.1 Authority, purpose, and scope.
(a) Authority. This part is issued pursuant to 12 U.S.C. 1 et seq.,
12 U.S.C. 24 (Seventh), and 12 U.S.C. 93a.
(b) Purpose. This part prescribes standards under which national
banks may purchase, sell, deal in, underwrite, and hold securities,
consistent with the authority contained in 12 U.S.C. 24 (Seventh) and
safe and sound banking practices.
(c) Scope. The standards set forth in this part apply to national
banks, District of Columbia banks, and federal branches of foreign
banks. Further, pursuant to 12 U.S.C. 335, State banks that are members
of the Federal Reserve System are subject to the same limitations and
conditions that apply to national banks in connection with purchasing,
selling, dealing in, and underwriting securities and stock. In addition
to activities authorized under this part, foreign branches of national
banks also may be authorized to conduct international activities
pursuant to part 211 of this title.
Sec. 1.2 Definitions.
(a) Capital and surplus means:
(1) A bank's Tier 1 and Tier 2 capital included in the bank's risk-
based capital under the OCC's Minimum Capital Ratios in Appendix A to
part 3 of this chapter based upon the bank's Consolidated Report of
Condition and Income filed under 12 U.S.C. 1817(a)(3); plus
(2) The balance of a bank's allowance for loan and lease losses not
included in the bank's Tier 2 capital, for purposes of the calculation
of risk-based capital under 12 CFR part 3, based upon the bank's
Consolidated Report of Condition and Income filed under 12 U.S.C.
1817(a)(3).
(b) General obligation of a State or political subdivision means:
(1) An obligation supported by the full faith and credit of an
obligor possessing general powers of taxation, including property
taxation; or
(2) An obligation payable from a special fund or by an obligor not
possessing general powers of taxation, when an obligor possessing
general powers of taxation, including property taxation, has
unconditionally promised to make payments into the fund or otherwise
provide funds to cover all required payments on the obligation.
(c) Investment company means an investment company, including a
mutual fund, registered under section 8 of the Investment Company Act
of 1940, 15 U.S.C. 80a-8.
(d) Investment grade means a security rated investment grade (in
one of the top four rating categories) by each nationally recognized
statistical rating organization that has rated the security.
(e) Investment security means a marketable debt obligation that is
not predominantly speculative in nature. A security is not
predominantly speculative in nature if it is rated investment grade.
When a security is not rated, the security must be the credit
equivalent of securities rated investment grade.
(f) Marketable means that the security is:
(1) Registered under the Securities Act of 1933, 15 U.S.C. 77a et
seq.;
(2) Exempt from registration under the Securities Act of 1933, 15
U.S.C. 77c, and authorized under 12 U.S.C. 24 (Seventh) as eligible for
investment without limitation by a national bank, such as a security
issued or guaranteed by:
[[Page 66160]]
(i) The United States or a territory thereof;
(ii) The District of Columbia;
(iii) A State of the United States;
(iv) A political subdivision of a State or territory;
(v) A public instrumentality of one or more States or territories;
or
(vi) A person controlled or supervised by and acting as an
instrumentality of the Government of the United States pursuant to
authority granted by the Congress of the United States;
(3) A municipal revenue bond exempt from registration under the
Securities Act of 1933, 15 U.S.C. 77c(a)(2); or
(4) Offered and sold pursuant to Securities and Exchange Commission
Rule 144A, 17 CFR 230.144A, and rated investment grade.
(g) Political subdivision means a county, city, town, or other
municipal corporation, a public authority, and generally any publicly-
owned entity that is an instrumentality of a State or of a municipal
corporation.
(h) Type I security means:
(1) Obligations of the United States;
(2) Obligations issued, insured, or guaranteed by a department or
an agency of the United States Government, if the obligation, insurance
or guarantee commits the full faith and credit of the United States for
the repayment of the obligation;
(3) Obligations issued by a department or agency of the United
States, or an agency or political subdivision of a State of the United
States, that represent an interest in a loan or a pool of loans made to
third parties, if the full faith and credit of the United States has
been validly pledged for the full and timely payment of interest on,
and principal of, the loans in the event of non-payment by the third
party obligor(s);
(4) General obligations of a State of the United States or any
political subdivision;
(5) Obligations authorized under 12 U.S.C. 24 (Seventh) as
permissible for a national bank to deal in, underwrite, purchase, and
sell for the bank's own account; and
(6) Other securities the OCC deems eligible as Type I securities in
accordance with 12 U.S.C. 24 (Seventh).
(i) Type II security means an investment security that represents:
(1) Obligations issued by a State, or a political subdivision or
agency of a State, for housing, university, or dormitory purposes;
(2) Obligations of international and multilateral development banks
and organizations listed in 12 U.S.C. 24 (Seventh);
(3) Other obligations listed in 12 U.S.C. 24 (Seventh) as
permissible for a bank to deal in, underwrite, purchase, and sell for
the bank's own account, subject to a limitation of 10 percent of the
bank's capital and surplus; and
(4) Other securities the OCC deems eligible as Type II securities
in accordance with 12 U.S.C. 24 (Seventh).
(j) Type III security means an investment security that does not
qualify as a Type I, II, IV, or V security, such as corporate bonds and
municipal revenue bonds.
(k) Type IV security means:
(1) A small business-related security as defined in section
3(a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C.
78c(a)(53)(A), that is fully secured by interests in a pool of
homogeneous loans to numerous obligors. The aggregate amount of
collateral from loans of any one obligor may not exceed 5 percent of
the total amount of collateral for the security;
(2) A commercial mortgage-related security that is offered or sold
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C.
77d(5), or a commercial mortgage-related security as defined in section
3(a)(41) of the Securities Exchange Act of 1934, 15 U.S.C. 78c(a)(41),
that represents ownership of a promissory note or certificate of
interest or participation that is directly secured by a first lien on
one or more parcels of real estate upon which one or more commercial
structures are located and that is fully secured by interests in a pool
of homogeneous loans to numerous obligors. The aggregate amount of
collateral from loans of any one obligor may not exceed 5 percent of
the total amount of collateral for the security.
(3) A residential mortgage-related security that is offered and
sold pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C.
77d(5), or a residential mortgage-related security as defined in
section 3(a)(41) of the Securities Exchange Act of 1934, 15 U.S.C.
78c(a)(41)), and that does not otherwise qualify as a Type I security.
(l) Type V security means a security that:
(1) Is rated investment grade;
(2) Is not a Type IV security; and
(3) Is fully secured by interests in a pool of homogeneous loans
(that a national bank could invest in directly) to numerous obligors.
The aggregate amount of collateral from loans of any one obligor may
not exceed 5 percent of the total amount of collateral for the
security.
Sec. 1.3 Limitations on dealing in, underwriting, and purchase and
sale of securities.
(a) Type I securities. A national bank may deal in, underwrite,
purchase, and sell Type I securities for its own account. The amount of
Type I securities that the bank may deal in, underwrite, purchase, and
sell is not limited to a specified percentage of the bank's capital and
surplus.
(b) Type II securities. A national bank may deal in, underwrite,
purchase, and sell Type II securities for its own account, provided the
aggregate par value of the obligations of any one obligor held by the
bank does not exceed 10 percent of the bank's capital and surplus. This
limitation applies to obligations that the bank is legally committed to
purchase and sell in addition to existing holdings.
(c) Type III securities. A national bank may purchase and sell Type
III securities for its own account, provided the aggregate par value of
the obligations of any one obligor held by the bank does not exceed 10
percent of the bank's capital and surplus. This limitation applies to
obligations that the bank is legally committed to purchase and sell in
addition to existing holdings.
(d) Type II and III securities; other investment securities
limitations. A national bank may not hold Type II and III securities of
any one obligor with an aggregate par value exceeding 10 percent of the
bank's capital and surplus. However, if the proceeds of each issue are
to be used to acquire and lease real estate and related facilities to
economically and legally separate industrial tenants, and if each issue
is payable solely from and secured by a first lien on the revenues to
be derived from rentals paid by the lessee under net noncancellable
leases, the bank may apply the 10 percent investment limitation
separately to each security issue of a single issuer of such
securities.
(e) Type IV securities. A national bank may purchase and sell Type
IV securities for its own account. The amount of the Type IV securities
that a bank may purchase and sell is not limited to a specified
percentage of the bank's capital and surplus. A national bank also may
deal in Type IV securities that are fully secured by Type I securities.
(f) Type V securities. A national bank may purchase and sell Type V
securities for its own account provided the aggregate par value of the
obligations of any one obligor does not exceed 15 percent of the bank's
capital and surplus. This limitation includes obligations the bank is
legally committed to purchase and sell in addition to existing
holdings.
(g) Asset securitization. A national bank may securitize and sell
its loan assets as a part of its banking business.
[[Page 66161]]
The amount of securitized loans that a bank may sell is not limited to
a specified percentage of the bank's capital and surplus.
(h) Investment company shares. A national bank may purchase and
sell for its own account investment company shares, provided that the
portfolio of the investment company consists wholly of securities and
loans that the national bank may purchase and sell for its own account
under this part, subject to the most stringent investment and/or
lending limitation that would apply to the underlying securities or
loans that comprise such company's portfolio.
(i) Securities held based on estimates of obligor's performance.
(1) Notwithstanding Sec. 1.2(e) of this part, a national bank may treat
a debt security as an investment security for purposes of this part if
the bank concludes, on the basis of estimates that the bank reasonably
believes are reliable, that the obligor will be able to satisfy its
obligations under that security, and the bank believes that the
security may be sold with reasonable promptness at a price which
corresponds reasonably to its fair value.
(2) The aggregate value of securities treated as investment
securities under paragraph (i)(1) of this section may not exceed 5
percent of the bank's capital and surplus.
Sec. 1.4 Calculation of limits.
(a) Calculation date. For purposes of determining compliance with
12 U.S.C. 24 (Seventh) and this part, a bank's limitations shall be
determined as of the most recent of the following dates:
(1) The date on which the bank's Consolidated Report of Condition
and Income is properly signed and submitted;
(2) The date on which the bank's Consolidated Report of Condition
and Income is required to be submitted; or
(3) When there is a change in the bank's capital category for
purposes of 12 U.S.C. 1831o and 12 CFR 6.3.
(b) Authority of OCC to require more frequent calculations. If the
OCC determines for safety and soundness reasons that a bank should
calculate its investment limits more frequently than required by
paragraph (a) of this section, the OCC may provide written notice to
the bank directing the bank to calculate its investment limitations at
a more frequent interval. The bank shall thereafter calculate its
investment limits at that interval until further notice.
(c) Calculation of Type III and Type V securities holdings. In
calculating the amount of its investment in Type III or Type V
securities of any one obligor, a bank shall combine:
(1) Obligations of issuers that are related directly or indirectly
through common control; and
(2) Securities that are credit-enhanced by the same entity.
(d) Calculation of investment company holdings. In calculating the
amount of its investment in investment company shares under this part,
a bank shall use reasonable efforts to calculate and combine its pro
rata share of a particular security in the portfolios of each
investment company with the bank's direct holdings of securities of
that issuer.
Sec. 1.5 Safe and sound banking practices; credit information
required.
(a) A national bank shall adhere to safe and sound banking
practices and the specific requirements of this part in conducting the
activities described in Sec. 1.3. This includes appropriate
consideration of the market, interest rate, credit, liquidity, legal,
and operations and systems risks presented by a proposed activity. The
bank's particular activities must be appropriate for that bank.
(b) In conducting these activities, the bank shall determine that
there is adequate evidence that an obligor possesses resources
sufficient to provide for all required payments on its obligations, or,
in the case of securities deemed to be investment securities on the
basis of reliable estimates of an obligor's performance, that the bank
reasonably believes that the obligor will be able to satisfy the
obligation.
(c) Each bank shall maintain records available for examination
purposes adequate to demonstrate that it meets the requirements of this
section. The bank may store the information in any manner that can be
readily retrieved and reproduced in a readable form.
Sec. 1.6 Convertible securities.
(a) When a national bank purchases an investment security
convertible into stock, or with a stock purchase warrant attached, the
bank shall write down the carrying value of the security to an amount
that represents the value of the security considered independently of
the conversion feature or attached stock purchase warrant.
(b) A national bank may not purchase securities convertible into
stock at the option of the issuer.
Sec. 1.7 Securities held in satisfaction of debts previously
contracted; holding period; disposal; accounting treatment; non-
speculative purpose.
(a) Securities held in satisfaction of debts previously contracted.
The restrictions and limitations of this part, other than those set
forth in paragraphs (b),(c), and (d) of this section, do not apply to
securities acquired:
(1) Through foreclosure on collateral;
(2) In good faith by way of compromise of a doubtful claim; or
(3) To avoid loss in connection with a debt previously contracted.
(b) Holding period. A national bank holding securities pursuant to
paragraph (a) of this section may do so for a period not to exceed five
years from the date that ownership of the securities was originally
transferred to the bank. The OCC may extend the holding period for up
to an additional five years.
(c) Accounting treatment. A bank shall mark-to-market securities
held pursuant to paragraph (a) of this section.
(d) Non-speculative purpose. A bank may not hold securities
pursuant to paragraph (a) of this section for speculative purposes.
Sec. 1.8 Nonconforming investments.
(a) An investment in securities, which conforms to this part when
made, will not be deemed a violation, but will be treated as
nonconforming if the investment no longer conforms to this part
because;
(1) The bank's capital declines;
(2) Issuers, obligors, or credit-enhancers merge;
(3) Issuers become related directly or indirectly through common
control;
(4) The investment securities rules change;
(5) The security no longer qualifies as an investment security;
(6) The substitution of collateral by an issuer or trustee causes a
Type IV or Type V security no longer to conform to the diversification
requirements of Secs. 1.2(k)(1) and (2) and 1.2(l)(3); or
(7) Other events identified by the OCC occur;
(b) A bank shall exercise reasonable efforts to bring an investment
that is nonconforming as a result of events described in paragraph (a)
of this section into conformity with this part unless to do so would be
inconsistent with safe and sound banking practices.
Interpretations
Sec. 1.100 Indirect general obligations.
(a) Obligation issued by an obligor not possessing general powers
of taxation. Pursuant to Sec. 1.2(c) of this part, an obligation issued
by an obligor not possessing general powers of taxation qualifies as a
general obligation of a State or political subdivision for the purposes
of 12 U.S.C. 24 (Seventh), if a party possessing general powers of
taxation unconditionally promises to make sufficient funds available
for all required payments in connection with the obligation.
[[Page 66162]]
(b) Indirect commitment of full faith and credit. The indirect
commitment of the full faith and credit of a State or political
subdivision (that possesses general powers of taxation) in support of
an obligation may be demonstrated by any of the following methods,
alone or in combination, when the State or political subdivision
pledges its full faith and credit in support of the obligation.
(1) Lease/rental agreement. The lease agreement must be valid and
binding on the State or the political subdivision, and the State or
political subdivision must unconditionally promise to pay rentals that,
together with any other available funds, are sufficient for the timely
payment of interest on, and principal of, the obligation. These lease/
rental agreements may, for instance, provide support for obligations
financing the acquisition or operation of public projects in the areas
of education, medical care, transportation, recreation, public
buildings, and facilities.
(2) Service/purchase agreement. The agreement must be valid and
binding on the State or the political subdivision, and the State or
political subdivision must unconditionally promise in the agreement to
make payments for services or resources provided through or by the
issuer of the obligation. These payments, together with any other
available funds, must be sufficient for the timely payment of interest
on, and principal of, the obligation. An agreement to purchase
municipal sewer, water, waste disposal, or electric services may, for
instance, provide support for obligations financing the construction or
acquisition of facilities supplying those services.
(3) Refillable debt service reserve fund. The reserve fund must at
least equal the amount necessary to meet the annual payment of interest
on, and principal of, the obligation as required by the applicable law.
The maintenance of a refillable reserve fund may be provided, for
instance, by statutory direction for an appropriation, or by statutory
automatic apportionment and payment from the State funds of amounts
necessary to restore the fund to the required level.
(4) Other grants or support. A statutory provision or agreement
must unconditionally commit the State or the political subdivision to
provide funds which, together with other available funds, are
sufficient for the timely payment of interest on, and principal of, the
obligation. Those funds may, for instance, be supplied in the form of
annual grants or may be advanced whenever the other available revenues
are not sufficient for the payment of principal and interest.
Sec. 1.110 Taxing powers of a State or political subdivision.
(a) An obligation is considered supported by the full faith and
credit of a State or political subdivision possessing general powers of
taxation when the promise or other commitment of the State or the
political subdivision will produce funds, which (together with any
other funds available for the purpose) will be sufficient to provide
for all required payments on the obligation. In order to evaluate
whether a commitment of a State or political subdivision is likely to
generate sufficient funds, a bank shall consider the impact of any
possible limitations regarding the State's or political subdivision's
taxing powers, as well as the availability of funds in view of the
projected revenues and expenditures. Quantitative restrictions on the
general powers of taxation of the State or political subdivision do not
necessarily mean that an obligation is not supported by the full faith
and credit of the State or political subdivision. In such case, the
bank shall determine the eligibility of obligations by reviewing, on a
case-by-case basis, whether tax revenues available under the limited
taxing powers are sufficient for the full and timely payment of
interest on, and principal of, the obligation. The bank shall use
current and reasonable financial projections in calculating the
availability of the revenues. An obligation expressly or implicitly
dependent upon voter or legislative authorization of appropriations may
be considered supported by the full faith and credit of a State or
political subdivision if the bank determines, on the basis of past
actions by the voters or legislative body in similar situations
involving similar types of projects, that it is reasonably probable
that the obligor will obtain all necessary appropriations.
(b) An obligation supported exclusively by excise taxes or license
fees is not a general obligation for the purposes of 12 U.S.C. 24
(Seventh). Nevertheless, an obligation that is primarily payable from a
fund consisting of excise taxes or other pledged revenues qualifies as
a ``general obligation,'' if, in the event of a deficiency of those
revenues, the obligation is also supported by the general revenues of a
State or a political subdivision possessing general powers of taxation.
Sec. 1.120 Prerefunded or escrowed bonds and obligations secured by
Type I securities.
(a) An obligation qualifies as a Type I security if it is secured
by an escrow fund consisting of obligations of the United States or
general obligations of a State or a political subdivision, and the
escrowed obligations produce interest earnings sufficient for the full
and timely payment of interest on, and principal of, the obligation.
(b) If the interest earnings from the escrowed Type I securities
alone are not sufficient to guarantee the full repayment of an
obligation, a promise of a State or a political subdivision possessing
general powers of taxation to maintain a reserve fund for the timely
payment of interest on, and principal of, the obligation may further
support a guarantee of the full repayment of an obligation.
(c) An obligation issued to refund an indirect general obligation
may be supported in a number of ways that, in combination, are
sufficient at all times to support the obligation with the full faith
and credit of the United States or a State or a political subdivision
possessing general powers of taxation. During the period following its
issuance, the proceeds of the refunding obligation may be invested in
U.S. obligations or municipal general obligations that will produce
sufficient interest income for payment of principal and interest. Upon
the retirement of the outstanding indirect general obligation bonds,
the same indirect commitment, such as a lease agreement or a reserve
fund, that supported the prior issue, may support the refunding
obligation.
Sec. 1.130 Type II securities; guidelines for obligations issued for
university and housing purposes.
(a) Investment quality. An obligation issued for housing,
university, or dormitory purposes is a Type II security only if it:
(1) Qualifies as an investment security, as defined in Sec. 1.2(e);
and
(2) Is issued for the appropriate purpose and by a qualifying
issuer.
(b) Obligation issued for university purposes. (1) An obligation
issued by a State or political subdivision or agency of a State or
political subdivision for the purpose of financing the construction or
improvement of facilities at or used by a university or a degree-
granting college- level institution, or financing loans for studies at
such institutions, qualifies as a Type II security. Facilities financed
in this manner may include student buildings, classrooms, university
utility buildings, cafeterias, stadiums, and university parking lots.
[[Page 66163]]
(2) An obligation that finances the construction or improvement of
facilities used by a hospital may be eligible as a Type II security, if
the hospital is a department or a division of a university, or
otherwise provides a nexus with university purposes, such as an
affiliation agreement between the university and the hospital, faculty
positions of the hospital staff, and training of medical students,
interns, residents, and nurses (e.g., a ``teaching hospital'').
(c) Obligation issued for housing purposes. An obligation issued
for housing purposes may qualify as a Type II security if the security
otherwise meets the criteria for a Type II security.
PART 7--INTERPRETIVE RULINGS
3. The authority citation for part 7 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 93a.
Sec. 7.7570 [Removed]
4. Section 7.7570 is removed.
Dated: December 14, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 95-30969 Filed 12-20-95; 8:45 am]
BILLING CODE 4810-33-P
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