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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A96-22402

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** September 6, 1996
- **Citation:** 61 FR 47242

## Text

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superseded by Board order or do not apply to insured banks that conduct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

\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
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

\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.
---------------------------------------------------------------------------

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

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

\7\ Letter of May 13, 1993, (1993 Transfer Binder) Fed. Sec. L.
Rep. (CCH) Paragraph 76,683.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A96-22402. Public record. Not legal advice.