Bank Holding Companies and Change in Bank Control (Regulation Y)

SUMMARY: The Board is proposing a comprehensive amendment of Regulation

Y that is intended to improve the competitiveness of bank holding

companies by eliminating unnecessary regulatory burden and operating

restrictions, and by streamlining the application/notice process. Among

other proposed revisions, the Board proposes to establish a streamlined

and expedited review process for bank and nonbanking proposals by well-

run bank holding companies. The Board also proposes to reorganize and

expand the regulatory list of nonbanking activities and to remove a

number of restrictions on those activities that are outmoded, have been

superseded by Board order or do not apply to insured banks that conduct

the same activity. In addition, the Board proposes several amendments

to the tying restrictions, including removal of the regulatory

extension of those restrictions to bank holding companies and their

nonbank subsidiaries. A number of other changes have also been proposed

to eliminate unnecessary regulatory burden and to streamline and

modernize Regulation Y, including changes to the provisions

implementing the Change in Bank Control Act and section 914 of the

Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

DATES: Comments must be received by October 31, 1996.

ADDRESSES: Comments should refer to Docket No. R-0935, and may be

mailed to Mr. William W. Wiles, Secretary, Board of Governors of the

Federal Reserve System, 20th Street and Constitution Avenue, NW.,

Washington, DC 20551. Comments may also be delivered to Room B-2222 of

the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, and to

the guard station in the Eccles Building courtyard on 20th Street, NW.

(between Constitution Avenue and C Street) at any time. Comments

received will be available for inspection in room MP-500 of the Martin

Building between 9 a.m. and 5 p.m. weekdays, except as provided in

section 261.8(a) of the Board's Rules Regarding Availability of

Information.

FOR FURTHER INFORMATION CONTACT: Scott G. Alvarez, Associate General

Counsel (202/452-3583), Gregory A. Baer, Managing Senior Counsel (202/

452-3236), Diane A. Koonjy, Senior Attorney (202/452-3274), Lisa R.

Chavarria, Attorney (202/452-3904), Satish M. Kini, Attorney (202/452-

3818), Legal Division; Molly Wassom, Assistant Director (202/452-2305),

Sid Sussan, Assistant Director (202/452-2638), Division of Banking

Supervision and Regulation, Board of Governors of the Federal Reserve

System. For the hearing impaired only, Telecommunication Device for the

Deaf (TDD), Dorothea Thompson (202/452-3544), Board of Governors of the

Federal Reserve System, 20th Street and Constitution Avenue, NW.,

Washington, DC.

SUPPLEMENTARY INFORMATION:

Outline: The discussion of proposed revisions to Regulation Y is

divided into the following sections:

A. Summary of principles applied in reviewing and revising

Regulation Y.

B. Summary of proposed revisions.

C. Explanation of proposed changes to the procedures governing bank

acquisitions.

D. Explanation of proposed changes to the nonbanking provisions.

E. Explanation of restrictions removed from permissible nonbanking

activities.

F. Explanation of changes to tying rules.

G. Explanation of other changes.

Discussion

A. Summary of the Principles Applied in Reviewing and Revising

Regulation Y

Regulation Y is the regulation the Board has adopted to implement

the requirements of the Bank Holding Company Act (the BHC Act), the

Change in Bank Control Act and provisions of the Federal Deposit

Insurance Act. As required by section 303 of the Riegle Community

Development and Regulatory Improvement Act of 1994, the Board has

conducted a comprehensive review of Regulation Y to improve efficiency,

reduce unnecessary costs, and eliminate unwarranted constraints on

credit availability while faithfully implementing statutory

requirements. This review included discussions with staff of the other

federal banking agencies regarding the implementation of common

statutory provisions.

Based on this review, the Board proposes a comprehensive revision

to Regulation Y that is intended to improve the competitiveness of bank

holding companies by eliminating unnecessary regulatory burden and

operating restrictions, and by streamlining and expediting the

application/notice process. The revisions proposed by the Board to

Regulation Y are summarized in the following sections and explained

more fully in sections C through G.

The Board invites comment on all aspects of its proposed revisions.

In addition, the Board invites other suggestions on revisions to

Regulation Y that would eliminate unnecessary burden while adhering to

applicable statutory requirements and maintaining safety and soundness.

Approval Process

Much of Regulation Y is comprised of procedures for evaluating

applications and notices. A number of revisions are proposed to these

procedures with the goal of eliminating, to the fullest extent

permitted under current law, any unnecessary burden and paperwork.

Two important principles underlie the revisions that are proposed

to the approval process for bank holding companies. First, the new

regulation would establish objective and verifiable measures for each

of the criteria set forth in the BHC Act and an expedited and nearly

red-tape free approval process for those bank holding companies that

meet these measures. Under this new procedure, a bank holding company

that meets these objective measures should be able to expect little

burden or delay from the approval process unless special circumstances

demonstrate that a closer review is warranted. Second, the application/

notice process should focus on an analysis of the effects of the

specific proposal and should not normally become a vehicle for

comprehensively evaluating and addressing supervisory and compliance

issues at the applicant organization that can more effectively be

addressed in the supervisory process.

Importantly, these principles reflect a change in approach to the

application/notice process, both procedural and substantive. They

recognize that the approval process is most effective as a gateway for

identifying (and rejecting) organizations that do not have the

resources or expertise to make an acquisition or conduct a particular

activity; and that the on-site inspection and supervisory process is

the most effective way to determine if a particular organization is in

fact managing its subsidiaries or conducting an approved activity in a

safe and sound manner and operating within its authority.

Based on these principles, a new streamlined approval procedure is

proposed that would permit well-rated and well-run bank holding

companies to acquire banks and nonbanking

[[Page 47243]]

companies and to engage in permissible nonbanking activities de novo

with the filing of a simple, short letter and only 15 days advance

notice. A qualifying bank holding company would be required to provide

only minimal information in connection with a notice (basically a brief

description of the proposal and certification that the financial and

other criteria are met). Staff analysis of these proposals would be

focused on verifying that the qualifying criteria are in fact met. As

explained in more detail below, a qualifying bank holding company could

make bank and nonbanking acquisitions using this streamlined procedure

totaling up to 35 percent of the risk-weighted assets of the acquiring

bank holding company during any 12 month period. This limitation on the

size of acquisitions would not apply to the acquisition of banks by

small qualifying bank holding companies so long as the pro forma

consolidated assets of the holding company do not exceed $300 million.

All bank acquisition proposals that exceed 35 percent of assets (or

cause a small bank holding company to exceed $300 million in assets) or

that involve bank holding companies that otherwise do not meet the

qualifying criteria would be reviewed under the Board's current 30/60-

day procedure.

Approximately 85 percent of the bank holding companies with

consolidated assets in excess of $100 million would qualify generally

for this expedited procedure and more than 50 percent of the

applications/notices reviewed by the System during 1995 would have

qualified for this new streamlined procedure. Adoption of this

procedure would substantially reduce the paperwork that must be filed

by a qualifying bank holding company, the staff analysis of proposals

by these well-run organizations, and the time required to secure System

action on these proposals. In addition to reducing burden on qualifying

applicants, adoption of this new procedure should free up System

resources to focus on cases raising more complex and difficult issues,

thereby improving the processing time associated with these cases.

The new proposed procedure follows the approach taken in the

regulatory relief bills currently pending before Congress but cannot

reach the level of efficiency in the regulatory relief bills without a

change in the terms of the BHC Act. For example, the BHC Act currently

requires that a bank holding company obtain Board approval prior to

acquiring an additional bank or commencing a nonbanking activity. Thus,

the Board may not eliminate the prior approval process for bank or

nonbanking proposals and may not adopt a post-consummation notification

process in place of a pre-consummation approval process. However, the

abbreviated prior notice procedure that is proposed here would satisfy

the BHC Act by permitting consummation of a bank or nonbanking proposal

at the expiration of a brief notice period. The proposed regulatory

relief bill would eliminate the prior approval requirement altogether

for certain classes of nonbanking proposals and permit post-

consummation notice.1

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\1\ The regulatory relief bills in both the House and the Senate

would allow well-capitalized and well-managed banks, without any

prior notice, to engage de novo in nonbanking activities that have

been approved by the Board by regulation. These companies would also

be permitted, after providing the Board with 12 to 15 business days'

prior notice, to acquire any bank or any nonbanking company engaged

in a permissible activity so long as the bank or nonbanking company

represents less than 10 percent of the assets of the acquiring bank

holding company.

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As part of the review of the procedures governing bank acquisition

proposals, the Board's policies governing public comment have been

reviewed to assure that a meaningful opportunity for public comment is

provided while at the same time providing for the efficient and timely

processing of applications and notices. As discussed more fully below,

the proposed revisions would retain the Board's self-imposed 30-day

public comment period for bank acquisition proposals, with publication

of these proposals required in the Federal Register and local

newspapers. The proposal recommends, however, that the System limit the

exercise of its discretion to consider untimely comments and adhere

strictly to the Board's existing rule that only comments received

during the public comment period be considered, absent a showing of

extraordinary circumstances.

Other revisions have been proposed to the various procedures in

Regulation Y to eliminate unnecessary burden and to make the

application/notice procedure more focused and efficient. For example,

the proposal would streamline the procedure for a bank holding company

to obtain a waiver for transactions that are in substance a bank-to-

bank merger subject to review by another federal banking agency, and

would extend this waiver procedure to internal corporate

reorganizations. In addition, the proposal would eliminate the 4-week

pre-acceptance review period for bank acquisition proposals, thereby

allowing prompt acceptance and review of bank acquisition proposals.

These suggestions are outlined below and explained in detail in later

sections of this document.

Nonbanking Activities

Regulation Y also addresses the permissible nonbanking activities

of bank holding companies. As noted above, a streamlined procedure is

suggested for proposals by bank holding companies to acquire nonbanking

companies and to engage de novo in permissible nonbanking activities.

In addition, the ``laundry list'' of nonbanking activities that the

Board has defined by regulation as ``closely related to banking,'' and

hence permissible, has been revised and reorganized, and a number of

other changes suggested to improve the ability of bank holding

companies to engage in nonbanking activities.

Several principles guided the suggested reforms in the nonbanking

area. Most important is the premise that bank holding companies should

be permitted to conduct nonbanking activities to the fullest extent

permissible under the BHC Act and that the regulation should be

sufficiently flexible to allow for industry changes in permissible

activities without creating unnecessary additional filing burdens.

Thus, definitions of permissible activities have been broadened and

updated, and new procedures are proposed to make it easier for any

interested person to obtain a Board decision regarding whether a new

activity is permissible. The proposed revisions anticipate that the

Board would be pro-active in authorizing new activities, especially as

new activities are permitted for banks or as new financial activities

develop, and recognize that, under the BHC Act, bank holding companies

are authorized to conduct activities beyond the scope of activities

that insured banks may conduct.

A comprehensive revision of the restrictions that govern the

nonbanking activities of bank holding companies has also been

conducted. This review drew on the experience that the System has

developed over the past two decades in authorizing and supervising

nonbanking activities and reflects removal of a significant number of

restrictions that the System's experience has found are not necessary

or are outdated. A basic tenet of the revisions proposed in this area

is that a bank holding company should not be subject to supervisory

restrictions on the conduct of a specific activity that would not apply

to an insured depository institution conducting the same activity.

Another precept guiding this review is that supervisory principles

governing

[[Page 47244]]

the conduct of an activity should be clearly explained, adjusted to

take account of market developments and the System's experience in

supervising the activity, and, wherever appropriate, uniformly applied

to insured depository institutions and their affiliates on an

interagency basis.

Accordingly, the proposed revisions eliminate restrictions on the

conduct of specific activities that would not apply to insured

depository institutions that conduct the same activity. Also eliminated

were any restrictions that are outmoded or that the Board has already

superseded by order. It is anticipated that, unless the Board

determines otherwise with regard to a specific activity or company,

these restrictions would be removed at the time of final adoption of

the proposed regulation for all bank holding companies with authority

to conduct the relevant activity, without requiring that individual

bank holding companies obtain specific relief or additional consent.

In addition, the revisions contemplate that the Board, in

conjunction with the other banking agencies wherever appropriate, will

develop supervisory policy statements that govern the conduct of

certain activities. A supervisory policy statement has the advantage of

being more easily adjusted to reflect market developments and provides

a vehicle for more comprehensive guidance on the conduct of a specific

activity than individual regulatory restrictions.

The Board and the other agencies have made effective use of

supervisory policy statements in other areas, most notably in providing

guidance on the sale of securities and other nondeposit investment

products on bank premises. System experience has been that bank holding

companies have taken these statements seriously. Accordingly, the

revisions anticipate that several restrictions that currently are

contained in Regulation Y would be moved to supervisory policy

statements that would be developed at a later date.

The proposed regulation continues to anticipate that the

marketplace for already approved activities will develop and evolve.

Bank holding companies may continue to participate in these market

developments in permissible activities without seeking additional Board

approval. In the past, there has on occasion been uncertainty regarding

whether a particular development or variation in an activity represents

a fundamental change that redefines the activity into a new activity

for which an additional approval would be required under the BHC Act.

To address this, a new procedure has been proposed outside of the

application/notice process through which a bank holding company may, on

an expedited basis, obtain Board confirmation that a given development

or variation in an activity is permissible. These interpretations of

the scope of permissible activities would be published and would allow

all bank holding companies to participate in the development or

variation without additional approval. This procedure would eliminate a

number of notices filed by bank holding companies that are uncertain of

the scope of permissible nonbanking activities.

Tying Restrictions

A final principle underlying the proposal is that each restriction

in Regulation Y should be reevaluated in light of developments in the

marketplace in which nonbanking subsidiaries of bank holding companies

operate. Application of this principle warrants significant changes to

the Board's anti-tying regulation, which the Board already has revised

substantially over the past two years. Section 106 of the Bank Holding

Company Act Amendments of 1970 restricts tying arrangements by banks on

the grounds that the unique role of banks in the economy, in particular

their power to extend credit, would allow them to gain a competitive

advantage in other markets. In 1971, the Board by regulation extended

the coverage of these anti-tying rules to bank holding companies and

their nonbank subsidiaries. However, the Board's experience has shown

that these nonbanking companies generally operate in markets that are

notable for their competitive vitality. Accordingly, the proposed

revisions eliminate the Board's regulatory extension of the anti-tying

statute, leaving restriction of anti-competitive behavior by bank

holding companies and their nonbank subsidiaries to the same general

antitrust laws that govern their competitors.

Other Changes

As explained in more detail below, these various principles have

also led to a number of other suggested reforms to Regulation Y. In

addition to proposing the suggestions discussed below, the Board

invites suggestions on other revisions to Regulation Y that would

further eliminate unnecessary regulatory burden and paperwork.

B. Summary of Proposed Revisions

The Board seeks public comment on proposals to amend Regulation Y

to:

Bank Acquisition Proposals

Establish a streamlined 15-day notice procedure for

proposals by well-capitalized and well-managed bank holding

companies with ``satisfactory'' or better CRA performance records to

acquire banks, within limits (this procedure would currently be

available to approximately 85 percent of the bank holding companies

with assets over $100 million and would have applied to

approximately 50 percent of the applications/notices submitted to

the System last year);

Eliminate the pre-acceptance period for all filings to

acquire a bank (thereby expediting processing of bank acquisition

proposals by as much as 28 days);

Provide for publication of newspaper and Federal

Register notices regarding bank acquisition proposals up to 30 days

before a filing for approval of the transaction is made;

Adhere strictly to the Board's policies governing

acceptance of public comments to require all comments on bank

acquisitions to be submitted during the public comment period;

2

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\2\ As part of its review of Regulation Y, the Board has

delegated additional authority to the Reserve Banks to act on

certain classes of protested bank acquisition proposals.

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Streamline the current waiver procedure for

transactions that are in substance bank-to-bank mergers and expand

the procedure to apply to internal corporate reorganizations by

registered bank holding companies;

Proposals Involving Nonbanking Activities and Acquisitions

Establish a streamlined 15-day notice procedure for

proposals by well-capitalized and well-managed bank holding

companies to engage de novo in permissible nonbanking activities and

to acquire, within limits, nonbanking companies engaged in any

activity permitted by regulation or permitted for that bank holding

company by order;

Revise and reorganize the laundry list of permissible

nonbanking activities into fourteen categories of functionally

related activities and permit bank holding companies to obtain

approval at one time to engage in all activities on the list or

within the same functional category;

Broaden the scope and description of activities,

including in particular, derivatives trading and investment

activities, investment advisory activities, and management

consulting activities;

Expand data processing and management consulting

activities to include, as an incidental activity, deriving up to 30

percent of total revenue from nonfinancial data processing and

management consulting activities;

Add to the regulatory laundry list of permissible

nonbanking activities several nonbanking activities previously

approved by the Board by order, including private placement of

securities, acting as riskless principal in the sale of securities,

acting as a futures commission merchant in the sale of nonfinancial

futures and options on futures, providing career counseling services

to employees in the financial industry, and providing asset

management services;

Remove from the regulation restrictions on the conduct

of permissible nonbanking

[[Page 47245]]

activities that have been superseded by Board order, are unnecessary

or would not apply to the conduct by an insured bank of the same

activity, including restrictions on the conduct of leasing

activities, private placement and riskless principal activities,

derivatives investment and advisory activities, futures clearing and

execution activities, foreign exchange activities, the sale of

payment instruments, tax planning and preparation activities, and

consumer counseling activities;

Eliminate the one year time limit on System approvals

to engage de novo in permissible nonbanking activities for bank

holding companies that maintain adequate capital and satisfactory

examination ratings (this would allow a bank holding company to seek

a single approval to engage in all permissible nonbanking

activities);

Establish a streamlined procedure outside the

application process for bank holding companies and others to obtain

an advisory opinion from the Board about the scope of permissible

activities;

Revise the Board's policy statement governing the

investment advisory activities of bank holding companies to remove

several restrictions that currently apply to bank holding companies

that advise mutual funds;

Provide for publication of Federal Register notices

regarding nonbanking proposals up to 30 days before a filing for

Board approval is made;

Allow bank holding companies with approval to engage in

any lending activity broader authority to acquire, in the ordinary

course of business and without special Board approval, assets from

third parties engaged in the same activity;

Revision of Tying Rules

Remove Board-imposed tying restrictions that limit the

ability of non-bank affiliates of a holding company to package their

products, create exceptions from the statutory restriction on bank

tying arrangements to allow banks greater flexibility to package

products with their affiliates, and clarify that the tying

restrictions do not apply abroad;

Bank Holding Company Formations

Reduce the threshold qualifications and information

requirements for the existing abbreviated procedure for bank holding

company formations by current shareholders of a bank;

Change in Bank Control Act Filings

Eliminate the current requirement that a person that

has already received Board approval under the Change in Bank Control

Act obtain additional approvals to acquire additional shares of the

same bank or bank holding company;

Add a definition of the term acting in concert and

establish presumptions to resolve questions about when a group is

acting in concert;

Allow after-the-fact filings when a CIBC Act filing

requirement is triggered by the action of an unrelated third party;

Permit public notice of CIBC Act filings to be

published 30 days in advance of filing notice with the System;

Other Changes

Modify requirements for filing prior notice of changes

in directors and senior executive officers of state member banks and

bank holding companies and clarify the appeals process for rejected

notices;

Establish a regulatory presumption that exempts

testamentary trusts from the definition of company in the BHC Act;

Reduce from 30 to 15 the number of days notice required

before a large stock redemption by a bank holding company, permit

bank holding companies to take account of intervening new issues of

stock in computing when a stock redemption notice must be filed, and

allow small bank holding companies to make stock redemptions without

notice if the holding company meets certain leverage and capital

requirements applicable to small bank holding companies;

Update and revise the Board's existing policy statement

on small one-bank holding companies to reduce burden in the approval

process for proposals to form small bank holding companies and by

small bank holding companies to acquire additional banks; and

Implement current Board decisions defining the terms

class of voting securities and immediate family.

C. Explanation of Proposed Changes to the Procedures Governing Bank

Acquisitions

1. Streamlined Procedure for Well-Run Bank Holding Companies

The proposed revision would establish a 15-day notice procedure for

acting on bank acquisition proposals by well-run bank holding companies

if the following criteria are met:

Well-capitalized. Both before and immediately following

the transaction, the bank holding company, its lead insured

depository institution and insured depository institutions

controlling at least 80 percent of the total depository institution

assets of the bank holding company are well-capitalized;3

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\3\ A small bank holding company--defined as any bank holding

company with assets under $150 million--would be required to meet

certain debt-to-equity levels to qualify for this streamlined

procedure.

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Well-managed. At the time of the transaction, the bank

holding company, its lead insured depository institution and insured

depository institutions controlling at least 80 percent of the total

depository institution assets of the bank holding company are well-

managed (i.e., have received one of the two highest composite

ratings at the most recent examination, a ``satisfactory''

management rating and at least a ``satisfactory'' compliance

rating);

Satisfactory CRA rating. At the time of the

transaction, the lead insured depository institution and insured

depository institutions controlling at least 80 percent of the total

insured depository institution assets of the acquiring bank holding

company have a ``satisfactory'' or better performance rating at the

most recent CRA examination;

Competition. In every relevant banking market as

defined by the Board, the market share for deposits controlled by

the acquiring bank holding company following the transaction is

below 35 percent and the proposal conforms with the Department of

Justice Horizontal Merger Guidelines as applied to banking

organizations, in both cases relying on thrift weighting at 50

percent and without reliance on divestitures;

Size of acquisition. During any 12 month period, the

book value of the aggregate assets acquired by the bank holding

company, combining all acquisitions under the expedited procedure

for bank acquisitions with acquisitions under the expedited

procedure for nonbanking proposals, does not exceed 35 percent of

the consolidated total risk-weighted assets of the acquiring bank

holding company as measured at the beginning of the 12 month period.

This limitation would not apply to bank acquisitions by qualifying

bank holding companies that have assets of less than $300 million on

a pro forma basis;

Interstate. Approval of the proposal is not barred

under the provisions governing interstate acquisitions (e.g., meets

relevant deposit concentration limits, State age requirements, and

other applicable requirements);

Consolidated Home Country Supervision. The acquiring

bank holding company meets the requirement for consolidated home

country supervision contained in the BHC Act; and

No Supervisory Actions. At the time of the transaction,

no significant supervisory action is pending against the acquiring

bank holding company.

As of March 31, 1996, approximately 85 percent of the bank holding

companies with assets greater than $100 million would qualify for these

procedures. More than 50 percent of the applications/notices submitted

by bank holding companies during 1995 would have qualified for this

streamlined procedure and reduced filing requirement.

A bank holding company that meets these qualifications would be

able to acquire a bank or bank holding company by providing the

appropriate Reserve Bank with 15-day prior written notice of the

transaction. Under this procedure, a bank holding company would be

required to provide only limited information. The information

requirements are specified in the proposed regulation and have been

reduced to providing certification that the bank holding company and

the transaction meet the requirements for the procedure, a description

of the transaction and the parties, and certain pro forma information

regarding the financial and competitive effects of the transaction. The

bank holding company must also provide evidence that public notice of

the transaction has been given sufficiently in advance to permit

interested members of the public 30

[[Page 47246]]

days to submit their views regarding the proposal to the Board.

An identical expedited procedure is proposed for nonbanking

proposals by well-capitalized and well-managed bank holding companies

where the bank holding company proposes to engage de novo or to acquire

a company engaged in a nonbanking activity that the Board has approved

by regulation or, with limited exceptions designated by the Board, by

order. The aggregate size limitation discussed above (i.e., an

aggregate limit of 35 percent of assets during any 12 month period for

all acquisitions under the bank and nonbanking expedited procedures)

would limit the total amount of banking and nonbanking acquisitions

that a bank holding company could make during any 12 month period under

the streamlined notice procedures. Finally, because the CRA, interstate

banking, and home country supervision requirements do not apply to

transactions under section 4 of the BHC Act, no criteria would be

established in these areas for nonbanking proposals under the expedited

procedure.4

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\4\ Consistent with Board precedent, the CRA criterion would

apply to proposals by bank holding companies to acquire savings

associations under section 4.

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The proposed procedure would permit the Board or the Reserve Bank

to notify a bank holding company for any reason that this streamlined

notice procedure is not available and that a full application--subject

to the current application procedure--would be required. This provision

provides a mechanism to address situations in which information

obtained either in an examination or outside the examination process

indicates that a more thorough review of the organization's ability to

meet the statutory factors is warranted. For example, the Board could

follow the normal 30/60-day procedure in cases that are subject to a

substantive protest, that raise issues regarding the funding of a

transaction or that raise concerns about the ability of the applicant

adequately to manage the risks associated with a particular activity.

It is anticipated that this mechanism would be used only sparingly and

in extraordinary situations.

A company or proposal that does not qualify for the proposed

streamlined procedure would follow the current application process,

which provides for Reserve Bank action within 30 days of filing and

Board action on more complex cases within 60 days of filing. As

explained below, a number of steps are proposed to reduce the burden of

the current application process. In the event that, during the review

of a transaction under the expedited proposal, the Board determines

that a bank holding company must follow the current approval procedure

rather than the expedited procedure, the proposed regulation

contemplates that the notice filed by the holding company under the

expedited procedure would be accepted under the normal procedure and

that the normal procedure will be deemed to have begun at the time that

the expedited notice was filed.

In the case of the acquisition of a bank, the BHC Act requires that

the primary supervisor for the bank to be acquired be given 30 calendar

days in which to submit comments on the transaction. In practice, the

primary supervisor generally allows the notice period to expire without

filing comments. Moreover, financial, managerial, legal and safety and

soundness concerns that are known to the primary bank supervisor are

generally also known by the Board because of ongoing sharing of

supervisory information. Accordingly, it usually serves no regulatory

purpose to allow this 30-day notice period to serve as a constraint on

the Board's action on a proposal.

Under the proposed procedure, the Reserve Bank would provide notice

of a proposal to the primary supervisor. The proposed procedure

contemplates that the System will act on any proposal within 15 days of

receiving a filing regarding the proposal even though the period for

obtaining comments from the primary supervisor has not expired. The new

procedure provides, however, that the System's action is subject to

revocation if the primary supervisor objects to a transaction within

the relevant notice period. Because bank acquisition proposals may not

be consummated for 15 days after System action--which is the post-

approval waiting period established by statute to allow the Department

of Justice to review a transaction--it is expected that the notice

period for the primary supervisor will expire prior to consummation of

a bank acquisition proposal.

The Board seeks comment on all aspects of this proposed procedure,

including comment on whether the procedure is workable and likely to

reduce burden and whether the proposed regulatory criteria are

appropriate. The Board intends that the proposed expedited procedure

apply to ``well-run'' bank holding companies, whether domestic or

foreign, large or small. The Board seeks comment on whether the

criteria proposed are appropriately defined to achieve this result. In

this regard, the Board has already proposed an adjustment to the

qualifying criteria for small bank holding companies (defined as bank

holding companies with total assets under $300 million).

2. Elimination of the Pre-Acceptance Period for Bank Acquisition

Proposals

Currently, Regulation Y provides a period prior to acceptance of a

filing involving a bank acquisition proposal during which the

appropriate Reserve Bank reviews the informational sufficiency of the

filing and may ask for additional information. An application is

accepted for processing once the information requested during this pre-

acceptance period is provided. A similar pre-acceptance period for

nonbanking proposals was eliminated by the Board in 1993 and the

experience with nonbanking proposals since that time indicates that the

pre-acceptance period is not necessary.

Accordingly, the proposed revision to Regulation Y would eliminate

the pre-acceptance period for all bank acquisition proposals. This

change would shorten by as much as 28 days the period that a proposal

is within the System, and would begin the processing of all

applications involving a bank acquisition--both under the streamlined

and standard procedure--on the date of submission of the required

filing. The proposed revision to Regulation Y would provide that,

within 7 calendar days of receipt of a notice or application to acquire

a bank, the appropriate Reserve Bank must either accept the filing as

of the date of receipt or return the filing as informationally

incomplete. It is expected that a filing that contains the information

specified in the regulation or in the appropriate Federal Reserve form

will, except in extraordinary circumstances, be accepted for action.

The draft regulation would allow the Board or the Reserve Bank to

request any additional information at any time during the period for

review of the proposal, although one of the premises underlying the

expedited procedure is that an analysis of transactions that qualify

for expedited processing will be limited and information beyond the

information stated in the regulation will only be requested for those

proposals in special circumstances.

3. Timing of Publication

In the case of a bank expansion proposal, the Board's rules require

that notice be published by the applicant in local newspapers and by

the Board in the Federal Register. The Board initiated the newspaper

publication

[[Page 47247]]

requirement for bank acquisition proposals in order to solicit

information from the local community regarding the effect of a proposal

on the convenience and needs of the local community, and retained the

requirement after the enactment of the Community Reinvestment Act.

Public notice of nonbanking proposals is published only in the Federal

Register.

Currently, the Board's rules require that newspaper notice of a

proposed bank acquisition be published in a newspaper of general

circulation no more than 7 days before or 7 days after the appropriate

filing is made with the Reserve Bank. The Board publishes notice in the

Federal Register of both bank acquisition proposals and nonbanking

proposals upon receipt of a filing. In over 90 percent of the bank

acquisition proposals filed with the System, no public comments are

submitted. Consequently, the current publication schedule often results

in substantial delay in action on a proposal in which no comments are

submitted. For example, because the public comment period is typically

30 days, this publication schedule delays action on some proposals

until up to 37 days after the proposal has been filed to allow for

Federal Register publication.

Moreover, public announcement of a proposed bank acquisition

usually well pre-dates the newspaper and Federal Register publication.

This has led to confusion on the part of commenters about when a timely

comment may be filed with the System.

To avoid this delay and confusion, the regulation would provide for

newspaper publication of bank acquisition proposals up to 30 days prior

to submission of a filing for System approval, which is closer to the

time of the actual public announcement of the proposal. In addition,

the applicant would be permitted to request that the Board publish

notice of a proposal in the Federal Register up to 30 days before a

filing is made with the System. This change would apply to all bank and

nonbanking proposals, including cases that qualify for the new

streamlined procedures outlined above, and would allow more efficient

processing of applications/notices while permitting the public a full

comment period. In the case of proposals that qualify for the new

streamlined procedure, advance publication of notice is essential to

permit System action within 15 days following the filing.

4. Revision of Public Comment Procedures for Bank Acquisitions

As just noted, since 1960, the Board has provided by regulation for

the publication of bank acquisition proposals. The Board's rules

currently provide that all comments from the public regarding a

proposed transaction must be received prior to the close of the public

comment period. However, the rules also provide that the Board may, in

its discretion, consider any untimely comment.

Since adoption of its publication rule, the Board has liberally

used its discretion to consider all comments, in particular,

supplemental comments filed by a commenter that has filed an initial

timely comment, to the fullest extent practicable without delaying

action on a proposal beyond the self-imposed 60-day processing

schedule. There has been growing concern that this practice of

accepting and considering public comments submitted after the close of

the public comment period has encouraged some commenters to file

comments after the close of the comment period, and other commenters to

file cursory comments during the public comment period while submitting

numerous and voluminous comments after the close of the comment period,

sometimes as late as the day of the Board's consideration of the case.

The Board proposes to retain its current practice of requiring

public notice of bank acquisition proposals and of providing commenters

at least 30 days in which to develop and submit comments on bank

acquisitions under the BHC Act. Similarly, public notice would continue

to be given of all nonbanking proposals, with the public provided at

least 14 days to comment on nonbanking transactions.

The Board also proposes, however, to adhere more strictly to its

current rules, and--for both bank and nonbanking proposals--no longer

to consider any comments submitted after the close of the comment

period, including supplemental comments filed after the close of the

comment period by a commenter that had filed initial comments on a

timely basis, except in extraordinary circumstances in which the

commenter provides compelling evidence that it could not have submitted

all of its comments in a timely fashion.5

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\5\ As part of its review of its policies and procedures

governing applications/notices, the Board has delegated additional

authority to the Reserve Banks to act on cases involving protests

that raise individual consumer complaints (such as denial of an

individual loan), allegations for which the commenter provides no

substantiation, and cases involving an assertion of violation of a

law where a court of the agency responsible for enforcing the

specific law has not made a determination that the law was violated

and the Board has determined the law is not within the Board's

jurisdiction to interpret and enforce (such as State laws preserving

the rights of minority shareholders and federal equal employment

laws). In each of these areas, the Reserve Bank would be required to

review the performance record of the applicant and could act only if

the CRA, managerial and other statutory factors supported approval.

The Board's Inspector General endorsed this change in procedure

based on a review of the Board's application process.

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5. Streamlined Waiver Process for Proposals Involving Bank Mergers

The Board's current regulation permits bank holding companies to

seek a waiver of the application filing requirement under the BHC Act

for transactions that involve the acquisition of stock of a bank for an

instant in time as part of a bank-to-bank merger. All of these

transactions are subject to review by a federal banking agency under

the Bank Merger Act, which requires review of the financial,

managerial, competitive, convenience and needs and CRA effects of the

bank merger. The Board established this waiver process to eliminate

redundant review of these transactions by multiple federal banking

agencies. The Board retained jurisdiction over these transactions and a

modest review process because some transactions have an effect on the

financial and other resources of the parent bank holding company, which

is not subject to an analysis under the Bank Merger Act.

Under the Board's current waiver process, a bank holding company

must provide 30 days advance notice to the System and file supporting

information. A waiver is automatically granted at the end of that

period unless the Board notifies the bank holding company that a full

application is required. The Board received approximately 110 waiver

requests in 1995.

The Board proposes to streamline the waiver procedure in three

ways. First, the length of the review process for waivers would be

reduced to 10 days from 30 days. Thus, a bank holding company would

receive a waiver for a qualifying transaction if the System does not

notify the bank holding company prior to expiration of a 10-day waiver

review process that a full application is required. Second, the

regulation would be amended to specify the information that must be

provided with a waiver request. That information would be limited to a

copy of the Bank Merger Act filing made with the appropriate federal

banking agency for the banks involved in the merger, and

[[Page 47248]]

a description of the transaction at the bank holding company level,

including the purchase price and the source of funding for the purchase

price.

Third, the proposed regulation would make the waiver process

available to internal reorganizations of bank holding companies, such

as the transfer of banks within a registered bank holding company, the

formation of new intermediate-tier bank holding companies, and the

merger of intermediate-tier bank holding companies. Some of these

transactions are not subject to a review under the Bank Merger Act.

However, all of these transactions involve corporate reorganizations by

registered bank holding companies that have received Board approval to

control and operate the banks involved in the transaction. The Board

has granted waivers for internal reorganizations in previous cases, on

a case-by-case basis.

In all cases in which a waiver is available, the Board would retain

the right to require a full application in individual cases if the

Board determines that circumstances warrant a full Board review and the

Board notifies the bank holding company that a filing is required.

The Board seeks comment on these revisions to the waiver procedure,

including whether the criteria identified in the proposal are adequate

to assure Board review of transactions that involve significant issues

under the standards set forth in the BHC Act.

6. Small Bank Holding Company Policy Statement

In 1984, the Board adopted a policy statement governing the

formation of small one bank holding companies that recognized that

there are public benefits to permitting small bank holding companies

with well capitalized and well managed subsidiary banks to operate with

levels of debt that are somewhat higher than ordinarily permitted for

bank holding companies. The Board proposes to revise and update this

policy statement to reduce the burden on small bank holding companies

of the applications process, especially for less highly leveraged

organizations, and to otherwise remove obsolete language. The revised

language reflects that the policy statement has, for some time, been

applied to small bank holding companies (regardless of the number of

subsidiary banks) otherwise meeting the statement's criteria, and not

just to small one bank holding companies. The statement would also be

revised to clarify that it applies to expansion proposals by small bank

holding companies as well as to small bank holding company formations.

In addition, the statement would be updated to replace outdated

language defining applicable capital levels with the requirement that

all subsidiary banks be well-capitalized. Notifications to form small

bank holding companies over banks that are well managed and in

satisfactory condition, and that present no other issues, will be

eligible for the expedited applications processing procedures if the

pro-forma debt to equity ratio is 1.0:1 or less. The criteria under

which these organizations could pay reasonable corporate dividends have

also been simplified.

Other proposals to form bank holding companies will be subject to a

focused review of the parent-level debt servicing ability or any other

issue presented. It is not expected that these organizations will pay

dividends until their leverage has been reduced to a 1.0:1 level.

The Board requests comment on these proposed revisions and, in

particular, the effect of these revisions on proposals to form small

bank holding companies and by small bank holding companies to acquire

additional banks.

D. Explanation of Proposed Changes to the Nonbanking Provisions

1. General Review and Updating of Nonbanking Activities

The principal authority for bank holding companies to engage in

nonbanking activities is set forth in section 4(c)(8) of the BHC Act.

That section generally provides that a bank holding company may seek

Board approval to engage in, or acquire shares of a company engaged in,

activities that the Board has determined, after notice and opportunity

for hearing, ``to be so closely related to banking or managing or

controlling banks as to be a proper incident thereto.'' The statute

provides that the Board may make this determination by order or by

regulation. The Board has to date determined by regulation that 24

activities are ``closely related to banking'' and has determined by

individual order that a number of additional activities are also

``closely related to banking.''

Once the Board has determined--either by regulation or by order--

that an activity is ``closely related to banking,'' the Board need not

make that determination again in subsequent cases. Review of subsequent

cases is limited to determining whether the conduct of the nonbanking

activity by the applying bank holding company would result in public

benefits that outweigh the potential adverse effects (the ``proper

incident'' test).

The list of nonbanking activities contained in Regulation Y (the

``laundry list'') is intended to serve the purpose of providing a

convenient and detailed list of most of the activities that the Board

has found to be closely related to banking and therefore permissible

for bank holding companies. The Regulation Y laundry list also

designates the activities that may be approved by the Reserve Banks

under delegated authority, although the Board has delegated authority

for Reserve Banks to act on proposals involving a number of activities

approved by order during intervals between modifications of Regulation

Y.

As explained above, the Board proposes to establish an expedited

procedure for ``well-rated'' and ``well-run'' bank holding companies to

obtain System approval to make nonbanking acquisitions that fall within

the size limit noted above and to engage de novo in permissible

nonbanking activities. The Board also proposes to reorganize the list

of permissible nonbanking activities into fourteen categories of

functionally related activities. This reorganization should make the

list easier to understand and make it easier for bank holding companies

to obtain approval to engage in related activities. For example, the

proposed revisions would permit a bank holding company to obtain

approval at one time to engage in all of the activities on the laundry

list or all activities listed in a functional category, or, at the

holding company's choosing, to obtain approval to engage in any

specific activity within a category.

As part of the reorganization of the laundry list, the proposal

amends the list to include nonbanking activities that previously have

been determined by order to be closely related to banking. Among the

activities that would be included are: (1) Riskless principal

transactions; (2) private placement services; (3) foreign exchange

trading for a bank holding company's own account; (4) dealing and

related activities in gold, silver, platinum and palladium; (5)

employee benefits consulting; (6) career counseling services; (7) asset

management, servicing and collection activities; (8) acquiring and

resolving debt-in-default; (9) printing and selling checks; and (10)

providing real-estate settlement services.

The Board also proposes to broaden the scope of permissible

derivatives and foreign exchange activities to assure that bank holding

companies may conduct these activities to the same degree as banks, and

to remove several restrictions on these activities that apply to bank

holding companies but do not

[[Page 47249]]

apply to banks that conduct these activities. In addition, the proposal

eliminates restrictions on a number of activities that no longer appear

to be warranted or that have been superseded.6 In particular, the

proposal revises and updates the description of derivatives activities

and foreign exchange activities to reflect recent Board decisions, and

eliminates any requirement that the Board specifically review and

approve new derivatives instruments or trading on new exchanges.

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\6\ For example, many of the current restrictions that treat

private placement activities as impermissible underwriting

activities would be eliminated. The Board recently eliminated these

restrictions as they applied to riskless principal transactions.

Restrictions designed to distinguish riskless principal and private

placement activities from securities underwriting activities would

be retained.

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2. Mechanism for Authorizing New Activities

The proposal would add two provisions to Regulation Y to ease the

burden associated with the authorization of new activities. First, the

proposed regulation would specifically reflect the fact that the Board

may, on its own initiative, begin a proceeding to find that an activity

is permissible for bank holding companies, as the Board did in the case

of many of the earlier nonbanking activities and as it is proposing in

the management consulting, data processing and other areas as part of

this proposal. The Board could amend the laundry list, for example, as

new activities are authorized for banks, as experience with a narrowly

defined activity indicates that bank holding companies should be

permitted to engage in a more broadly defined activity, or as

developments occur in technology or the marketplace for financial

products and services. As part of this proposal, the System would

actively track market developments as well as decisions that authorize

banks to conduct new activities and evaluate adding these activities to

the laundry list even if an individual request has not yet been made to

engage in these activities.

Second, the Board proposes to amend the regulation to establish a

streamlined procedure outside the application process through which a

bank holding company may request an advisory opinion from the Board

that a particular variation on an activity is permissible under an

existing authorization and is not deemed to be a new activity. This

procedure would be particularly helpful in areas such as data

processing, investment advisory, derivatives and foreign exchange

activities where some bank holding companies have questioned whether

the general authorization granted by the Board to conduct these

activities permits the bank holding company to conduct variations that

develop in response to market changes after the original authorization

granted by the Board.

These two procedures, when combined with the proposals to broaden

several of the definitions of permissible nonbanking activities, should

make it easier for bank holding companies to participate in marketplace

developments in permissible nonbanking activities and in new

activities. For example, because most permissible nonbanking activities

have been broadly defined, a bank holding company would not be required

to seek additional Board approval to participate in market developments

in permissible activities. As noted above, if a bank holding company is

uncertain about the permissibility of a development, an expedited

procedure outside the approval process is available to obtain Board

guidance on the scope of the authorized activity. All bank holding

companies would then be able to act on the basis of that guidance

without additional approval. This procedure will eliminate a number of

applications that are currently filed by bank holding companies that

are uncertain about the scope of permissible activities.

As previously noted, the draft proposal would also establish a

procedure that would allow bank holding companies and others to seek a

Board determination, outside of the applications process, that a given

new activity is permissible. The Board could then add this activity to

the new functional categories or establish a new category, as

appropriate. At the time the Board reviews this new activity, the Board

would determine whether it is appropriate to permit bank holding

companies to engage in this activity without additional approval (as,

for example, a variation of one or more previously authorized

activities) or to require bank holding companies to obtain approval

prior to conducting the activity (because, for example, the activity

does not fall within a previously approved activity or category). The

Board has in the past followed these approaches at various times.

3. Nonbanking Activities That Are Incidental to a Permissible Activity

The Board proposes to expand its interpretation governing the scope

of activities that are incidental to a permissible nonbanking activity.

For example, the Board has permitted bank holding companies that

conduct permissible data processing activities to use excess hardware

capacity to conduct data processing involving nonfinancial data where

the hardware has not been purchased solely to create excess capacity

and the holding company does not provide software to process the

nonfinancial data (other than making system software available). The

Board also permits bank holding companies to sell general purpose data

processing hardware where the hardware represents less than 30 percent

of the total cost of the data processing services provided by the bank

holding company. In addition, the Board permits companies engaged in

securities underwriting activities to provide certain incidental

services so long as the revenue from those services is counted as

ineligible revenue for purposes of applying the Board's section 20

revenue test.

Over the past year, several industry members have recommended that

the Board broaden this interpretation to permit bank holding companies

greater flexibility in conducting data processing and management

consulting activities. In particular, these members have recommended

that the Board permit a bank holding company, as an incidental activity

to the holding company's permissible financial data processing and

management consulting activities, to receive a modest amount of revenue

from providing nonfinancial data processing services and from providing

management consulting services to nonbanking companies.

Bank holding companies argue that they are at a competitive

disadvantage in providing data processing and management consulting

services because of the strict limitations tying these services to

financial data and financial consulting. Bank holding companies also

claim that these limitations disadvantage bank holding companies in

hiring the most competent employees, who often have interests and

skills beyond financial areas.

The Board proposes to amend Regulation Y to permit bank holding

companies engaged in data processing and management consulting

activities, as an incidental activity, to derive up to 30 percent of

their annual revenue from nonfinancial data processing or consulting

services. This 30-percent level is based on the amount of general

purpose hardware that a bank holding company is already permitted to

provide in connection with permissible data processing activities.

[[Page 47250]]

4. Removal of Restrictions Governing Permissible Activities

As noted above, the proposal would remove restrictions currently

contained in the regulation that are outmoded, have been superseded by

Board order or do not apply to insured depository institutions that

conduct the same activity. A detailed discussion of the restrictions

that are proposed to be removed is contained in section E below.

In summary, restrictions in the current regulation on the conduct

of individual activities, such as restrictions governing disclosures to

customers, requiring compliance with anti-tying rules, limiting

disclosure of customer information, and requiring divestiture of

property within specific periods of time, have been deleted from the

regulation with the expectation that existing and future Board policies

and guidance would more fully address the manner in which individual

activities should be conducted. This approach permits greater

flexibility in developing and changing the guidance for individual

activities in order to adapt to changes and developments in the

marketplace. Supervisory statements also permit the opportunity for

uniform interagency guidance, where such an approach is appropriate.

5. Elimination of Time Limit on System Approvals for Nonbanking

Acquisitions

The proposed draft takes several other steps to ease the burden on

bank holding companies that seek approval to engage in permissible

activities. Currently, a bank holding company that seeks approval to

engage in a nonbanking activity must commence the activity within one

year of receiving System approval or the approval lapses. This

requirement is not legally required and elimination of this requirement

would allow a bank holding company to seek a single approval to engage

de novo in all permissible nonbanking activities, thereby greatly

reducing the filing burden on bank holding companies.

This change would significantly reduce burden by eliminating the

filing of multiple applications to engage in permissible nonbanking

activities and by permitting bank holding companies quickly to respond

to a decision to compete in a permissible nonbanking activity.

Moreover, this change would focus the filing requirement on

acquisitions of nonbanking companies, which are the types of proposals

that have the most significant effects on most organizations.

The Board originally imposed the time limit on its approvals in

order to address concern that the financial and other resources of a

bank holding company could change between the time that the System

approved a proposal and commencement of the activity by the holding

company. This concern would appear to be minimal in the case of

proposals by a bank holding company to engage de novo in a permissible

activity. To address this concern, the proposed revision would provide

that an approval to engage de novo in an activity would not expire so

long as the bank holding company continues to have adequate capital and

at least satisfactory composite and management examination ratings.

6. Revision of Policy Statement Governing Investment Advisory

Activities

In 1972, the Board permitted bank holding companies to provide

investment advice to mutual funds and other investment companies. In

connection with that determination, the Board adopted a policy

statement outlining a number of restrictions that the Board believed

were necessary to address the potential that the investment advisory

activities of bank holding companies may result in the ``subtle

hazards'' that the Glass-Steagall Act was designed to prevent. In 1992,

the Board substantially revised the policy statement to remove many of

the restrictions on investment advisory activities to conform with

various court decisions and developments in the market that had

occurred since the policy statement was adopted. On August 23, 1996,

the Board also amended this policy statement to allow a bank holding

company to purchase, as fiduciary, shares of a mutual fund advised by

the holding company where the purchase of shares is permitted by the

fiduciary agreement, relevant state law or court order. In addition,

the Board rescinded a letter issued in 1986 (the ``Sovran letter'')

that governs the manner in which a bank holding company may act as

broker in the sale of mutual fund shares to bank customers.

The Board proposes to remove four restrictions that remain in the

policy statement. These restrictions are:

A prohibition on a bank holding company owning any

shares of a mutual fund advised by the bank holding company;

A prohibition on a bank holding company lending to a

mutual fund advised by the bank holding company;

A prohibition on a bank holding company accepting

shares of a mutual fund that it advises as collateral for any loan

to a customer that is for the purpose of purchasing such mutual fund

shares; and

A prohibition on a bank holding company serving as an

investment adviser to an investment company or mutual fund that has

a name that is similar to, or a variation of, the name of the bank

holding company or any of its subsidiary banks.

None of these four restrictions is specifically required by the

Glass-Steagall Act. The first restriction was intended to assure that a

bank holding company does not, in violation of the Glass-Steagall Act,

control a mutual fund that it advises. Removal of this prohibition

would allow a bank holding company to acquire up to 5 percent of the

shares of a mutual fund, which is the limit contained in the BHC Act

for investments by bank holding companies in the voting shares of any

company. This modest investment amount would not appear to enhance

significantly the ability of a bank holding company to control a mutual

fund it advises. The federal securities laws require, for example, that

the board of directors of a mutual fund maintain at least a majority of

directors that are independent of the investment adviser, and it is

these directors that must review and approve the continued service of

the investment adviser.

The second limitation governs loans by a bank holding company to an

investment company advised by the bank holding company. In 1982,

section 23A of the Federal Reserve Act, which establishes quantitative

and qualitative limitations on the lending activities of banks, was

amended to cover these types of lending transactions by banks. Section

23A would permit a bank to lend to a mutual fund advised by the bank or

an affiliate within the overall limits that apply to loans by banks to

affiliates. In light of section 23A, a complete prohibition on these

lending activities by a bank holding company--which does not lend

insured funds--does not appear necessary and the Board proposes to

remove this restriction.

The third limitation prohibits a bank holding company from

accepting as collateral for a loan shares of an investment company that

the holding company advises where the purpose of the loan is to

purchase the investment company shares. Section 23A limits the ability

of banks to accept these shares as collateral for a loan from the bank.

This restriction in section 23A was intended to address potential

safety and soundness concerns that could result from allowing an

insured institution to accept shares of a related mutual fund as

collateral for a loan. A bank holding company, on the other hand, does

not lend insured funds. Moreover, the collateral and other requirements

in

[[Page 47251]]

section 23A do not apply to loans by bank holding companies.

Accordingly, the Board seeks public comment on permitting bank holding

companies and their nonbanking affiliates to extend credit that is

collateralized by shares of investment companies that the bank holding

company advises.

The fourth restriction raises an issue regarding the potential for

customer confusion about whether shares of investment companies are

federally insured. The Board's rule prohibits bank holding company from

having a name that is ``similar to, or a variation of'' a mutual fund

or investment company advised by the holding company or any of its

subsidiary banks. This rule is stricter than the rule adopted by the

Comptroller of the Currency for national banks, which permits a

national bank to advise an investment company with a name that is

similar to the name of the bank provided that the name is not identical

to the bank's name. The Board's rule is also stricter than the position

of the SEC, which permits an investment company to have a name similar

to that of an insured depository institution provided that the

investment company makes a number of disclosures that advise customers

that the investment company is not federally insured or guaranteed by

the insured depository institution.7

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\7\ Letter of May 13, 1993, (1993 Transfer Binder) Fed. Sec. L.

Rep. (CCH) Paragraph 76,683.

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The Board seeks comment on amending its rule to permit similar

names so long as: (1) The investment company name is not identical to

that of the holding company or an affiliated insured depository

institution, (2) the investment company name does not include the term

bank, and (3) the holding company or investment company discloses to

customers in writing that shares of the investment company are not

federally insured and are not obligations of or guaranteed by any

insured depository institution, and the role of the bank holding

company as an adviser to the investment company. The Board seeks

comment on whether these limitations would adequately address the

potential for customer confusion that shares of an investment company

advised by a bank holding company are not federally insured.

7. Revision to Exception for Acquisitions of Lending Assets in the

Ordinary Course of Business

The Board also proposes to update the regulatory language

permitting a bank holding company, without additional approval, to

acquire lending assets from a third party in the ordinary course of

business. The Board currently permits a bank holding company, without

additional approval, to acquire assets of an office of another company

related to making, acquiring or servicing loans so long as the bank

holding company and the transaction meet certain qualifications. Among

the qualifications are that the assets relate to consumer or mortgage

lending, and that the acquired assets represent the lesser of $25

million or 25 percent of the consumer lending, mortgage banking or

industrial banking assets of the acquiring bank holding company. The

office must also be located in the geographic area served by the bank

holding company.

The Board proposes to revise this provision in three ways. First,

since the Board no longer limits the geographic scope of its approval

to engage in nonbanking activities, this restriction would be removed.

Second, the scope of the exception would be broadened from consumer and

mortgage banking assets to permit the acquisition of assets related to

any lending activity. Third, the threshold limits would be raised to

permit the acquisition of assets representing up to the lesser of $100

million or 50 percent of the lending assets of the bank holding

company.

The Board invites public comment on these revisions.

E. Explanation of the Restrictions Removed From Permissible Nonbanking

Activities

As noted above, the Board proposes to remove restrictions contained

in the current regulation that are outmoded, have been superseded by

Board order or would not apply to an insured depository institution

conducting the same activity. The limitations that remain are necessary

to establish a definition of the permitted activity or to prevent

circumvention of another statute, such as the Glass-Steagall Act. The

following discussion explains, by functional group of activities, the

restrictions that the Board proposes to eliminate as well as, the

limitations that the Board proposes to retain.

The Board seeks comment on all aspects of its proposed changes to

the Regulation Y laundry list. In particular, comment is invited on

whether the activities are properly defined and whether, as defined,

each activity is closely related to banking for purposes of section

4(c)(8) of the BHC Act. Comment is also invited on new activities that

the Board should consider including on the regulatory laundry list.

Comments regarding new activities should explain the basis for finding

that the activity is closely related to banking for purposes of the BHC

Act.

The Board invites comment on whether the restrictions on nonbanking

activities that are proposed to be retained are adequate to address

potential adverse effects from the conduct of the relevant activity,

including potential conflicts of interests and customer confusion. In

addition, the Board seeks comment on whether supervisory policy

statements are adequate for addressing potential adverse effects that

may be associated with certain activities, and the type of guidance

that should be provided in such a policy statement.

1. Extending Credit and Servicing Loans

Lending activities are already broadly defined and contain no

restrictions.

2. Activities Related to Extending Credit

A new category has been added authorizing activities that the Board

determines to be usual in connection with making, acquiring, brokering

or servicing loans or other extensions of credit. Without limiting the

scope of this activity, the category lists a number of activities that

the Board has previously determined are related to credit extending

activities, including, by way of example, credit bureau, collection

agency, appraisal, asset management, check guarantee, and real-estate

settlement activities. Restrictions governing disclosures, tying,

preferential treatment of customers of affiliates, disclosure of

confidential customer information without customer consent and similar

restrictions have been removed from these activities. These

restrictions do not apply to banks that conduct these activities and,

to the extent these restrictions are appropriate, supervisory guidance

on the conduct of the activity would be developed.

3. Leasing Personal or Real Property

The leasing provision of the regulation was streamlined by

combining the two types of leasing activities permissible for bank

holding companies: Full-payout leasing and high residual value

leasing.8 The

[[Page 47252]]

following restrictions have been removed--

\8\ A full-payout lease is the functional equivalent of an

extension of credit and relies primarily on rental payments and tax

benefits to recover the cost of the leased property and related

financing costs. High residual value leasing may involve significant

reliance on the expected residual value of the leased property--on

average, under 50 percent, but in some cases, up to the full

original cost of leased property--to recoup the cost of the leased

property and related financing costs. Under the Board's regulation,

bank holding companies may provide full-payout leases for any type

of personal property or real property, and may make high residual

value leases only for personal property. Bank holding companies have

not been permitted to engage in high residual value leasing for real

property because of concern that such leasing would be

indistinguishable from real estate development and investment

activities.

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The lease must serve as the functional equivalent of an

extension of credit (permissible high residual value leasing may not

be the functional equivalent of an extension of credit);

The property must be acquired only for a specific

leasing transaction;

Leased property must be re-leased or sold within 2

years of the end of each lease;

The maximum lease term may not exceed 40 years; and

No leased property may be held for more than 50 years.

These restrictions were removed from the regulation primarily to

permit bank holding companies greater flexibility to acquire property

in quantity in the expectation of leasing activities and to grant more

flexibility in selling or releasing property at the expiration of a

lease. It is expected that supervisory guidance would be developed to

aid examiners in supervising the acquisition and retention of property

for leasing.

The draft also removes the provision limiting to 100 percent of the

initial acquisition cost the amount of reliance that may be placed on

the residual value of leased personal property. No such limit applies

to national bank leasing activities. The estimated residual value of

real property continues to be limited to 25 percent of the value of the

property at the time of the initial lease. This restriction is intended

to distinguish real property leasing from real estate development and

investment activities.

Two other requirements were retained: (1) That the lease be non-

operating, and (2) that the initial lease term be at least 90 days.

These requirements were developed in the course of litigation regarding

the leasing activities of national banks, and were relied on by the

courts in distinguishing bank leasing activities from general property

rental and real estate development businesses. The requirement that a

lease be non-operating is also a statutory requirement limiting the

high residual value leasing activities of national banks.9 In

particular, the definition of nonoperating leases in the automobile

rental context, which was developed in litigation and prevents a bank

holding company from directly providing repair and similar services,

has been retained. The draft would permit a bank holding company to

arrange for a third party to provide repair and other services in

connection with a lease.

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\9\ As a general matter, the requirement that a lease be non-

operating means that the bank holding company does not itself

operate the equipment or property being leased or repair or service

the property. This limitation was intended to help distinguish bank

leasing activities from general commercial activities.

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4. Operating Nonbank Depository Institutions

This category permits ownership of a savings association and an

industrial loan company. The proposed regulation retains the

restrictions in the BHC Act that the institution not be operated as a

``bank'' for purposes of the BHC Act 10 and that the activities of

the institution conform to the relevant statutory provisions of the BHC

Act.

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\10\ The BHC Act contains an exception from the definition of

``bank'' for industrial loan companies and savings associations that

meet requirements listed in the BHC Act.

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5. Trust Company Functions

The current regulation limits the deposit-taking and lending

activities of trust companies. These limitations are already

encompassed in the requirement in the BHC Act that the trust company

not be a ``bank'' for purposes of the BHC Act, and have, therefore,

been deleted from the regulation.

6. Financial and Investment Advisory Activities

The regulation has been reorganized to group together all

investment and financial advisory activities. The proposed rule broadly

authorizes acting as investment or financial adviser to any person,

without restriction. The proposed definition of investment and

financial advisory activities is very broad and would permit some types

of advisory activities beyond the scope of advisory activities

currently permitted by regulation. The Board invites comment on whether

this activity has been properly defined and whether all investment and

financial advisory activities are closely related to banking.

Without limiting the breadth of the advisory authority, the rule

also lists as specific examples of permissible advisory activities

certain types of investment or financial advice, counseling and related

services that previously had been separately authorized. These examples

are--

Advising an investment company and sponsoring,

organizing and managing a closed-end investment company;

Furnishing general economic information and forecasts;

Providing financial advice regarding mergers and

similar corporate transactions;

Providing consumer educational courses and providing

tax-planning and tax-preparation; and

Providing advice regarding derivatives transactions.

The few restrictions imposed by the Board on these activities would

be removed. Specifically, the Board proposes to remove the current

restriction that discretionary investment advice be provided only to

institutional customers, thereby allowing bank holding companies to

manage retail customer accounts outside of the trust department of an

affiliated bank. This activity would continue to be governed by the

fiduciary principles in relevant state law. Similarly, the requirement

that investment advice regarding derivatives transactions be provided

only to institutional investors would be removed, thereby allowing this

advice to be provided to retail customers. These restrictions do not

apply to banks that provide investment advisory services.

Restrictions also have been deleted in the areas of tax-planning

and preparation services and consumer counseling services that

prohibited bank holding companies from promoting specific products and

services and from obtaining or disclosing confidential customer

information without the customer's consent. These restrictions do not

apply to banks that engage in these activities.

7. Agency Transactional Services for Customer Investments

The various transactional services that a bank holding company may

provide as agent have been reorganized into a single functional

category. This category includes securities brokerage activities,

private placement activities, riskless principal activities, execution

and clearance of derivatives contracts, foreign exchange execution

services and other transactional services.

i. Securities brokerage activities.

The current regulation differentiates between securities brokerage

services provided alone (i.e., discount brokerage services) and

securities brokerage services provided in combination with investment

advisory services (i.e., full-service brokerage activities). The

proposed rule would authorize securities brokerage without

distinguishing between discount and full-service brokerage activities.

Under the current regulation, bank holding companies providing

full-service brokerage services must make certain disclosures to

customers regarding the uninsured nature of securities and may not

disclose confidential customer information without the customer's

consent. These requirements have been deleted. The disclosure

requirements--along with a number of other requirements that

specifically address the potential for

[[Page 47253]]

customer confusion, training requirements, suitability requirements and

other matters--are already contained in an interagency policy statement

that governs the sale of securities and other non-deposit investment

products on bank premises as well as in rules adopted by the SEC. In

addition, similar disclosure requirements are required by the Board's

policy statement governing the sale by bank holding companies of shares

of mutual funds and other investment companies that the bank holding

company advises. To the extent that disclosures to customers are

appropriate in areas not covered by these policy statements, it is

expected that the Board would develop supervisory guidance, on an

interagency basis where appropriate.

The Board seeks comment on whether elimination of these

restrictions from the regulation would lead to adverse effects,

including customer confusion about the uninsured nature of non-deposit

investment products sold through bank holding companies.

ii. Riskless principal activities.

The Board recently reduced the restrictions that govern riskless

principal activities. The restrictions that were retained were designed

to ensure that bank holding companies does not avoid the Glass-Steagall

Act provisions by classifying underwriting and dealing activities as

riskless principal activities. The provisions that are proposed to be

retained prohibit:

Selling bank-ineligible securities at the order of a

customer who is the issuer or in a transaction in which the bank

holding company has an agreement to place the securities of the

issuer;

Acting as riskless principal in any transaction

involving a bank-ineligible security for which the bank holding

company or an affiliate makes a market;

Acting as riskless principal for any bank-ineligible

security carried in the inventory of the bank holding company or any

affiliate; and

Acting as riskless principal on behalf of any U.S.

affiliate that engages in bank-ineligible securities underwriting or

dealing activities or any foreign affiliate that engages in

securities underwriting or dealing activities outside the U.S.

The proposed regulation retains these four restrictions. The Board

requests comment on whether these restrictions, and in particular the

second and third restrictions, are necessary to assure compliance with

the Glass-Steagall Act.

iii. Private placement activities.

In adding private placement activities to the laundry list, the

regulation adopts the definition of private placement activities used

by the SEC and the federal securities laws. All but one restriction

that had been imposed by Board order on the conduct of this activity

would be removed. That restriction prohibits a bank holding company

from purchasing for its own account securities that it is placing and

from holding in inventory unsold portions of securities it is

attempting to place. This restriction prevents a bank holding company

from classifying its securities underwriting activities, which are

governed by the Glass-Steagall Act and the Board's section 20

decisions, as private placement activities.

Among the restrictions that would be removed from the conduct of

private placement activities are prohibitions on:

Extending credit that enhances the marketability of a

security being placed;

Lending to an issuer for the purpose of covering the

funding lost through the unsold portion of securities being placed;

Lending to the issuer for the purpose of repurchasing

securities being placed;

Acquiring securities through an account for which the

bank holding company has fiduciary authority;

Providing advice to any purchaser regarding a security

the bank holding company is placing; and

Placing securities with any non-institutional investors

(the SEC rules allow sales to institutional investors and up to 35

non-institutional investors).

None of these restrictions have been applied to national banks that

conduct private placement activities. The Board seeks comment on

whether any of these restrictions must be retained to address potential

adverse effects, including potential conflicts of interest or customer

confusion, or to assure fulfillment of fiduciary duties.

iv. Futures commission merchant activities.

a. In general. The current regulation authorizes bank holding

companies to execute and clear derivatives on certain financial

instruments on major exchanges, subject to a number of restrictions.

The Board has, by order, broadened this authority in two key

respects. First, the Board has by order permitted bank holding

companies to execute and clear derivative contracts on a broad range of

nonfinancial commodities. Second, the Board has permitted bank holding

companies to clear derivative contracts without simultaneously

providing execution services. The proposed regulation has been amended

to incorporate these actions.

The proposal also deletes the restriction that a bank holding

company not act as a futures commission merchant (FCM) on any exchange

unless the rules of the exchange have been reviewed by the Board. All

U.S. commodities exchanges are supervised by the CFTC. A review by the

Federal Reserve System of the rules of an exchange, whether domestic or

foreign, does not provide a reliable guide regarding the risk

management systems of the exchange or the safety of conducting FCM

activities on the exchange. A more effective method for addressing the

risks of FCM activities--whether on domestic or foreign exchanges--is

through the on-site inspection and supervision of the risk management

systems of the bank holding company.

The proposed rule removes several other requirements, including

that the FCM subsidiary--

Time stamp all orders and execute them in chronological

order;

Not trade for its own account;

Not extend margin credit to customers; and

Maintain adequate capital.

As noted above, the Board is proposing to remove restrictions on

subsidiary FCM trading for its own account, and conduct in the other

areas listed above is addressed in rules of the CFTC or the relevant

self-regulatory organization.

The proposed rule retains the requirements of the current

regulation that a bank holding company conduct its FCM activities

through a separately incorporated subsidiary (i.e., not through the

parent bank holding company) and that the subsidiary not become a

member of an exchange that requires the parent bank holding company

also to become a member of the exchange. The purpose of this

restriction is to limit the bank holding company's exposure to

contingent obligations under the loss sharing rules of exchange

clearing houses in order to preserve the holding company's ability to

serve as a source of strength to its subsidiary insured depository

institutions.

The Board invites comment on all aspects of its proposed revision

to FCM activities. In particular, the Board invites comment on whether

the requirement limiting the parent bank holding company from becoming

a member of an exchange is appropriate and on whether the Board's

concern could be addressed more effectively by an alternative

restriction, such as a requirement that the parent bank holding company

not provide a guarantee of non-proprietary trades conducted by an FCM

subsidiary. A restriction on the holding company providing such a

guarantee has been imposed on bank holding companies through

examination guidance and various Board orders to assure that the

capital of the holding company is

[[Page 47254]]

available to support the insured depository institution subsidiaries of

the holding company.

b. Proposed change in Board precedent regarding clearing-only

activities. The Board has by order permitted bank holding companies to

clear trades that the FCM has not executed itself. The proposed rule

incorporates this activity in the laundry list, retaining two

restrictions currently imposed by Board order. The first restriction

prohibits the clearing subsidiary from serving as the primary or

qualifying clearing firm for a customer. The second restriction is that

the clearing subsidiary have a contractual right to decline to clear

any trade that the subsidiary believes poses unacceptable risks.

These requirements were adopted to ensure that the clearing

subsidiary of a bank holding company could limit its exposure to

traders that execute trades themselves or through third parties. In

particular, these requirements prevent a bank holding company from

clearing trades executed by exchange locals or market makers. In 1991,

the Board rejected a proposal by a bank holding company to engage in

clearing trades for exchange locals and market makers because of

concerns about the inability of the bank holding company to monitor and

control its credit exposures during the trading day.\11\ The Board

found that the activity was closely related to banking, but believed

that the potential adverse effects of conducting the activity

outweighed the potential public benefits.

---------------------------------------------------------------------------

\11\ Stichting Prioriteit ABN AMRO Holding, 77 Federal Reserve

Bulletin 189 (January 9, 1991).

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The Board seeks comment on whether these two restrictions on the

conduct of clearing-only activities by bank holding companies should be

retained or whether bank holding companies, as part of permissible FCM

activities, should be permitted to engage in clearing without executing

trades, including clearing trades for professional traders. In

particular, the Board invites comment on whether and how bank holding

companies are able to monitor and limit adequately the potential

exposure from conducting this activity.

v. Other transactional services.

In addition to the transactional services described above, the

proposed rule adds a provision allowing a bank holding company to

provide transactional services for customers involving any derivative

or foreign exchange transaction that a bank holding company is

permitted to conduct for its own account.

The proposed rule also removes the restriction in the current

regulation prohibiting a bank holding company from providing foreign

exchange transactional services in the same subsidiary that provides

advice regarding foreign exchange. Banks are not subject to this

restriction. With this change, a bank holding company would be

permitted to provide any transactional service to any customer in

combination with a related advisory service, and may provide any

advisory and transactional services as agent to both retail and

institutional customers.

8. Investment Transactions as Principal

The proposal incorporates decisions by the Board that permit bank

holding companies broadly to invest for the holding company's own

account as principal in derivatives on financial and nonfinancial

commodities. The proposal would allow a bank holding company to trade

as principal for its own account any derivative contract on a financial

or nonfinancial commodity or index of commodities, so long as any one

of three conditions is met:

The underlying asset is a permissible investment for

State member banks;

The derivative contract requires cash settlement; or

The derivative contract allows for assignment,

termination or offset prior to expiration and the bank holding

company makes every reasonable effort to avoid delivery.

The proposal also includes authority that the Board has previously

granted by order permitting bank holding companies to buy, sell and

store gold, silver, platinum and palladium bullion, coins, bars and

rounds. The regulation retains the current authority to trade in

foreign exchange and bank-eligible securities. The proposal does not

expand the current authority of bank holding companies to acquire as

principal securities or physical commodities that a bank is not

currently permitted to own for its own account.

In several areas, such as foreign exchange trading and certain

derivatives trading, the Board has prohibited bank holding companies

from engaging in the same subsidiary in trading activities as principal

and providing advice to customers. This restriction does not apply to

banks that conduct the same activities and has been removed. It is

expected that supervisory guidance would be developed to address

potential conflicts of interest that may arise in this area.

9. Management Consulting and Counseling Activities

The current regulation authorizes bank holding companies to provide

management consulting services on any matter to any depository

institution or affiliate of a depository institution. The rule has been

expanded in two respects.

First, bank holding companies would be authorized to provide

management consulting services regarding financial, economic,

accounting or audit matters to any company. These activities are

directly related to the activities and expertise of bank holding

companies. The Board invites comment on whether this activity is

closely related to banking for purposes of section 4(c)(8) of the BHC

Act.

Second, a bank holding company would be permitted to derive up to

30 percent of its management consulting revenue from management

consulting services provided to any customer on any matter.

Two restrictions have been retained--governing interlocks with and

investments in client companies--to ensure that a bank holding company

does not exercise control over a client company through a management

consulting contract.

10. Support Services

This category includes courier services (other than armored car

services) and printing checks and related documents. Both services are

included in the laundry list as they were authorized by the Board,

without change.

11. Insurance Agency and Underwriting Activities

The insurance provisions reflect the detailed restrictions on

insurance activities of bank holding companies specified in the BHC

Act. The current regulation has not been changed.

Community Development Activities

The current regulation permits bank holding companies to make

equity and debt investments in corporations and projects designed

primarily to promote community welfare. The proposal amends the

description of this activity to clarify that this activity includes

providing advisory and related services to community development

programs. The Board has permitted these advisory services by order.

13. Money Orders, Savings Bonds and Traveler's Checks

The current regulation limits the sale and issuance of money orders

and similar consumer payment instruments to instruments with a face

value of less

[[Page 47255]]

than $1,000. The Board has by order authorized this activity for

payment instruments of any face amount. Accordingly, the limitation on

the face amount of these instruments has been removed.

14. Data Processing Activities

The current regulation broadly authorizes bank holding companies to

provide data processing and data transmission services by any

technological means so long as the data processed or furnished are

financial, banking or economic. The proposed rule clarifies that a bank

holding company may render advice to anyone on processing and

transmitting banking, financial and economic data.

The following two restrictions on permissible data processing

activities have been deleted:

All data processing services must be provided pursuant

to a written agreement with the third party that describes and

limits the services; and

Data processing facilities must be designed, marketed

and operated for processing and transmitting financial, banking or

economic data.

The data processing activity has also been revised to permit bank

holding companies to derive up to 30 percent of their data processing

revenues from processing and transmitting data that are not financial,

banking or economic.

F. Explanation of Changes to Tying Rules

The Board is proposing amendments to its rules regarding tying

arrangements. The amendments would allow bank holding companies

significantly greater flexibility to package their products, and

thereby provide more efficient and lower cost service to their

consumers.

Tying arrangements, where a customer's ability to purchase or

receive a discount on one product is tied to the customer's purchase of

another product, are prohibited by section 106 of the Bank Holding

Company Act Amendments of 1970. Although section 106 applies only when

a bank offers the tying product, the Board in 1971 extended its special

restrictions to bank holding companies and their nonbank subsidiaries.

36 FR 10,777 (June 3, 1971).

The Board has authority to grant exceptions to section 106 and, in

the past few years, has used its exemptive authority to allow banks to

offer products to their customers more efficiently and at lower cost,

without risk of anti competitive effects. For example, the Board has

allowed arrangements that included discounts on brokerage services and

other products based on a customer's relationship with the bank or bank

holding company. The proposed amendments set forth below would build on

this recent history in attempting to identify broader categories of

packaging arrangements that do not raise the concerns that section 106

was intended to address and should therefore be permitted.

Section 106 contains five restrictions intended to prohibit anti-

competitive behavior by banks: two prohibit tying arrangements; Two

prohibit reciprocity arrangements; and one prohibits exclusive dealing

arrangements. The tying restrictions, which have the greatest effect on

industry practices, prohibit a bank from restricting the availability

or varying the consideration for one product or service (the ``tying''

product) on the condition that a customer purchase another product or

service offered by the bank or by any of its affiliates (the ``tied''

product).\12\

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\12\ Violations of section 106 may be redressed through: (1) An

enforcement action for civil money penalties brought by the

appropriate Federal banking agency, (2) an action for injunctive

relief brought by the Justice Department or any person who can show

``danger of irreparable loss or damage,'' or (3) a civil suit

brought by ``any person who is injured in his business or property''

by the prohibited arrangement, with the court directed to award

treble damages and attorneys fees if the plaintiff prevails. See 12

U.S.C. 1972(2)(F), 1973, 1975.

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Section 106 is a broader prohibition than those contained in the

antitrust laws because, unlike the antitrust laws, a plaintiff in

action under section 106 need not show that: (1) the seller has market

power in the market for the tying product; (2) the tying arrangement

has had an anti-competitive effect in the market for the tied product;

or (3) the tying arrangement has had a substantial effect on interstate

commerce. The broader reach of section 106 is most evident in that it

prohibits a bank from varying the consideration for one of its

products--that is, offering a discount on one of its products--for

customers who purchase a second product from the bank or its

affiliates. Such an arrangement generally would not be prohibited by

the antitrust laws.

Section 106 was adopted in 1970 when Congress expanded the

authority of the Board to approve bank holding companies to engage in

nonbanking activities. Section 106 was based on Congressional concern

that banks' unique role in the economy, in particular their power to

extend credit, would allow them to gain a competitive advantage in the

new, nonbanking markets that their affiliates were being allowed to

enter. See S. Rep. No. 1084, 91st Cong., 2d Sess. (1970). Congress

therefore imposed special limitations on tying by banks--restrictions

beyond those imposed by the antitrust laws.

1. Rescind the Board's Regulatory Extension of the Statute

As noted above, the Board has by regulation extended the

restrictions of section 106 to bank holding companies and their nonbank

subsidiaries as if they were banks. This extension was adopted at the

same time that the Board approved by regulation the first ``laundry

list'' of nonbanking activities under section 4(c)(8) of the BHC Act,

apparently as a prophylactic measure addressed at potential anti-

competitive practices by companies engaging in nonbanking activities.

In the past 25 years, the Board has gained extensive experience

with nonbank affiliates of bank holding companies and the markets in

which they operate. Based on this experience, the Board does not

believe that these nonbank companies possess the market power over

credit or other unique competitive advantages that Congress was

concerned that banks enjoyed in 1970. Bank holding companies may never

have possessed such market power but, even if they once did, financial

services markets have generally become much more competitive over time.

Accordingly, the Board believes that applying the special bank anti-

tying rules to such companies is no longer justified. Any competitive

problems that might arise would be isolated cases, better addressed not

through a special blanket prohibition but rather through the same

general antitrust laws that bind their nonbank competitors.

In recognition of these facts, the Board has over the past several

years relaxed the anti-tying restrictions on nonbanks within bank

holding companies. In addition to adopting various exceptions that

applied both to banks and nonbanks, the Board in 1994 permitted a bank

holding company or its nonbank subsidiary to offer a discount on any of

its products or services on the condition that a customer obtain any

other product or service from that company or from any of its nonbank

affiliates--that is, permitted discount arrangements that did not

involve a bank. 12 CFR 225.7(b)(3). However, even with this exception,

tying between a bank holding company or its nonbank subsidiary and an

affiliated bank is still restricted, as is any inter-affiliate tying

arrangement that does not involve the offering of a discount.

The Board proposes to rescind its regulatory extension of the anti-

tying

[[Page 47256]]

rules to nonbanks. The Board notes that in doing so it would not be

granting an ``exception'' to section 106--as section 106 never

envisioned that non-banks would be covered in the first place. Rather,

the Board would be lifting a restriction that it itself imposed, and

one which it believes should be maintained only if there is clear

evidence of its necessity.

Removal of these special restrictions on bank holding companies and

their nonbank subsidiaries would eliminate a competitive disadvantage

by allowing them the same freedom to package products that their

competitors currently enjoy. The Sherman Act would continue to prohibit

bank holding companies and their subsidiaries from engaging in any

tying arrangement that had an anti-competitive effect. 15 U.S.C. 1.

Furthermore, section 106 would continue to prohibit a bank from tying

one of its products to a product offered by one of its affiliates, bank

or nonbank.

The Board is seeking comment, however, on whether it should retain

its regulatory extension of the statute for purposes of one type of

tying arrangement. Section 825(a)(3) of the Personal Responsibility and

Work Opportunity Reconciliation Act of 1996, signed into law on August

22, 1996, amended the Food Stamp Act of 1997 to prohibit tying the

availability of electronic benefit transfer services to other point-of-

sale services. Enforcement of the Act is assigned to the Secretary of

Agriculture. 104 Pub. L. 193, 110 Stat. 2105; 7 U.S.C. 2016(i)(11).

Banks, bank holding companies, and nonbank subsidiaries of bank holding

companies were exempted from the statute, apparently because they were

already restricted by section 106 (in the case of banks) and the

Board's regulation (in the case of bank holding companies and their

nonbank subsidiaries). Thus, unless the Board were to retain a

restriction on bank holding companies and their nonbank subsidiaries,

they would be the only companies not subject to a special restriction

on tying of electronic benefit transfer services.

2. Treat Inter-Affiliate Tying Arrangements the Same as Intra-Bank

Arrangements

The Board is also proposing to broaden a statutory exception

designed to preserve traditional banking relationships. The statutory

exception is limited to traditional banking relationships within one

bank, and the proposed regulatory exception would extend the statutory

exception to apply to relationships that involve more than one bank or

other affiliate.

Section 106 contains an explicit exception (the ``statutory

traditional bank product exception'') that permits a bank to tie any

product or service to a loan, discount, deposit, or trust service

offered by that bank. 12 U.S.C. Sec. 1972(1)(A). For example, a bank

could condition the use of its messenger service on a customer's

maintaining a deposit account at the bank. Although the statutory

traditional bank product exception appears to have been effective in

preserving traditional relationships between customer and bank, the

exception is limited in an important way: it does not extend to

transactions involving products offered by affiliates. Thus, a bank

could not condition the use of its messenger service on a customer's

maintaining a deposit at an affiliated bank. As another example, the

Board recently granted an exemption to allow a secured credit card

program where a bank required that a customer maintain a deposit at an

affiliated bank. Although a bank could have offered a secured credit

card program conditioned on a customer's maintaining a deposit at that

same bank, the inter-affiliate arrangement was otherwise prohibited by

section 106 but for the exemption.

The Board has already adopted a ``regulatory traditional bank

product exception'' that generally extends the statutory traditional

bank product exception between affiliates--for example, allowing one

bank to offer a discount on a loan based on a customer's deposit

relationship with an affiliated bank. However, taking an incremental

approach, the Board placed two restrictions on the regulatory

exception. First, the Board required that both products involved in the

tying arrangement be traditional bank products (thereby disqualifying

the messenger service example above). Second, the Board required that

the arrangement consist of discounting the tying product rather than

restricting its availability (thereby disqualifying the secured credit

card example above).

The Board believes that there remains a rationale for the latter

restrictions--for example, secured credit cards aside, there are few

examples where restricting the availability of one product on the

purchase of another serves a valid economic purpose.13

Nonetheless, Congress has already decided not to apply these

restrictions to the statutory traditional bank product exception for

intra-bank transactions, and it is difficult to argue that inter-

affiliate transactions pose any greater risk of anti-competitive

behavior than intra-bank transactions. Moreover, Congress has already

extended the statutory traditional bank product exception between

affiliates, without restriction, for savings associations and their

affiliates. 12 U.S.C. 1464(q)(1)(A).

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\13\ The Board has recently been presented with another case

where restricting the availability of a product may be justifiable.

A petitioner has sought an exemption from section 106 to allow a

brokerage subsidiary of a bank holding company to require a customer

to maintain a deposit at an affiliated bank in order to facilitate

compliance with the time-for-payment requirements of Regulation T.

Even if the Board were to rescind its regulatory extension of

section 106 to bank holding companies and their nonbank

subsidiaries, a brokerage department of a bank would still be

prohibited from imposing this requirement, absent the proposed

amendment to the traditional bank product exception.

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3. Extend the Expanded Regulatory Traditional Bank Product Exception to

Reciprocity Arrangements

As noted above, section 106 prohibits not only tying arrangements

(conditioning the availability of one product on the purchase of

another) but also reciprocity arrangements (conditioning the

availability of one product on the providing of another by the

customer). 12 U.S.C. 1972(1) (C) and (D). Like the tying prohibition,

the prohibition on reciprocity arrangements contains an exception

intended to preserve traditional banking relationships. The exception

provides that a bank may condition the availability of a loan,

discount, deposit or trust service on the customer's providing some

product or service ``related to, and usually provided in connection

with'' such a loan, discount, deposit or trust service. 12 U.S.C.

1972(1)(C).

Also like the statutory traditional bank product exception to the

tying prohibition, this exception to the reciprocity prohibition does

not apply to inter-affiliate transactions. Although the Board has

received only one request to extend the exception--probably because

this exception is confusing and rarely invoked in the case law--the

Board is proposing such an extension for comment, for the same reasons

noted above.

4. Coverage of Foreign Banks Under Section 106

A petitioner has sought an interpretation or exemption from the

statute to clarify that section 106 does not restrict ``foreign

transactions.'' Petitioner argues that statutes are generally presumed

not to have an extra-territorial reach unless specified by Congress,

and that no specification was made in section 106. Petitioner

[[Page 47257]]

notes that if section 106 did apply, U.S. firms would be at a

competitive disadvantage, as there is no equivalent to section 106 in

other nations.

The Board seeks comment on whether it should establish a ``safe

harbor'' to provide certainty with respect to foreign transactions. In

particular, the Board seeks comment on whether any safe harbor should

define ``foreign transactions'' according to the location of the

customer (as suggested by petitioner), the location of the market where

any potential anti-competitive effects would occur (as appears to be

the practice under the Sherman Act), or some other factor or factors.

G. Explanation of Other Proposed Changes

1. Bank Holding Company Formations

Regulation Y currently implements the provisions enacted in the

Riegle Community Development Act that establish a streamlined 30-day

notice procedure for proposals by existing shareholders of a bank to

establish a bank holding company. To qualify for this procedure under

current rules, the shareholders of the bank must acquire at least 80

percent of the shares of the new bank holding company in substantially

the same proportion as the shareholders' bank ownership, must certify

that the shareholders are not subject to any supervisory or

administrative action, and must identify the shareholders of the new

bank holding company.

The Board proposes several changes to these requirements. First,

the Board proposes to reduce the percentage of the bank holding company

that must be owned by shareholders of the bank from 80 to 67 percent.

This level assures that the transaction is in fact a reorganization in

which the bank shareholders continue to control the new bank holding

company and minimizes the likelihood that a new controlling shareholder

will be introduced without adequate review.

Next, the proposal would require that only the principal

shareholders (i.e., shareholders owning in excess of 10 percent of the

bank holding company) certify that they are not subject to any

supervisory or administrative action, rather than requiring that all

shareholders make this certification. Finally, the proposal would

eliminate any publication requirement for this category of bank holding

company formations. The Riegle Act does not require publication of

these proceedings and, because these transactions represent a corporate

reorganization, little purpose is served by requiring public notice.

The System would continue to consider all of the same statutory factors

in reviewing these proposals, including considering the competitive

effects, financial and managerial resources of the organization, effect

on the convenience and needs of the community and the CRA performance

record of the bank.

The Board invites comment on whether these changes are appropriate,

would reduce unnecessary burden on the formation of new bank holding

companies--particularly small bank holding companies--and are

consistent with the provisions of the BHC Act permitting this expedited

procedure.

2. Change in Bank Control Act Filings

The Board proposes to reorganize, clarify and simplify the portion

of Regulation Y that implements the Change in Bank Control Act (CIBC

Act). The proposal attempts to harmonize the scope and procedural

requirements of the Board's regulation implementing the CIBC Act with

those of the other federal banking agencies and to reduce any

unnecessary regulatory burden. The proposal also incorporates various

interpretations of this subpart made by the Board since the last

revision of Regulation Y. These changes have been developed in

consultation with the other federal banking agencies in an effort to

develop a uniform regulatory approach to implementing the CIBC Act at

all of the banking agencies.

Currently, the Board's rules generally require any person (other

than a bank holding company) seeking to acquire shares of a state

member bank or bank holding company to file a notice under the CIBC Act

at two thresholds: when the person's ownership level exceeds 10 percent

of the voting shares of the bank or bank holding company, and again

when the ownership level exceeds 25 percent. This two-tiered approach

allowed a review of the financial resources of an acquiror at two

stages, with a lesser showing of financial resources required for

transactions below the 25 percent threshold.

The Board proposes to reduce regulatory burden by eliminating the

25 percent threshold. This eliminates the requirement that persons who

have received authorization to own in excess of 10 percent, but less

than 25 percent, of the voting shares of a member bank or bank holding

company file a second notice before owning 25 percent or more of the

voting shares of the institution. Persons who initially acquire in

excess of 25 percent of the shares of a bank or bank holding company

would continue to be subject to only one review under the CIBC Act. The

other federal banking agencies have already adopted this approach.

Under the proposal, persons who currently own 10 percent (but less

than 25 percent) of the shares of a state member bank or bank holding

company with Board approval under the CIBC Act would be exempt from

further filing requirements under the CIBC Act, unless otherwise

notified in writing by the System. In future cases in which a person

appears to have sufficient financial resources to acquire more than 10

percent, but less than 100 percent of the shares of a bank, the System

may limit the approval granted on a case-by-case basis to require

further review of the financial resources of the person as appropriate.

The proposal also adds definitions of key terms to clarify the

scope of the regulation. In particular, the Board proposes to add a

definition of the term acting in concert and includes specific

presumptions of concerted action to provide guidance to acquirors. In

addition, the proposal incorporates current Board practice that the

acquisition of a loan in default that is secured by voting securities

of a state member bank or bank holding company is presumed to be an

acquisition of the underlying securities.

The proposal also would reduce regulatory burden on persons whose

ownership percentage increases as the result of a redemption of voting

securities by the issuing bank or the action of a third party not

within the acquiring person's control. In these situations, the

proposal would permit the person affected by the bank or third party

action to file a notice within 90 calendar days after the transaction

occurs, provided that the acquiring person does not reasonably have

advance knowledge of the triggering transaction. Currently, these

persons must file notice under the CIBC Act prior to the action that

increases the person's percentage ownership, and, because these persons

cannot control the third party action that causes the increased

percentage ownership, are often put in violation of the CIBC Act and

the Board's Regulation Y.

The Board also proposes to provide more flexible timing for

newspaper announcements of filings under the CIBC Act by permitting

notificants to publish the announcement up to 30 calendar days before

submitting the filing. In addition, the newspaper notice requirement

would be modified to eliminate the requirement that the notice include

a statement of the percentage of shares proposed to be acquired.

Finally, the proposal would add a new section reflecting the stock

[[Page 47258]]

loan reporting requirements in section 205 of the Federal Deposit

Insurance Corporation Improvement Act.

The Board invites comment on all of its proposed revisions to the

CIBC Act implementing regulation. In particular, the Board requests

comment on whether the revisions identifying when persons will be

presumed to be acting in concert identify all relevant situations in

which a bank may undergo a change in control. The Board also requests

comment on other ways that its implementing rules under the CIBC Act

may be modified to eliminate unnecessary burden and paperwork,

consistent with the requirements of the CIBC Act.

3. Notice of Change of Directors and Senior Executive Officers

In addition to the BHC Act and CIBC Act, Regulation Y implements

section 914 of the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (section 914). Section 914 requires a state

member bank and a bank holding company (together, ``regulated

institutions'') to give prior notice to the System before changing

directors or senior executive officers if the regulated institution is

in financially troubled condition, has undergone a change in control

within two years, or has been chartered for less than two years.

The proposed rule retains a number of the current regulation's

substantive provisions. For example, the financial condition of

regulated institutions remains the focus for defining when an

institution's troubled condition would trigger the prior notice

requirements of section 914. The proposed rule also continues to

interpret a change in control for purposes of section 914 to mean a

transaction that requires a filing under the CIBC Act. Accordingly,

section 914 filings are not triggered by the acquisition of a state

member bank by a bank holding company under section 3 of the BHC Act.

The current rule would be modified in several ways. The proposed

rule would eliminate any filing requirement under section 914 for

charter conversions and ``phantom'' bank mergers (chartering an insured

depository institution to facilitate the acquisition of an existing

insured depository institution) if the converting or acquired

depository institution has been in operation for at least two years.

The proposed rule also would adopt the System's current practice of

granting individuals who seek election to the board of directors of

regulated institutions without the support of management an automatic

waiver that allows these individuals to commence service immediately

after election to the board and to make a post-election filing under

section 914. In addition, the proposed rule would provide more guidance

on appealing a disapproved notice. Other changes have been proposed in

cooperation with the staffs of the other banking agencies in an attempt

to develop uniform definitions, notice procedures and appeals

procedures.

The Board invites public comment on these changes, as well as on

other ways that the procedures for reviewing changes in officers and

directors may be revised to reduce unnecessary burden consistent with

the requirements of section 914.

4. Other Changes

The Board has also proposed several other modifications to the

regulation to incorporate previous Board decisions and policies

regarding the definitions of ``class of voting securities'' and

``immediate family'' and has modified references and several time

periods for Reserve Bank action to accommodate the changes explained

above. Public comment is welcome on these proposed revisions.

In addition, the Board invites public comment on other suggestions

for revising Regulation Y to eliminate unnecessary burden and paperwork

consistent with the Board's statutory mandates and safety and

soundness.

Attached is a draft of Regulation Y that incorporates the proposed

revisions. These revisions affect subparts A, B, C and E, appendix C

and the Board's interpretation at 12 CFR 225.125. Changes to the

Board's Rules of Procedure will be made as necessary to conform to

changes to Regulation Y that are finally adopted. No changes are being

proposed at this time to subparts D, F or G, which address,

respectively, Control and Divestiture Proceedings, Limitations on

Nonbank Banks and Appraisal Standards for Federally Related

Transactions.

Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act, the Board is required

to conduct an analysis of the effect, on small institutions, of the

proposed revision to Regulation Y. As of December 31, 1995, the number

of bank holding companies totalled 5,274.14 The following chart

provides a distribution, based on asset size, for those companies.

---------------------------------------------------------------------------

\14\ Financial top-tier domestic bank holding companies.

Excludes middle-tier bank holding companies, and foreign bank

holding companies that are not required to file a Y-9 report with

the Federal Reserve System.

------------------------------------------------------------------------

Percent

Number of of bank

Asset size category (M=million) bank holding

holding company

companies assets

------------------------------------------------------------------------

Less than $150M.................................... 3,954 \15\ 5.5

$150M-$300M........................................ 655 3.2

Greater than $300M................................. 665 91.3

------------------------------------------------------------------------

\15\ Bank holding companies with consolidated assets of less than $150

million are not required to file financial regulatory reports on a

consolidated basis. Assets for this group are estimated based on

reports filed by the parent companies and subsidiaries.

The proposed comprehensive revision to Regulation Y is intended to

eliminate unnecessary burden for all bank holding companies, including

smaller banking organizations. Included in the proposed revision are an

expedited 15-day notice procedure with minimal information requirements

for well-rated and well-run bank holding companies, a reorganization

and streamlining of the regulatory laundry list of permissible

nonbanking activities, the removal of unnecessary and outmoded

regulatory restrictions, and an automatic waiver of filing requirements

for bank acquisitions that are in-substance bank-to-bank mergers. These

changes apply to all bank holding companies and will be particularly

helpful to small bank holding companies.

The proposed revisions include a number of other changes applicable

to smaller organizations in particular. These changes include a special

exception for small bank holding companies with assets of less than

$300 million from the aggregate size limit applying to the use of the

expedited application procedures, an update of the small bank holding

company policy statement that applies to bank holding companies with

assets of less than $150 million and reduction of burden for qualifying

small bank holding companies, reduction of the thresholds for

qualification for streamlined formation of new bank holding companies,

reduction in the filing requirements under the Change in Bank Control

Act, and addition of a new exception for small bank holding companies

from the prior approval requirements regarding stock redemption

proposals. These and the other changes described above are explained in

more detail in the Supplementary Information portion of this document.

The Board expects that the numerous changes proposed will result in

a significant reduction in regulatory filings, in the paperwork burden

and processing time associated with regulatory filings, and in the

costs

[[Page 47259]]

associated with complying with regulation, thereby improving the

ability of all bank holding companies, including small organizations,

to conduct business on a more cost-efficient basis. The Board invites

public comment on this subject.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

Ch. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the

proposed rule under the authority delegated to the Board by the Office

of Management and Budget. Comments on the collections of information

should be sent to the Office of Management and Budget, Paperwork

Reduction Project (7100-00171, 7100-0121, 7100-0134, 7100-0131, 7100-

0119, as applicable; see below), Washington, DC 20503, with copies of

such comments to be sent to Mary M. McLaughlin, Federal Reserve Board

Clearance Officer, Division of Research and Statistics, Mail Stop 97,

Board of Governors of the Federal Reserve System, Washington, DC 20551.

The collection of information requirements in this proposed

regulation are found in 12 CFR 225.11, 12 CFR 225.12, 12 CFR 225.14, 12

CFR 225.17, 12 CFR 225.23, 12 CFR 225.24, 12 USC 1817(j) and 1831(i),

12 CFR 225.73, 12 CFR 225.4, and 12 CFR 225.3(a). This information is

required to evidence compliance with the requirements of the Bank

Holding Company Act, the Change in Bank Control Act and provisions of

the Federal Deposit Insurance Act. The respondents are for-profit

financial institutions and other corporations, including small

businesses, and individuals.

The Federal Reserve may not conduct or sponsor, and an organization

is not required to respond to, these information collections unless it

displays a currently valid OMB control number. The OMB control numbers

are indicated below.

The proposed streamlining of applications to acquire banks and

nonbanking companies by institutions that meet the qualifying criteria

should result in a significant reduction in burden for respondents that

file the Application for Prior Approval To Become a Bank Holding

Company, or for a Bank Holding Company To Acquire an Additional Bank or

Bank Holding Company (FR Y-3; OMB No. 7100-0171). Approximately 196

respondents file the FR Y-3 annually pursuant to section 3(a)(1) of the

Bank Holding Company Act (Act) and 303 respondents file annually the FR

Y-3 pursuant to section 3(a)(3) and 3(a)(5) of the Act. The current

burden per response is 48.5 hours and 59.0 hours, respectively, for a

total estimated annual burden of 27,383 hours. Under the proposed rule,

it is estimated that 50 percent of these respondents, or a total of 249

respondents for both types of applications, would meet the criteria to

qualify for the filing of a streamlined application. The average number

of hours per response for proposed applications of each type is

estimated to decrease to 2.5 hours. Therefore the total amount of

annual burden is estimated to be 14,343.5 hours. Based on an hourly

cost of $50, the annual cost to the public under the proposed revision

is estimated to be $717,175, which represents an estimated cost

reduction of $651,975 from the estimated annual cost to the public of

$1,369,150 under the current rule.

The proposed streamlining of applications to engage de novo in

permissible nonbanking activities and to acquire nonbanking companies

and the proposal to permit bank holding companies to obtain approval at

one time to engage in a preauthorized list of such activities should

result in a significant reduction in burden for respondents that file

the Application for Prior Approval To Engage Directly or Indirectly in

Certain Nonbanking Activities (FR Y-4; OMB No. 7100-0121).

Approximately 362 respondents file the FR Y-4 annually to meet

application requirements, and 114 respondents file to meet notification

requirements. The current burden per response is 59.0 hours and 1.5

hours, respectively, for a total estimated annual burden of 21,529

hours. Under the proposed rule it is estimated that 50 percent of these

respondents would meet the criteria to qualify for the filing of a

streamlined application, representing an estimated 181 applications and

57 notifications. The average number of hours per response for proposed

applications of this type is estimated to decrease to 1.5 hours. The

estimated burden per response to meet the notification requirement

remains unchanged at 1.5 hours. Therefore the total amount of annual

burden is estimated to be 11,121.5 hours. Based on an hourly cost of

$50, the annual cost to the public under the proposed revision is

estimated to be $556,075, which represents an estimated cost reduction

of $520,375 from the current estimated annual cost to the public of

$1,076,450 under the current rule.

The proposed elimination of the requirement that a person who has

already received Board approval under the Change in Bank Control Act

obtain additional approvals to acquire additional shares of the same

bank or bank holding company should result in a significant reduction

in burden for respondents that file the Notice of Change in Bank

Control (FR 2081; OMB No. 7100-0134). Approximately 300 respondents

file the FR 2081 annually to meet the notification requirements of

change in control, 280 respondents file to meet the requirements for

notice of a change in director or senior executive officer, and 1000

respondents file to meet requirements to report certain biographical

and financial information. The current burden per response for each

requirement is 30.0 hours, 2.0 hours, and 4.0 hours, respectively, for

a total estimated annual burden of 13,560 hours. Under the proposed

rule it is estimated that 50 percent fewer notifications of change in

control will be filed for an annual total of 150 responses. The

estimated number of filings to meet the other two requirements and the

estimated average hours per response for each requirement remains

unchanged. Therefore the total amount of annual burden is estimated to

be 9,060 hours. Based on an hourly cost of $20, the total annual cost

to the public under the proposed revision is estimated to be $181,200,

which represents an estimated cost reduction of $90,000 from the

current estimated annual cost to the public of $271,200 under the

current rule.

The proposed allowance for bank holding companies to take account

of intervening new issues of stock in computing when a stock redemption

notice must be filed and the exemption provided to small bank holding

companies that meet certain leverage and capital requirements should

result in a significant reduction in burden for respondents that file

the Notice of Proposed Stock Redemption (FR 4008; OMB No. 7100-0131).

Approximately 50 respondents file the FR 4008 annually. The current

burden per response is 15.5 hours, for a total estimated annual burden

of 775 hours. Under the proposed rule it is estimated that 50 percent

fewer notifications will be filed for an annual total of 25 responses

and the estimated average hours per response remains unchanged.

Therefore the total amount of annual burden is estimated to be 387.5

hours. Based on an hourly cost of $30, the total annual cost to the

public under the proposed revision is estimated to be $11,625, which

represents a cost reduction of $11,625 from the current estimated cost

to the public of $23,250 under the current rule.

The proposed streamlining of application requirements are not

expected to change the ongoing annual

[[Page 47260]]

burden associated with the Application for a Foreign Organization to

Become a Bank Holding Company (FR Y-1f; OMB No. 7100-0119).

Approximately 2 respondents file the FR Y-1f annually. The current

burden per response is 77 hours for a total estimated annual burden of

144 hours. Based on an hourly cost of $20, the annual cost to the

public is estimated to be $3,080.

All information contained in these collections of information are

available to the public unless the respondent can substantiate that

disclosure of certain information would result in substantial

competitive harm or an unwarranted invasion of personal privacy or

would otherwise qualify for an exemption under the Freedom of

Information Act.

Comments are invited on: (a) Whether the proposed collections of

information are necessary for the proper performance of the Federal

Reserve's functions; including whether the information has practical

utility; (b) the accuracy of the Federal Reserve's estimate of the

burden of the proposed information collections, including the cost of

compliance; (c) ways to enhance the quality, utility, and clarity of

the information to be collected; and (d) ways to minimize the burden of

information collection on respondents, including through the use of

automated collection techniques or other forms of information

technology.

List of Subjects in 12 CFR Part 225

Administrative practice and procedure, Banks, banking, Federal

Reserve System, Holding companies, Reporting and recordkeeping

requirements, Securities.

For the reasons set out in the preamble, the Board proposes to

amend 12 CFR part 225 as follows:

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL

(REGULATION Y)

1. The authority citation for Part 225 continues to read as

follows:

Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-1,

1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and

3909.

2. Subpart A is revised to read as follows:

Subpart A--General Provisions

Sec.

225.1 Authority, purpose, and scope.

225.2 Definitions.

225.3 Administration.

225.4 Corporate practices.

225.5 Registration, reports, and inspections.

225.6 Penalties for violations.

225.7 Exceptions to tying restrictions.

Subpart A--General Provisions

Sec. 225.1 Authority, purpose, and scope.

(a) Authority. This part 1 (Regulation Y) is issued by the

Board of Governors of the Federal Reserve System (Board) under section

5(b) of the Bank Holding Company Act of 1956, as amended (12 U.S.C.

1844(b)) (BHC Act); sections 8 and 13(a) of the International Banking

Act of 1978 (12 U.S.C. 3106 and 3108); section 7(j)(13) of the Federal

Deposit Insurance Act, as amended by the Change in Bank Control Act of

1978 (12 U.S.C. 1817(j)(13)) (Bank Control Act); section 8(b) of the

Federal Deposit Insurance Act (12 U.S.C. 1818(b)); section 914 of the

Financial Institutions Reform, Recovery and Enforcement Act of 1989 (12

U.S.C. 1831i); and the International Lending Supervision Act of 1983

(Pub. L. 98-181, title IX). The BHC Act is codified at 12 U.S.C. 1841,

et seq.

---------------------------------------------------------------------------

\1\ Code of Federal Regulations, title 12, chapter II, part 225.

---------------------------------------------------------------------------

(b) Purpose. The principal purposes of this part are to regulate

the acquisition of control of banks by companies and individuals, to

define and regulate the nonbanking activities in which bank holding

companies and foreign banking organizations with United States

operations may engage, and to set forth the procedures for securing

approval for such transactions and activities.

(c) Scope. (1) Subpart A contains general provisions and

definitions of terms used in this regulation.

(2) Subpart B governs acquisitions of bank or bank holding company

securities and assets by bank holding companies or by any company that

will become a bank holding company as a result of the acquisition.

(3) Subpart C defines and regulates the nonbanking activities in

which bank holding companies and foreign banking organizations may

engage directly or through a subsidiary. In addition, certain

nonbanking activities conducted by foreign banking organizations and

certain foreign activities conducted by bank holding companies are

governed by the Board's Regulation K (12 CFR part 211, International

Banking Operations).

(4) Subpart D specifies situations in which a company is presumed

to control voting securities or to have the power to exercise a

controlling influence over the management or policies of a bank or

other company, sets forth the procedures for making a control

determination, and provides rules governing the effectiveness of

divestitures by bank holding companies.

(5) Subpart E governs changes in bank control resulting from the

acquisition by individuals or companies (other than bank holding

companies) of voting securities of a bank holding company or state

member bank of the Federal Reserve System.

(6) Subpart F specifies the limitations that govern companies that

control so-called nonbank banks and the activities of nonbank banks.

(7) Subpart G prescribes minimum standards that apply to the

performance of real estate appraisals and identifies transactions that

require state certified appraisers.

(8) Subpart H identifies the circumstances when written notice must

be provided to the Board prior to the appointment of a director or

senior officer of a bank holding company and establishes procedures for

obtaining the required Board approval.

(9) Appendix A to the regulation contains the Board's Risk-Based

Capital Adequacy Guidelines for bank holding companies and for state

member banks.

(10) Appendix B to the regulation contains the Board's Capital

Adequacy Guidelines for measuring leverage for bank holding companies

and state member banks.

(11) Appendix C to the regulation contains the Board's policy

statement governing small bank holding companies.

(12) Appendix D to the regulation contains the Board's capital

adequacy guidelines for measuring tier 1 leverage for bank holding

companies.

Sec. 225.2 Definitions.

Except as modified in this regulation or unless the context

otherwise requires, the terms used in this regulation have the same

meanings as set forth in the relevant statutes.

(a) Affiliate. Affiliate means any company that controls, is

controlled by, or is under common control with, a bank or nonbank bank.

(b) Bank. (1) Bank means:

(i) An insured bank as defined in section 3(h) of the Federal

Deposit Insurance Act (12 U.S.C. 1813(h)); or

(ii) An institution organized under the laws of the United States

which both:

(A) Accepts demand deposits or deposits that the depositor may

withdraw by check or similar means for payment to third parties or

others; and

(B) Is engaged in the business of making commercial loans.

(2) The term bank does not include those institutions qualifying

under the exceptions listed in section 2(c)(2) of the BHC Act (12

U.S.C. 1841(c)(2)).

(c) Bank holding company--(1) Bank holding company means any

company

[[Page 47261]]

(including a bank) that has direct or indirect control of a bank, other

than control that results from the ownership or control of:

(i) Voting securities held in good faith in a fiduciary capacity

(other than as provided in paragraphs (e)(2) (ii) and (iii) of this

section) without sole discretionary voting authority, or as otherwise

exempted under section 2(a)(5)(A) of the BHC Act;

(ii) Voting securities acquired and held only for a reasonable

period of time in connection with the underwriting of securities, as

provided in section 2(a)(5)(B) of the BHC Act;

(iii) Voting rights to voting securities acquired for the sole

purpose and in the course of participating in a proxy solicitation, as

provided in section 2(a)(5)(C) of the BHC Act;

(iv) Voting securities acquired in satisfaction of debts previously

contracted in good faith, as provided in section 2(a)(5)(D) of the BHC

Act, if the securities are divested within two years of acquisition (or

such later period as the Board may permit by order); or

(v) Voting securities of certain institutions owned by a thrift

institution or a trust company, as provided in sections 2(a)(5) (E) and

(F) of the BHC Act.

(2) Except for the purposes of section 225.4(b) of this subpart and

subpart E of this part or as otherwise provided in this regulation, the

term bank holding company includes a foreign banking organization. For

the purposes of subpart B of this part, the term bank holding company

includes a foreign banking organization only if it owns or controls a

bank in the United States.

(d) Company--(1) Company includes any bank, corporation, general or

limited partnership, association or similar organization, business

trust, or any other trust unless by its terms it must terminate either

within 25 years, or within 21 years and 10 months after the death of

individuals living on the effective date of the trust.

(2) Company does not include any organization, the majority of the

voting securities of which are owned by the United States or any state.

(3) Testamentary Trusts Exempt. Unless the Board finds that the

trust is being operated as a business trust, a trust is presumed not to

be a company if the trust:

(i) Terminates within 21 years and 10 months after the death of

grantors or beneficiaries of the trust living on the effective date of

the trust;

(ii) Is a testamentary trust established by an individual or

individuals for the benefit of natural persons (or trusts for the

benefit of natural persons) who are related by blood, marriage or

adoption;

(iii) Contains only assets previously owned by the individual or

individuals who established the trust;

(iv) Is not a Massachusetts business trust; and

(v) Does not issue shares, certificates or any other evidence of

ownership.

(e) Control--(1) Control of a bank or other company means (except

for the purposes of subpart E of this part):

(i) Ownership, control, or power to vote 25 percent or more of the

outstanding shares of any class of voting securities of the bank or

other company, directly or indirectly or acting through one or more

other persons;

(ii) Control in any manner over the election of a majority of the

directors, trustees, or general partners (or individuals exercising

similar functions) of the bank or other company;

(iii) The power to exercise, directly or indirectly, a controlling

influence over the management or policies of the bank or other company,

as determined by the Board after notice and opportunity for hearing in

accordance with Sec. 225.31 of subpart D of this part; or

(iv) Conditioning in any manner the transfer of 25 percent or more

of the outstanding shares of any class of voting securities of a bank

or other company upon the transfer of 25 percent or more of the

outstanding shares of any class of voting securities of another bank or

other company.

(2) A bank or other company is deemed to control voting securities

or assets owned, controlled, or held, directly or indirectly:

(i) By any subsidiary of the bank or other company;

(ii) In a fiduciary capacity (including by pension and profit-

sharing trusts) for the benefit of the shareholders, members, or

employees (or individuals serving in similar capacities) of the bank or

other company or of any of its subsidiaries; or

(iii) In a fiduciary capacity for the benefit of the bank or other

company or any of its subsidiaries.

(f) Foreign banking organization. Foreign banking organization and

qualifying foreign banking organization shall have the same meanings as

provided in Sec. 211.23 of the Board's Regulation K (12 CFR 211.23).

(g) Management official. Management official means any officer,

director (including honorary or advisory directors), partner, or

trustee of a bank or other company, or any employee of the bank or

other company with policy-making functions.

(h) Nonbank bank. Nonbank bank means any institution that:

(1) Became a bank as a result of enactment of the Competitive

Equality Amendments of 1987 (Pub. L. 100-86), on the date of such

enactment (August 10, 1987); and

(2) Was not controlled by a bank holding company on the day before

the enactment of the Competitive Equality Amendments of 1987 (August 9,

1987).

(i) Outstanding shares. Outstanding shares means any voting

securities, but does not include securities owned by the United States

or by a company wholly owned by the United States.

(j) Person. Person includes an individual, bank, corporation,

partnership, trust, association, joint venture, pool, syndicate, sole

proprietorship, unincorporated organization, or any other form of

entity.

(k) Savings association. Savings association means:

(1) Any federal savings association or federal savings bank;

(2) Any building and loan association, savings and loan

association, homestead association, or cooperative bank if such

association or cooperative bank is a member of the Savings Association

Insurance Fund; and

(3) Any savings bank or cooperative which is deemed by the director

of the Office of Thrift Supervision to be a savings association under

section 10(l) of the Home Owners Loan Act.

(l) Shareholder--(1) Controlling shareholder means a person that

owns or controls, directly or indirectly, 25 percent or more of any

class of voting securities of a bank or other company.

(2) Principal shareholder means a person that owns or controls,

directly or indirectly, 10 percent or more of any class of voting

securities of a bank or other company, or any person that the Board

determines has the power, directly or indirectly, to exercise a

controlling influence over the management or policies of a bank or

other company.

(m) Subsidiary. Subsidiary means a bank or other company that is

controlled by another company, and refers to a direct or indirect

subsidiary of a bank holding company. An indirect subsidiary is a bank

or other company that is controlled by a subsidiary of the bank holding

company.

(n) United States. United States means the United States and

includes any state of the United States, the District of Columbia, any

territory of the United States, Puerto Rico, Guam, American Samoa, and

the Virgin Islands.

(o) Voting securities--(1) In general. Voting securities means

shares of common or preferred stock, general or limited partnership

shares or interests,

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or similar interests if the shares or interest, by statute, charter, or

in any manner, entitle the holder:

(i) To vote for or to select directors, trustees, or partners (or

persons exercising similar functions of the issuing company); or

(ii) To vote on or to direct the conduct of the operations or other

significant policies of the issuing company.

(2) Nonvoting shares. Preferred shares, limited partnership shares

or interests, or similar interests are not voting securities if:

(i) Any voting rights associated with the shares or interest are

limited solely to the type customarily provided by statute with regard

to matters that would significantly and adversely affect the rights or

preference of the security or other interest, such as the issuance of

additional amounts or classes of senior securities, the modification of

the terms of the security or interest, the dissolution of the issuing

company, or the payment of dividends by the issuing company when

preferred dividends are in arrears;

(ii) The shares or interest represent an essentially passive

investment or financing device and do not otherwise provide the holder

with control over the issuing company; and

(iii) The shares or interest do not entitle the holder, by statute,

charter, or in any manner, to select or to vote for the selection of

directors, trustees, or partners (or persons exercising similar

functions) of the issuing company.

(3) Class of voting shares. Shares of stock issued by a single

issuer are deemed to be the same class of voting shares, regardless of

differences in dividend rights or liquidation preference, if the shares

are voted together as a single class on all matters for which the

shares have voting rights other than matters described in paragraph

(o)(2)(i) of this section that affect solely the rights or preferences

of the shares.

Sec. 225.3 Administration.

(a) Delegation of authority. Designated Board members and officers

and the Federal Reserve Banks are authorized by the Board to exercise

various functions prescribed in this regulation and in the Board's

Rules Regarding Delegation of Authority (12 CFR part 265) and the

Board's Rules of Procedure (12 CFR part 262).

(b) Appropriate Federal Reserve Bank. In administering this

regulation, unless a different Federal Reserve Bank is designated by

the Board, the appropriate Federal Reserve Bank is as follows:

(1) For a bank holding company (or a company applying to become a

bank holding company): The Reserve Bank of the Federal Reserve district

in which the company's banking operations are principally conducted, as

measured by total domestic deposits in its subsidiary banks on the date

it became (or will become) a bank holding company;

(2) For a foreign banking organization that has no subsidiary bank

and is not subject to paragraph (b)(1) of this section: The Reserve

Bank of the Federal Reserve district in which the total assets of the

organization's United States branches, agencies, and commercial lending

companies are the largest as of the later of January 1, 1980, or the

date it becomes a foreign banking organization;

(3) For an individual or company submitting a notice under subpart

E of this part: the Reserve Bank of the Federal Reserve district in

which the banking operations of the bank holding company or state

member bank to be acquired are principally conducted, as measured by

total domestic deposits on the date the notice is filed.

Sec. 225.4 Corporate practices.

(a) Bank holding company policy and operations. (1) A bank holding

company shall serve as a source of financial and managerial strength to

its subsidiary banks and shall not conduct its operations in an unsafe

or unsound manner.

(2) Whenever the Board believes an activity of a bank holding

company or control of a nonbank subsidiary (other than a nonbank

subsidiary of a bank) constitutes a serious risk to the financial

safety, soundness, or stability of a subsidiary bank of the bank

holding company and is inconsistent with sound banking principles or

the purposes of the BHC Act or the Financial Institutions Supervisory

Act of 1966, as amended (12 U.S.C. 1818(b) et seq.), the Board may

require the bank holding company to terminate the activity or to

terminate control of the subsidiary, as provided in section 5(e) of the

BHC Act.

(b) Purchase or redemption by a bank holding company of its own

securities. (1) Filing notice. Except as provided in paragraph (b)(6)

or paragraph (b)(7) of this section, a bank holding company shall give

the Board prior written notice before purchasing or redeeming its

equity securities if the gross consideration for the purchase or

redemption, when aggregated with the net consideration paid by the

company for all such purchases or redemptions during the preceding 12

months, is equal to 10 percent or more of the company's consolidated

net worth. For the purposes of this section, ``net consideration'' is

the gross consideration paid by the company for all of its equity

securities purchased or redeemed during the period minus the gross

consideration received for all of its equity securities sold during the

period.

(2) Content of notice. Any notice under this section shall be filed

with the appropriate Reserve Bank and shall contain the following

information:

(i) The purpose of the transaction, a description of the securities

to be purchased or redeemed, the total number of each class

outstanding, the gross consideration to be paid, and the terms of any

debt incurred in connection with the transaction;

(ii) A description of all equity securities redeemed within the

preceding 12 months, the net consideration paid, and the terms of any

debt incurred in connection with those transactions; and

(iii) A current and pro forma consolidated balance sheet if the

bank holding company has total assets of over $150 million, or a

current and pro forma parent-company-only balance sheet if the bank

holding company has total assets of $150 million or less.

(3) Acting on notice. Within 15 calendar days of receipt of a

notice under this section, the appropriate Reserve Bank shall either

approve the transaction proposed in the notice or refer the notice to

the Board for decision. If the notice is referred to the Board for

decision, the Board shall act on the notice within 30 calendar days

after the Reserve Bank receives the notice.

(4) Factors considered in acting on notice. The Board may

disapprove a proposed purchase or redemption if it finds that the

proposal would constitute an unsafe or unsound practice, or would

violate any law, regulation, Board order, directive, or any condition

imposed by, or written agreement with, the Board. In determining

whether a proposal constitutes an unsafe or unsound practice, the Board

will consider whether the bank holding company's financial condition,

after giving effect to the proposed purchase or redemption, meets the

financial standards applied by the Board under section 3 of the BHC

Act, including the Board's Capital Adequacy Guidelines (appendix A) and

the Board's Policy Statement for Small Bank Holding Companies (appendix

C).

(5) Disapproval and hearing. The Board shall notify the bank

holding company in writing of the reasons for a decision to disapprove

any proposed purchase or redemption. Within 10 calendar days of receipt

of a notice of disapproval by the Board, the bank holding company may

submit a written request for a hearing. The Board will

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order a hearing within 10 calendar days of receipt of that request if

it finds that material facts are in dispute or if it otherw

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