Rules, Policies, and Procedures for Corporate Activities

SUMMARY: The Office of the Comptroller of the Currency (OCC) is

revising its rules governing corporate applications and notices. This

final rule is another component of the OCC's Regulation Review Program

to update and streamline OCC regulations, focus regulations on key

safety and soundness concerns and agency objectives, and reduce

unnecessary regulatory costs and other burdens.

The final rule revises and reorganizes the OCC's regulation for

national bank corporate activities and transactions. It also modernizes

and clarifies the rules, reduces unnecessary regulatory burden and,

consistent with statutory requirements, imposes regulatory requirements

only where needed to address safety and soundness concerns or to

accomplish other statutory responsibilities of the OCC.

EFFECTIVE DATE: December 31, 1996.

FOR FURTHER INFORMATION CONTACT: Stuart E. Feldstein, Assistant

Director, Legislative and Regulatory Activities, (202) 874-5090; Karen

McSweeney, Attorney, Legislative and Regulatory Activities, (202) 874-

5090; Jerome Edelstein, Senior Counsel, Bank Activities and Structure,

(202) 874-5300; or Cheryl A. Martin, Senior Licensing Policy and

Systems Analyst, Licensing Policy and Systems Division, (202) 874-5060.

Office of the Comptroller of the Currency, 250 E Street, SW,

Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

The Proposal

On November 29, 1994, the OCC published a notice of proposed

rulemaking (59 FR 61034, Nov. 29, 1994) (proposal) to revise 12 CFR

part 5--the OCC's rule governing the policies and procedures for

national bank corporate transactions and activities.

The proposal sought to implement the goals of the OCC's Regulation

Review Program by eliminating unnecessary regulatory burden and

streamlining procedures for corporate applications and transactions

while protecting the safety and soundness of the national banking

system. The proposal also restructured various sections of part 5 to

create a more readable and understandable regulation, and it updated

other sections by incorporating interpretive rulings and significant

OCC interpretive positions where necessary.

Comments Received and Changes Made

The final rule implements most of the initiatives contained in the

proposal. However, the OCC has made a number of changes in the final

rule in response to the comments received and to further reduce

unnecessary regulatory burden.

The OCC received 71 comment letters on the proposal. The vast

majority of these comments supported the OCC's proposed changes to part

5. The comment letters received by the OCC included 34 from banks, bank

holding companies, and related entities, 16 from trade associations

(including bank, securities, real estate, insurance, newspaper, and

travel agency), four from community groups, four from private

businesses, five from members of Congress, two from Federal regulators,

two from unaffiliated individuals, three from law firms, and one from a

clearinghouse.

Commenters strongly favored reducing unnecessary regulatory burden,

updating and clarifying the rules, and streamlining the application

process. Overall, most commenters commended the OCC's efforts, and some

commenters offered variations on certain of the proposed changes.

Overview of the Final Rule

The OCC reviewed part 5 to update and streamline corporate filing

procedures for national banks and to reduce unnecessary regulatory

burden consistent with safe and sound banking practices and other

regulatory responsibilities of the OCC.

The final rule contains a fundamental restructuring of the OCC's

approach to the corporate application process by creating a new

expedited review process for many types of applications submitted by

healthy banks whose applications should entail low levels of risk. This

new process enables the OCC to calibrate the extent of regulatory

review an application receives to focus more resources on applications

that are novel, are complex, or present potentially greater risk to the

applicant bank.

Section-by-Section Discussion

Most commenters focused on specific provisions of the proposal with

many recommending further changes. The OCC carefully considered each of

the comment letters and has made a number of changes to the proposal in

response to those comments and recommendations. The following section-

by-section discussion identifies and discusses comments and changes to

the proposal. A table summarizing the sections of the former part 5

changed by the final rule is included at the end of this preamble.

Scope (Sec. 5.1)

The proposal clarified the purpose of part 5 and transferred

information concerning the role of the OCC's Multinational Banking

Department to Sec. 5.3, Definitions, and Sec. 5.4, Filing required. The

OCC received no comments on this section.

The OCC adopts the changes contained in the proposal and clarifies

the corporate filing procedures for Federal branches and agencies. The

final rule also adds a new subpart F, which outlines the filing

procedures for Federal branches and agencies and directs readers to 12

CFR part 28 for further information.

Rules of General Applicability (Sec. 5.2)

The proposal consolidated the rules of general applicability for

part 5 into a single section. The proposal also relocated the

definitions to Sec. 5.3, Definitions, and the information regarding

denials to Sec. 5.13, Decisions. Proposed Sec. 5.2(b) described the

limited circumstances under which the OCC may adopt materially

different procedures for a filing or class of filings.

Two commenters expressed concern that proposed Sec. 5.2(b) would

allow the OCC too much latitude to adopt procedures other than those

set forth in part 5. One commenter suggested limiting the circumstances

under which the OCC may adopt materially different procedures. The OCC

has historically limited its discretion under this provision to special

circumstances, thus enabling the OCC to respond promptly to emergencies

such as Hurricane Andrew. This continues to be the OCC's intent, and

the final rule includes this language to reflect this approach.

Definitions (Sec. 5.3)

The proposal consolidated in Sec. 5.3 definitions previously

located throughout part 5. The proposal also added new definitions to

clarify the part generally and updated existing definitions to make

them more accurate and precise.

The proposal added a definition of ``short-distance relocation,''

used in connection with both branch and main office relocations.

``Short-distance

[[Page 60343]]

relocation'' was defined as moving the premises of a branch or main

office within a one thousand-foot radius of the current site if it is

located within a central city of a Metropolitan Statistical Area (MSA)

designated by the Department of Commerce; a one mile radius of the site

if it is located within an MSA designated by the Department of

Commerce, but not within a central city; or a two-mile radius of the

site if it is not located within an MSA.

In response to a request by two commenters, the final rule contains

a definition of the term ``central city'' used to define a short-

distance relocation. This definition recognizes that the Office of

Management and Budget has succeeded the Commerce Department as the

agency that identifies central cities for certain purposes. Under the

final rule, a central city is a city or cities identified as a central

city by the Director of the Office of Management and Budget. This

provides a simple, unambiguous test for determining when relocation

applications are subject to a ten-day public comment period instead of

a 30-day comment period.

Another commenter stated that having two designations for sites

located within an MSA was confusing. This commenter suggested removing

the first prong of the definition (i.e., within a one thousand foot-

radius of a site located within a central city of an MSA). The OCC

believes that the distances in the proposed definition are appropriate

for different types of metropolitan areas. Therefore, the final rule

does not change this aspect of the proposal.

Two other commenters urged the OCC to include more flexible

language in the definition of ``short-distance relocation.'' However,

using any test other than a bright-line test could create further

uncertainties. Therefore, the OCC adopts this definition as proposed.

The final rule also modifies the proposed definition of

``appropriate district office'' by identifying the OCC's International

Banking and Finance Department as the ``appropriate district office''

for Federal branches and agencies.

The proposal also contained a definition of ``eligible bank,'' a

concept central to the new system of expedited review for certain

applications filed with the OCC. The proposal defined the term

``eligible bank'' as a national bank that is well capitalized as

defined in 12 CFR part 6, has a composite rating of 1 or 2 under the

Uniform Financial Institutions Rating System (CAMEL), has a CRA rating

of ``Satisfactory'' or better, and is not subject to certain formal OCC

enforcement actions.

The OCC received 15 comment letters on the definition of eligible

bank. Eleven commenters supported the definition. Four commenters

opposed the definition and the concept of expedited processing.

A number of commenters expressed concern that by making banks with

``Satisfactory'' or ``Outstanding'' CRA ratings eligible for expedited

processing, the OCC was establishing a ``safe harbor'' against public

challenge to an applicant bank's CRA performance. This is neither the

purpose nor the effect of the eligible bank concept. In fact, Sec. 5.13

of the final rule explicitly enables the OCC to remove a filing from

expedited review procedures if the OCC concludes, among other things,

that an adverse comment presents a significant CRA concern that, in the

OCC's view, has not previously been satisfactorily resolved. Thus, as

discussed in greater detail later, Sec. 5.13 ensures that the OCC will

fully and carefully consider all significant adverse CRA comments,

including those involving eligible banks.

Several commenters also expressed concern that CAMEL ratings would

become publicly available as a result of this new process. Some

commenters suggested eliminating the CAMEL rating from the list of

criteria necessary to qualify as an eligible bank, thus placing more

emphasis on the capital adequacy of the bank filing the application.

Other commenters suggested adopting altogether different criteria such

as the Federal Deposit Insurance Corporation's (FDIC's) assessment risk

classifications.

The OCC carefully considered these concerns and concluded that the

suggested alternatives do not adequately address the criteria that are

critical in permitting a bank to use expedited review. For example,

limiting the definition to criteria focused primarily on capital

adequacy eliminates important supervisory considerations regarding

management of the bank. Moreover, while the FDIC's assessment risk

classification system has attractive features, it appears better suited

for the FDIC's insurance purposes than for determining which banks

would qualify for expedited application processing. Therefore, the OCC

adopts the definition of eligible bank as proposed.

The final rule also adds a definition of ``eligible depository

institution,'' a term used in Sec. 5.24, Conversions, and Sec. 5.33,

Business combinations. An eligible depository institution is a state

bank or a Federal or state savings association that meets the

``eligible bank'' criteria under Sec. 5.3(g) and is FDIC-insured,

except that the bank's primary Federal regulator makes the

determinations regarding certain of the eligible bank criteria.

The OCC also adopts the other definitions as proposed with some

minor changes.

Filing Required (Sec. 5.4)

The proposal clarified the application and notice filing

requirements and permitted an applicant to file with the OCC forms that

the applicant had submitted to another Federal agency, if the forms

covered the proposed action and contained substantially the same

information that the OCC would require.

Each commenter addressing this section supported the proposal.

Therefore, the OCC adopts this section as proposed, with minor

modifications and one new burden-reducing feature.

The final rule contains a new provision that allows an applicant to

incorporate by reference information that the applicant submitted to

the OCC or another Federal agency with a previous application or other

filing. Material incorporated by reference must be current and

responsive to the information requested by the OCC, and the applicant

must attach a copy of the relevant material to its application. This

provision allows an applicant to avoid compiling lengthy background or

supporting documentation each time it submits an application to the OCC

and also ensures that the information is current, accurate, and

accessible to the OCC.

Fees (Sec. 5.5)

The proposal removed unnecessary information from former Sec. 5.5,

such as procedures for determining the fee schedule, and referred to 12

CFR 8.8 regarding the ``Notice of Comptroller of the Currency fees.''

Two commenters suggested that the OCC create a differential fee

structure for eligible banks. The OCC intends to implement this

suggestion in the near future. Therefore, the OCC adopts this section

as proposed with minor clarifying changes.

Investigations (Sec. 5.7)

The proposal clarified and condensed the relevant information and

incorporated the fee provision pertaining to investigations. Two

commenters suggested that the OCC limit the circumstances under which

it may request additional information in connection with a filing.

However, the proposal provides needed flexibility to evaluate factual

and legal issues that arise during the course of a filing. Thus, the

final rule retains the general authority for the OCC to seek additional

information in connection with a filing

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and to deem a filing abandoned if the requested information is not

furnished within the specified time period. However, this provision is

moved to Sec. 5.13.

Public Notice (Sec. 5.8)

The proposal required an applicant to publish a public notice of

its filing in a newspaper widely available in each geographic area in

which the applicant proposed to engage in business.

Several commenters urged the OCC not to make this change, but

rather to retain the language in the former regulation. Under former

Sec. 5.8(a), a bank must publish public notice in a newspaper of

general circulation in the community in which the applicant proposes to

engage in business. These commenters stated that the former standard

provided more effective notice to the public.

The OCC agrees with the commenters that the former standard better

advises the public of filings submitted to the OCC and does not unduly

burden applicants. Thus, the final rule retains the language from the

former regulation.

The proposal also provided under Sec. 5.8(f) that the OCC may

require or give public notice and request comment on any filing and in

any manner the OCC determines appropriate for the particular filing. In

addition, in circumstances where the public notice requirements of

Sec. 5.8 do not apply to a particular filing, the OCC may determine to

give public notice if the filing presents a significant and novel

policy, supervisory, or legal issue. The proposal also authorized the

OCC to require public notice in addition to any notice otherwise

required under this part.

The proposal also added several provisions to reduce unnecessary

regulatory burden. For example, the proposal allowed an applicant to

publish a single notice in certain circumstances for two or more

filings and permitted the OCC to accept a notice published by an

applicant for another Federal agency in lieu of the public notice

requirements of part 5.

The OCC adopts these proposed changes with some minor

modifications. First, in connection with publishing a single notice for

multiple transactions, the final rule amends proposed Sec. 5.8(d) to

require the applicant to explain in the notice how the transactions

that are the subject of the notice are related.

Second, in Sec. 5.8(e), the final rule clarifies that the OCC may

accept a single joint notice containing the information required by the

OCC and the other Federal agency, provided that the notice states that

comments must be submitted to both the OCC and the other Federal

agency.

Public Availability (Sec. 5.9)

The proposal condensed this section to reflect the current OCC

practice of granting requests for information on particular filings.

Two commenters suggested that the OCC include standards for

confidential treatment of information concerning applications. The

final rule clarifies that the OCC follows the Freedom of Information

Act (FOIA), 5 U.S.C. 552, in determining whether to treat information

as confidential.

The OCC final rule also adds language to clarify that requests for

the public file on pending applications should be directed to the

appropriate district office, and requests for the public file on

applications or notices that have been closed or decided should be

directed to the Disclosure Officer, Communications Division. The

revisions also clarify what constitutes the public file and that an

applicant or interested person submitting information may request

confidential treatment for specific information.

Comments (Sec. 5.10)

The proposal reorganized this section, removed unnecessary and

repetitive information, and clarified the remaining provisions. The

proposal also established the time period for interested persons to

submit comments.

The proposal included a provision that allowed the OCC to extend

the comment period if the applicant failed to file all required

supporting data in time to permit review by interested persons, if any

person requesting an extension of time provided ``adequate

justification,'' or if the OCC determined that other extenuating

circumstances existed. The proposal also removed a provision that

automatically granted a 14-day extension of the comment period for

individuals whose request for a hearing had been denied.

Several commenters recommended that the OCC clarify the term

``adequate justification.'' In response to these comments, the final

rule removes the phrase ``adequate justification'' and provides that a

person requesting an extension of the comment period must

satisfactorily demonstrate to the OCC that he or she needs additional

time to develop factual information that the OCC determines is

necessary to consider the application.

One commenter also objected to the proposed elimination of the 14-

day automatic extension of the comment period for interested persons

upon the OCC's denial of a hearing request. The commenter suggested

that the OCC permit a person to submit additional information at any

time once a person has filed timely comments. Other commenters

supported the elimination of the 14-day automatic extension of the

comment period and suggested placing additional restrictions on the

comment period.

The OCC believes that the proposal strikes an appropriate balance

between providing an opportunity for interested persons to comment on

an application and the need for an applicant to have some reliable time

frame for the application process. In particular, the OCC notes that as

a general matter it considers late-filed comments on a filing if doing

so would not inappropriately delay action on a filing. The OCC adopts

this provision as proposed.

The final rule also removes the hearing-related provisions from

proposed Sec. 5.10, Comments and requests for hearings, and places them

in Sec. 5.11, Hearings and other meetings.

Hearings and Other Meetings (Sec. 5.11)

The proposal reorganized and streamlined this section. Under the

proposal, any person could submit a written request for a hearing. The

proposal noted that the OCC generally grants a hearing request only

upon a determination that written submissions would be insufficient or

that a hearing would benefit the decisionmaking process or be in the

public interest.

Some commenters recommended that the OCC adopt more stringent

requirements for determining when to grant a hearing. Other commenters

suggested that the OCC make the standards for granting a hearing more

lenient. The OCC believes that this provision represents an equitable

and balanced approach because it provides an adequate basis for an

individual to request a hearing, but provides more clarity with respect

to the circumstances under which the OCC will grant the request. The

OCC adopts this provision substantially as proposed.

The proposal also provided that the person requesting a hearing

would no longer bear the cost of the hearing room or the OCC's

transcripts. The person requesting the hearing would continue to assume

the cost of one copy of the transcript for his or her use.

Some commenters suggested that the OCC continue to require the

person requesting the hearing to bear the cost of the hearing room and

transcription of the proceedings. These commenters believed that by not

imposing these costs the number of requests might increase. This could

increase the burden

[[Page 60345]]

and costs associated with filing an application. However, the ability

to cover these costs is not a factor in determining whether to grant a

request for a hearing. The OCC has consistently considered requests to

waive these costs on a case-by-case basis. Thus, the final rule does

not change the proposal in this regard.

The final rule also adds new provisions for the OCC to arrange

meetings between interested parties to an application in settings less

formal than a hearing. Under the final rule, the OCC may arrange for a

public meeting in connection with an application, either upon receipt

of a written request for such a meeting which is made during the

comment period or upon the OCC's own initiative. The OCC also may

arrange a private meeting with an applicant or other interested parties

to an application, or with an applicant and other interested parties to

an application, in order to clarify and narrow the range of differences

on an application.

The final rule also makes a structural change to this section and

Sec. 5.10, Comments, by adopting proposed Sec. 5.10(c)-(e) as part of

Sec. 5.11 to consolidate all the information on hearings into one

section.

Computation of Time (Sec. 5.12)

The proposal made no substantive changes to this section, and the

OCC received no comments on this section. Therefore, the OCC adopts

this section as proposed.

Decisions (Sec. 5.13)

The proposal reorganized and clarified the various types of OCC

decisions on filings. It also explained that the OCC grants eligible

banks expedited processing for certain filings and clarified the

circumstances under which the OCC may determine not to grant expedited

processing for a filing by an eligible bank. Under the proposal, the

OCC would have decided not to process an application under the

expedited procedures if it had concluded that the filing or an adverse

public comment received prior to the OCC's decision presented a

significant supervisory, CRA (if applicable), or compliance concern, or

raised a significant legal or policy issue.

The great majority of commenters strongly supported the proposed

revisions to this section, with a number of commenters suggesting

additional changes. In response to the comments, the OCC changed the

final rule to clarify both when the expedited review process might be

extended and the circumstances under which an application will be

removed from the expedited review process. As set forth below, these

changes are designed to balance the concerns of those interested in

removing undue delays from the application process with the need fairly

to assess legitimate CRA concerns.

Under the final rule, the OCC will remove a filing from the

expedited review category if the OCC concludes that the filing, or an

adverse comment regarding the filing, presents a significant

supervisory, CRA (if applicable), or compliance concern, or raises a

significant legal or policy issue requiring additional OCC review. With

respect to adverse comments that present CRA concerns, the final rule

clarifies that a significant CRA concern exists if the OCC concludes

that: (1) a bank's CRA rating is less than satisfactory, institution-

wide, or, where applicable, in a state or multistate MSA; or (2) a

bank's CRA performance is less than satisfactory in an MSA or in the

non-MSA portion of a state in which it seeks to expand through approval

of an application for a deposit facility as defined in 12 U.S.C.

Sec. 2902(3).

The final rule also adds a new provision to recognize that in

certain circumstances it may be necessary to extend the review process

in order to evaluate further whether to remove an application from

expedited review processing. Under the final rule, the OCC may extend

the review process up to an additional ten days in circumstances where

a comment contains specific assertions concerning a bank's CRA

performance. Under the final rule, the OCC may extend the review period

if these specific assertions, if true, would indicate a reasonable

possibility that: (1) a bank's CRA rating would be less than

satisfactory, institution-wide, or, where applicable, in a state or

multistate MSA; or (2) a bank's CRA performance would be less than

satisfactory in an MSA or in the non-MSA portion of a state in which it

seeks to expand through approval of an application for a deposit

facility as defined in 12 U.S.C. Sec. 2902(3). This provision allows

the OCC additional time to assess specific CRA assertions by a

commenter and determine whether additional review, which would warrant

removal of the application from the expedited review category, is

needed.

The OCC notes, however, that it may not be necessary to trigger the

extra ten-day review period in all cases. For example, the OCC may

already have sufficient current information to permit it to assess the

particular assertions contained in the comment. In these cases, the

OCC's information would provide the basis for concluding whether or not

to remove an application from expedited review processing without

extending the period an additional ten days.

In other circumstances, the OCC is prepared, within the additional

time allowed, promptly to conduct a targeted investigation of CRA

performance. These inquiries could be conducted, for example, whenever

additional detailed information is needed to evaluate CRA comments

involving particular branches or assessment areas. In these situations,

the information obtained from the inquiry would allow the OCC to

determine whether the comment raises a ``significant'' unresolved CRA

concern necessitating further review and removal from expedited review

processing. The OCC will provide the applicant with a written

explanation if it decides not to process an application from an

eligible bank under expedited review pursuant to Sec. 5.13(a).

The OCC also notes that it may deny or condition approval of an

application, including under the expedited review procedures, even if

the bank has an overall satisfactory CRA rating in order to ensure

satisfactory performance in a particular state or multistate MSA, or,

where applicable, in an MSA or the non-MSA portion of states.

The proposal also set forth certain circumstances where adverse CRA

comments would not remove an application from expedited review

processing. Under the proposal, adverse comments that did not raise

significant supervisory, CRA (where applicable), or compliance

concerns, or significant legal or policy issues, or that were

frivolous, filed primarily to delay action on the filing, or that

raised negative CRA issues that already had been resolved between the

commenter and the applicant would not prevent an eligible bank's filing

from receiving expedited processing. Several commenters suggested that

the OCC clarify the phrase ``resolved by the commenter and the

applicant.''

The OCC understands the difficulties in having all parties agree

that an issue has been ``resolved.'' Therefore, rather than have the

commenter and the applicant decide that an issue has been resolved, the

final rule clarifies the circumstances under which the OCC will

determine an issue to have been satisfactorily resolved. Under the

final rule, the OCC considers a CRA concern to have been satisfactorily

resolved if the OCC previously reviewed (e.g., in an examination or in

connection with an application) a CRA concern presenting substantially

the same issue in substantially the same area during

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substantially the same time, and the OCC determines that the concern

would not warrant denial or imposition of a condition on approval of

the application. The final rule also removes reference to comments

``filed for competitive reasons'' from these processing criteria

because the OCC has concluded that such standard would likely be

impractical to apply.

The proposal also set forth the circumstances under which the OCC

would reconsider a denial of a filing and consolidated the paragraph

regarding OCC reconsideration of applications.

One commenter suggested that the OCC include a reference to the

OCC's Ombudsman in the regulation. The final rule notes that an

applicant may file an appeal with the Ombudsman or the Deputy

Comptroller for Bank Organization and Structure.

The proposal also added a provision explaining that the OCC does

not generally grant a national bank an extension of time to commence a

corporate activity once approved by the OCC. Some commenters indicated

that the OCC should provide more flexibility for certain transactions

that are beyond the applicant's control. The OCC recognizes this

concern and has modified the rule accordingly. Under the final rule,

the OCC generally will not grant an extension of time to commence a new

or expanded corporate activity, unless the OCC determines that the

delay is beyond the applicant's control.

The proposal also provided that the OCC could nullify any decision

if there was a material misrepresentation or omission in the underlying

filing, or if the decision was contrary to law, regulation, or OCC

policy, or was granted due to a clerical or administrative error or a

material mistake of law or fact. Two commenters suggested that the OCC

should revise the proposal regarding its authority to nullify a

decision. However, the OCC believes that this approach will not prove

burdensome to applicants and will preserve the integrity of the

application process. Therefore, the OCC adopts the language contained

in the proposal.

Finally, the OCC has changed this section to clarify that a filing

must contain all information required by the relevant regulation and

that a filing may be deemed abandoned if required information is not

furnished as required or within a specified time period.

Organizing a Bank (Sec. 5.20)

The proposal clarified, streamlined, and reorganized this section

to focus on those issues central to charter applications. It also

incorporated and consolidated provisions regarding special purpose

national banks, such as national banks limited to fiduciary activities.

The OCC received few comments addressing this section. One

commenter recommended an expedited review process for ``well-

capitalized'' bank holding companies establishing de novo banks.

Another commenter urged the OCC to consider the financial and

managerial resources of a sponsoring bank holding company rather than

those of the organizers.

The OCC agrees with the commenters that an application to organize

a new bank that is sponsored by a bank holding company whose lead

depository institution meets certain requirements does not present the

same level of safety and soundness and other supervisory concerns as

other applications to organize a bank. Thus, the final rule provides

that the OCC will preliminarily approve a charter application sponsored

by a bank holding company whose lead depository institution is an

eligible bank or eligible depository institution, as of the 15th day

after the close of the comment period or 45 days after a filing is

received by the OCC, whichever is later, unless the OCC notifies the

applicant that it is not eligible for expedited review, or the

expedited review process is extended, under Sec. 5.13, or the OCC

determines that the proposed bank will offer banking services that are

materially different from those offered by the lead depository

institution. The final rule defines the term ``lead depository

institution'' in Sec. 5.20(d)(5) as the largest depository institution

controlled by the bank holding company based on a comparison of the

average total assets controlled by each depository institution as

reported in its Consolidated Report of Condition and Income for the

immediately preceding four calendar quarters. The final rule also

clarifies that the OCC considers the financial and managerial resources

of the sponsor, rather than the organizing group, if the organizing

group is sponsored by an existing holding company, individuals

currently affiliated with other depository institutions, or individuals

who, in the OCC's view, are otherwise collectively experienced in

banking and have demonstrated the ability to work together effectively.

The proposal also maintained the OCC's ability, as a condition of

charter approval, to object to and preclude the hiring of any officer,

or appointment or election of any director, for two years following the

commencement of the bank's business. This provision is retained in the

final rule.

The final rule also provides that a national bank that seeks to

invest in a bank with a community development focus must comply with

the applicable requirements of 12 CFR part 24.

Conversion (Sec. 5.24)

The proposal reorganized and streamlined the OCC's rules governing

charter conversions involving national banks. Among other things, the

proposal clarified the types of entities that may convert to a national

bank and established procedures for conversions from a national bank to

another form of charter. The proposal also added specific language

throughout this section to clarify the precise requirements and law

applicable to an institution converting to a national bank charter.

The proposal also provided more explicit procedures for a financial

institution converting to a national bank charter. The proposal

required institutions converting to a national bank charter to identify

all subsidiaries the institution seeks to retain following the

conversion and to provide the information and analysis of the

subsidiary's activities that would be required under Sec. 5.34. In

addition, as did the proposal, the final rule requires institutions

converting to a national bank charter to identify nonconforming assets

(including nonconforming subsidiaries) and nonconforming activities

that the institution holds or engages in. The OCC considers requests to

retain nonconforming assets of a state bank pursuant to its authority

under 12 U.S.C. 35.

The OCC adopts the language in the proposal with a few clarifying

changes and one additional change intended to reduce regulatory burden.

The final rule establishes an expedited review procedure for healthy

state banks or Federal or state savings associations (eligible

depository institutions as defined in Sec. 5.3(h)) that wish to convert

to a national bank charter. Under this provision, an application by an

eligible depository institution to convert to a national bank is deemed

approved as of the 30th day after a filing is received by the OCC,

unless the bank is notified that it is not eligible for expedited

review under the standards contained in Sec. 5.13(a)(2).

Fiduciary Powers (Sec. 5.26)

The proposal reorganized the OCC's application procedures for

fiduciary powers and clarified the circumstances under which the OCC

requires a national bank to obtain approval to

[[Page 60347]]

exercise fiduciary powers. The proposal also provided that a separate

application to exercise fiduciary powers was not required when: (1) two

or more national banks merge or consolidate and one of the banks has

previously received approval to exercise fiduciary powers that is in

effect at the time of the merger, or (2) a national bank with fiduciary

powers is the resulting bank in a merger or consolidation with a state

bank without fiduciary powers. An applicant applying for a charter for

a national bank limited to fiduciary activities should file its

application under Sec. 5.20.

Two commenters supported the revisions to Sec. 5.26. The OCC adopts

the changes contained in the proposal with two substantive additions

intended to further reduce paperwork burdens for a national bank filing

an application under this section. Under the final rule, if approval to

exercise fiduciary powers is desired in connection with any other

transaction subject to an application under this part, an applicant may

include its request for approval to exercise fiduciary powers as part

of its other application. The OCC does not require a separate

application to exercise fiduciary powers in these circumstances.

The final rule also streamlines the application procedure for a

national bank meeting the eligible bank criteria contained in

Sec. 5.3(g). Under the final rule, an eligible bank need not submit an

opinion of counsel to the OCC. However, in certain circumstances, the

OCC may request this information prior to the bank commencing the

activity.

Finally, the final rule clarifies that when a national bank with

prior OCC approval to exercise fiduciary powers commences fiduciary

activities in a new state, the bank need not file an additional

application under this section, and is only required to file a written

notice with the OCC within ten days after commencing the activities.

Establishment, Acquisition, and Relocation of a Branch (Sec. 5.30)

The proposal comprehensively revised the OCC's branching regulation

to update the definition of the types of facilities that constitute a

``branch'' and to streamline procedures for acquiring and moving

branches.

The OCC received numerous comments on this section. The OCC

carefully considered all the comments, and the final rule reflects

changes made in response to those comments and also incorporates recent

statutory changes.

A. Definition of ``Branch''

Proposed Sec. 5.30(d)(1)(ii)(A) excluded from the definition of a

branch a facility to which ``the bank does not permit members of the

public to have physical access * * * (e.g., an office established by

the bank that receives deposits only through the mail).'' This aspect

of the proposal reflected the position taken by the OCC in several

interpretive letters.

Several commenters specifically supported this provision but sought

further clarification. One commenter was concerned that prohibiting

access to ``members of the public'' would prohibit access even to those

members of the public, such as delivery people, that are at the site

for reasons other than to conduct banking transactions.

The final rule excludes from the definition of ``branch'' a

facility that would otherwise qualify as a branch because it is

established by a national bank and engages in one or more branching

functions (receipt of deposits, payment of withdrawals, or making

loans) but which prohibits access to members of the public for purposes

of conducting one or more branching functions. The OCC expects that

facilities that come within this exception will not be designed to

undertake in-person branching transactions with customers nor would

they invite members of the public to visit such sites to conduct

branching transactions.

Proposed Sec. 5.30(d)(1)(ii)(B) clarified that the term ``branch''

does not include a facility that is ``generally available to customers

of other banks to receive substantially similar services pertaining to

their accounts at other banks on the basis of substantially similar

terms and conditions.'' As recognized by a number of commenters, the

primary impact of this provision would have been to exclude from the

definition of branch ATMs that are linked to networks and, thus,

provide services to bank customers and non-customers alike. However, as

a result of recent statutory changes contained in Section 2205 of the

Economic Growth and Regulatory Paperwork Reduction Act of 1996, Public

Law 104-208, Sept. 30, 1996 (110 Stat. 3009), ATMs and remote service

units are no longer considered branches and, thus, are not subject to

the limitations on national bank branching imposed by the McFadden Act

and codified at 12 U.S.C. 36. Consequently, the OCC has deleted this

provision from the final rule and has also revised the final rule to

state specifically that ATMS and remote service units are not branches.

The OCC also recognizes, however, that other situations may still arise

where a particular facility should not be considered to be a bank

branch because it, in fact, provides services generally on a

nondiscriminatory basis with respect to accounts that its customers

hold as well as accounts held by noncustomers in other banks and

depository institutions. The OCC believes these issues are best

considered on a case-by-case basis based on the particular

circumstances involved.

B. Messenger Service

Proposed Sec. 5.30(f)(2)(iii) sets forth procedural rules specific

to the establishment of messenger services. One commenter asked the OCC

to define the term ``messenger service.'' The OCC believes that

defining the term ``messenger service'' will clarify the applicability

of these provisions and thus adds a definition that cross-references

the definition of ``messenger service'' in 12 CFR 7.1012. In addition,

the provisions permitting multiple messenger service applications to be

combined has been retained in the final rule.

C. Public Notice for a Mobile Branch

Proposed Sec. 5.30(h)(1) stated the publication requirements for a

mobile branch application. One commenter requested clarification on the

publication requirements. An applicant must publish public notice for a

mobile branch or messenger service application in a newspaper that

meets the requirements of Sec. 5.8 for each area in which the mobile

facility will provide branching services. An applicant need only

publish public notice in one newspaper that meets those requirements in

each area that it intends to serve. In addition, the final rule adds a

definition of ``mobile branch'' which includes a branch, other than a

messenger service facility, that does not have a single, fixed site,

such as a van that travels to various public locations to enable

customers to conduct their banking business. Each mobile unit requires

a branching license. This is because a mobile facility is available at

public sites to customers generally, unlike a messenger service

facility that only serves specific customers at places such as their

homes or businesses.

D. Reduced Comment Period

Proposed Sec. 5.30(h)(2) provided a ten-day comment period for an

application to establish an ATM branch and to engage in a short-

distance branch relocation. While many commenters explicitly supported

these reduced comment periods, several commenters thought that the OCC

should apply the ten-day comment period more broadly.

In applying a reduced comment period for ATM branches and short-

distance relocations, the OCC attempted to identify those types of

applications

[[Page 60348]]

that are less likely to raise legal and policy concerns which generally

lead to public comment. Short-distance relocations, which are unlikely

in most states to raise legal concerns and where the relocated branch

will serve the same area as the former branch, are less likely to raise

concerns giving rise to public comment. Consequently, the final rule

does not expand the availability of the reduced comment period.

However, because the statutory change excluded ATMs from the term

``branch'' as that term is used in the McFadden Act, the final

regulation applies the reduced comment period only to short distance

relocations and increases the comment period to 15 days. Similarly,

because of the statutory change with respect to ATMs and remote service

units, the proposed rule permitting a national bank to seek approval

for multiple ATMs and unstaffed branches in one application is no

longer necessary.

E. Temporary Branches

The proposal requested comment on whether to apply streamlined

procedures to temporary branches. All commenters who addressed this

issue supported some form of streamlined processing for temporary

branches. Therefore, the final rule contains a statement that the OCC

will consider a request to waive or reduce the public notice and

comment period with respect to an application to restore banking

services to a community affected by a disaster or temporarily replace

banking facilities where, because of an emergency, the bank temporarily

cannot provide or must curtail banking services. Also, the procedures

set forth in OCC Advisory Letters 94-3, 94-4, and 94-6 regarding

branches at colleges and universities continue to be valid.

The final rule also provides that the OCC may waive or reduce the

public notice and comment period, with respect to an application to

establish a temporary branch, if: (1) the applicant bank has a CRA

rating of ``Satisfactory'' or better; and (2) the temporary branch, if

established by a state bank to operate in the manner proposed, would be

permissible under state law without state approval. For these purposes,

the final rule defines a temporary branch as a branch that is located

at a fixed site and from the time of its opening is scheduled to close,

and will permanently close, as of a certain date no longer than one

year after it is first opened. Of course, if a proposal for a temporary

branch does not meet these requirements, the bank can still apply to

establish the branch under the standard branch application procedures.

Business Combinations (Sec. 5.33)

The proposal substantially reorganized, condensed, and simplified

this section. The proposal used the term ``business combination,''

rather than ``merger,'' to avoid confusion on specific transactions and

incorporated pertinent information regarding interim banks from former

Secs. 5.20 and 5.21. The proposal also provided for expedited review of

certain corporate reorganizations (e.g., a holding company could

combine certain subsidiary banks under an expedited review process).

The proposal adopted the procedures of 12 U.S.C. 214a, 214c, 215,

and 215a for combinations between national banks and Federal savings

associations, with appropriate modifications to conform the style of

Sec. 5.33(g) with the rest of Sec. 5.33 and part 5. In addition,

similar to the treatment of conversions, references in 12 U.S.C. 214c

to the ``law of the State in which such national banking association is

located'' and ``any State authority'' mean ``the laws and regulations

governing Federal savings associations'' and ``Office of Thrift

Supervision,'' respectively.

The proposal also revised this section to reflect certain

provisions of the Riegle-Neal Interstate Banking and Branching

Efficiency Act of 1994, Public Law 103-328, Sept. 29, 1994, 108 Stat.

2338 (Riegle-Neal Act), regarding interstate business combinations.

The overwhelming number of comments received supported the proposed

changes to Sec. 5.33. Therefore, the OCC adopts this section

substantially as proposed with an additional burden-reducing feature.

This new provision in the final rule permits certain healthy banks to

use a streamlined application form under expedited review procedures to

effect certain types of business combinations. The OCC believes that

this approach will significantly reduce paperwork burden for these

banks while maintaining the focus of the OCC's review on those areas

that pose significant risks to national banks.

Under the final rule, an applicant may file an abbreviated

application form as instructed in the Manual and qualify for expedited

processing of its application if: (1) at least one party to the

transaction is an eligible bank and all other parties to the

transaction are eligible banks or eligible depository institutions, the

resulting national bank will be well capitalized immediately following

the consummation of the transaction, and the total assets of the target

depository institution are not more than 50 percent of the total assets

of the acquiring bank, as reported in each institution's Consolidated

Report of Condition and Income filed for the quarter immediately

preceding the filing of the application; (2) the acquiring national

bank is an eligible bank, the target bank is not an eligible bank or an

eligible depository institution, the resulting national bank will be

well capitalized immediately following consummation of the transaction,

and either (a) the appropriate district office has approved the use of

the streamlined form; or (b) the total assets acquired do not exceed 10

percent of the total assets of the acquiring national bank, as reported

in each institution's Consolidated Report of Condition and Income filed

for the quarter immediately preceding the filing of the application. A

streamlined application form will, of course, continue to require

information necessary for the OCC to make a determination under the

standards of the Bank Merger Act and this regulation, which include the

convenience and needs of the community to be served and relevant CRA

considerations.

Under the final rule, these applications, together with

applications that qualify as ``business reorganizations,'' will be

deemed approved by the OCC as of the 45th day after the filing is

received by the OCC or the 15th day after the close of the comment

period, whichever is later, unless the OCC notifies the bank that the

filing is not eligible for expedited review, or the expedited review

process is extended, under the standards in Sec. 5.13.

In addition, with respect to business reorganizations, the final

rule incorporates the eligible depository institution concept into the

expedited review process for these transactions. Thus, a business

combination between an eligible bank and eligible depository

institution controlled by the same holding company would receive

expedited processing.

Operating Subsidiaries (Sec. 5.34)

The proposal contained comprehensive revisions to Sec. 5.34,

Operating subsidiaries, and solicited public comment on a number of

issues. The overwhelming majority of commenters supported the changes

contained in the proposal. A number of commenters opposed specific

provisions, two commenters asserted that the OCC lacked authority to

issue the regulation under 12 U.S.C. 93a, and several other commenters

urged specific changes. A discussion of the comments and the changes

made in the final rule is set forth below.

[[Page 60349]]

A. Procedures

The proposal restructured the OCC approval requirements for an

application by a national bank to establish or acquire an operating

subsidiary, or to commence a new activity in an existing operating

subsidiary. Essentially, operating subsidiary proposals would fall into

one of three categories: (1) after-the-fact notice for certain types of

activities; (2) expedited processing for certain other types of

activities, when proposed to be conducted by financially strong and

well-managed banks; and (3) standard processing in other cases. These

revised procedures would expedite application processing for less

complex activities and thus reduce unnecessary regulatory burden and

enable the OCC to focus attention on novel or complex filings.

First, the after-the-fact notice procedures required a national

bank to file a notice with the OCC within ten days after acquiring or

establishing the subsidiary or commencing the new activity. The

national bank was required to be ``adequately capitalized'' or ``well

capitalized'' and not deemed to have been in ``troubled condition'' for

purposes of Sec. 5.51. In addition, the subsidiary could only engage in

certain preapproved activities that were listed as eligible for after-

the-fact notice.

The second category of procedures provided for expedited review of

applications requiring prior OCC approval. To qualify for expedited

review, a national bank was required to be an eligible bank, and the

activity proposed had to be on the list of activities permissible for

expedited processing. These applications were deemed approved 30 days

after filing, unless the OCC notified the applicant prior to that date

that the application was not eligible for expedited review under

Sec. 5.13(a)(2).

The third category of procedures generally covered all other

operating subsidiary situations.

The OCC received 20 comments addressing these procedures. The

majority of commenters supported the proposed changes.

Four commenters recommended moving certain activities from the

expedited review to the notice category. These recommendations

generally concerned activities related to foreign exchange, coin and

bullion, leasing of personal property, securities brokerage, lending

activities and providing investment advice. Two commenters also

suggested adding property appraisal services to the notice list.

In the final rule, the OCC retains the activities in the categories

set forth in the proposal with a few changes. The proposal included in

the notice category providing financial and transactional advice to

customers and assisting customers in structuring, arranging, and

executing various financial transactions, provided the bank and its

affiliates did not participate as principal. These transactions

included mergers and acquisitions, swaps and derivatives, foreign

exchange and related transactions, and arranging commercial real estate

equity financing. The final rule removes the prohibition on

participating as principal with respect to swaps and derivatives and

foreign exchange and related transactions, since these are activities

frequently undertaken directly by banks as part of their banking

business. These notice category provisions relating to swaps and

derivatives, and foreign exchange transactions, were then combined with

the provision in the expedited category relating to dealing, trading,

and investing in foreign exchange, coin and bullion and retained in the

expedited processing category.

The final rule also moves the following activities from the

expedited processing category to the notice category: (1) Activities

that relate to making, purchasing, selling, servicing and warehousing

loans, or interests therein; and (2) activities related to leasing of

personal property. However, these activities are not eligible for the

notice category where the notice involves the direct or indirect

acquisition by the bank of any low-quality asset from an affiliate in

connection with any transaction subject to Sec. 5.34. The terms ``low-

quality asset'' and ``affiliate'' have the same meaning as provided in

section 23A of the Federal Reserve Act, 12 U.S.C. 371c.

In response to comments, the final rule adds to the expedited

processing category real estate appraisal services conducted for the

subsidiary, the bank, or other financial institutions. The final rule

also adds to the notice category establishing and operating a

subsidiary to own, hold, or manage all or part of the parent bank's

investment securities portfolio.

Finally, the final rule updates activities relating to data

processing to recognize that national banks are engaging in an

increasing range of activities through electronic means. Under the

final rule, the notice category relating to data processing activities

is revised to cover activities involving data processing and

warehousing products, services and related activities, including

equipment and technology, performed for the operating subsidiary, its

parent bank, and their affiliates. The final rule also includes in the

expedited processing category data processing and warehousing products,

services and related activities, including data processing equipment

and technology permissible under 12 U.S.C. 24(Seventh) and 12 CFR

7.1019. The activities in the expedited processing category may be

performed externally for parties other than the subsidiary itself, its

parent bank, and their affiliates.

The notice category contains less complex, commonly accepted

banking-related activities that the OCC has previously approved for

operating subsidiaries on a case-by-case basis. The activities in the

expedited review category are also activities that the OCC has

previously approved but that are more complex, may require more

specialized expertise, and, at this time, warrant prior OCC review. The

OCC intends to revisit the activities contained in these categories on

a regular basis and make changes as experience dictates.

The final rule also provides that notices and expedited approvals

submitted to the OCC must contain a representation and undertaking that

the activity will be conducted in accordance with OCC policy contained

in published OCC guidance. This provision ensures that banks seeking

expedited review and after-the-fact notice procedures conform their

activities to parameters defined by the OCC. A bank may also apply

through the standard processing procedures to engage in any activity

that may not conform with OCC published guidance.

B. Ownership of the Operating Subsidiary

Former Sec. 5.34 required a national bank to own at least 80

percent of the voting stock of a corporation to qualify as an operating

subsidiary. The proposal would have amended this provision to require

the parent bank to own more than 50 percent of the voting stock.

The majority of commenters supported the proposed change, noting

that this provision would increase a national bank's flexibility to

structure its internal organization.

A number of commenters also urged the OCC to permit a national bank

to own 50 percent or less of a subsidiary under Sec. 5.34 where the

bank has effective working control over the subsidiary through other

means. The OCC has carefully considered these comments and agrees that

the bank's control of the operating subsidiary should be the

determinative factor, whether that control is through a majority of the

voting interest or though other means. Accordingly, the final rule

[[Page 60350]]

permits a national bank to own more than 50 percent of the voting (or

similar type of controlling) interest of an operating subsidiary, or 50

percent or less of the voting (or similar) interest of the subsidiary

if the bank otherwise controls the subsidiary and no other party

controls more than 50 percent of the voting (or similar type of

controlling) interest of the subsidiary.

However, to recognize that effective working control arrangements

will come in a variety of forms, the final rule requires a national

bank to file an application for OCC approval under the standard

application procedures where the national bank proposes to own 50

percent or less of the voting (or similar) interest of the subsidiary.

Thus, regardless of the type of activity that the subsidiary proposes

to engage in, a national bank would not qualify for the notice or

expedited review if it proposes to acquire 50 percent or less of the

voting (or similar) interest of an operating subsidiary. This will

permit the OCC to conduct a case-by-case review to ensure that the

national bank has effective control over the subsidiary and that the

bank is not exposed to undue risks. In determining whether there is

control, one factor the OCC will consider is whether generally accepted

accounting principles or Consolidated Reports of Condition and Income

instructions would require consolidation of the bank and its

subsidiaries.

The proposal also solicited comment on whether Sec. 5.34 should

include interests in entities other than corporations, such as limited

liability companies (LLCs). The OCC received 11 comments addressing

this issue, all of which supported including LLCs under the operating

subsidiary rule. Some commenters also suggested broadening the rule to

include other similar entities.

LLCs and other similar entities, e.g., business trusts, have

recently emerged in many states as an alternative to the corporate form

of ownership. These entities are hybrid business organizations with

characteristics of corporations (limited liability) and partnerships

(tax treatment). As such, the entities have certain key attributes of

corporations and joint ventures that the OCC has long permitted banks

to participate in--bank control of the entity and limitation or

insulation of the bank's liability for the entity's activities.

Authorizing investments in these and other similar types of entities as

operating subsidiaries increases the flexibility of national banks to

structure their operations. Moreover, to date, the OCC's experience

with LLCs has not revealed any additional risks unique to these

entities. Thus, the final rule provides that an operating subsidiary

that a national bank may invest in includes a corporation, limited

liability company, or similar entity, if the parent bank owns more than

50 percent of the entity's voting (or similar type of controlling)

interest, or otherwise controls the subsidiary and no other party

controls more than 50 percent of the voting (or similar type of

controlling) interest in the subsidiary. However, as is the case with

national bank investments in operating subsidiaries that are

corporations, only the standard application procedures apply to

investments of 50 percent or less of the voting (or similar) interest

where the parent bank otherwise controls the LLC or similar entity.

The final rule retains the language in the former rule relating to

consolidation of book figures of a parent bank and operating subsidiary

with some modifications. Under the final rule, pertinent book figures

of the parent bank and its operating subsidiary must be combined in

order to apply certain statutory limitations to the parent bank and its

subsidiary on a combined basis, such as dividend limitations and

lending limits. See e.g., 12 U.S.C. 56, 60, 84 and 371d. However, in

determining compliance with statutory limits based on regulatory

capital, the bank will be required to make any reductions in regulatory

capital required by 5.34(f), discussed later.

C. Fiduciary Powers

The proposal also requested comment on whether Sec. 5.34 should

require a national bank to obtain approval to exercise fiduciary powers

as a precondition to providing investment advice, either in the bank or

through a subsidiary.

The OCC received seven comments on this issue and all opposed the

requirement. A number of commenters viewed the requirement as overly

broad. Moreover, commenters noted that requiring a national bank to

obtain prior OCC approval could result in different treatment for

national banks and state-chartered banks.

The OCC has carefully considered these comments, and the final rule

provides that if an operating subsidiary proposes to exercise

investment discretion on behalf of customers or to provide investment

advice for a fee, the bank must obtain OCC approval to exercise

fiduciary powers, and the subsidiary will be subject to the

requirements of 12 CFR part 9, except in two circumstances. First, the

bank is not required to obtain approval to exercise fiduciary powers if

the subsidiary is registered under the Investment Advisers Act of 1940,

15 U.S.C. 80b-1 et seq. Second, approval is not required if the

subsidiary is registered, or has filed a notice, under the applicable

provisions of sections 15, 15B or 15C of the Securities Exchange Act of

1934, 15 U.S.C. 78o, 78o-4, or 78o-5, as a broker, dealer, municipal

securities dealer, government securities broker or government

securities dealer; and the subsidiary's performance of investment

advisory services as described in 15 U.S.C. 80b-2(a)(11) is solely

incidental to the conduct of its business as broker or dealer and there

is no special compensation to the subsidiary for those advisory

services. This approach ensures effective regulation of the entity

exercising the investment discretion in accordance with industry

standards and avoids duplicative layers of regulatory oversight.

D. New Procedure for Certain Activities

The proposal revised former Sec. 5.34(d)(2)(i) to provide that

``unless otherwise provided by statute or regulation, or determined by

the OCC in writing, all provisions of Federal banking laws and

regulations applicable to the operations of the parent bank apply to

the operations of the bank's operating subsidiaries.'' (Emphasis

added). The proposed revised standard would have allowed the OCC to

determine, on a case-by-case basis, whether a bank could conduct

through a subsidiary an activity within the business of banking or

incidental thereto, but for one reason or another prohibited to a

national bank directly to conduct or conduct in that manner, as in the

case where (1) a specific prohibition applies to a parent bank but not

to the bank's subsidiary, or (2) the legal authority to conduct the

activity is otherwise restricted to the subsidiary.

The OCC received 46 comments on this provision. Approximately 75

percent of the commenters supported the provision in some fashion, most

very strongly. Among other things, commenters noted that the proposal

would: (1) provide banks with corporate flexibility and a meaningful

alternative to structure their operations; (2) improve efficiencies;

and (3) foster competition in the development and delivery of banking

products and services to benefit consumers and businesses.

Several commenters opposed the proposal, however. These commenters

included several trade associations that generally questioned bank

entry into certain lines of business. A number of these commenters also

urged the OCC not to take action on the proposal until

[[Page 60351]]

Congress acted on the scope of permissible bank affiliate powers.

Commenters also raised concerns with the OCC's authority to adopt

the proposal and with safety and soundness issues associated with the

proposal. Among other things, commenters asserted that: (1) the OCC

lacks the authority to adopt the provision under 12 U.S.C. 24(Seventh)

because the proposal would be inconsistent with the statutory language

and legislative history of 12 U.S.C. 24(Seventh); (2) the proposal is

inconsistent with past OCC precedent; (3) the provision may be

inconsistent with sections 16 and 21 of the Banking Act of 1933 (Act of

June 16, 1933, Ch. 89, section 16 and section 21, 48 Stat. 162, 184,

and 189) (the 1933 Act or the Glass-Steagall Act); (4) the proposal may

be inconsistent with the Bank Holding Company Act because that Act

should be viewed as the exclusive method by which bank affiliates may

engage in bank-ineligible activities; (5) the OCC lacks the authority

to adopt the proposed changes under 12 U.S.C. 93a because that

authority does not apply to securities activities of national banks

under the Glass-Steagall Act 1; and (6) the proposal would expose

national banks to unacceptable safety and soundness risks.

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\1\ The Securities and Exchange Commission expressed no

objection to the OCC's proposal regarding expanded activities for

operating subsidiaries subject to the understanding that: (1) the

OCC intended that securities activities conducted in operating

subsidiaries are subject to regulation under the Federal securities

laws, and (2) the OCC's proposal was not intended as a steppingstone

to permit activities previously not permitted for a bank to conduct

itself to be shifted from an operating subsidiary to the bank. If,

in fact, securities activities are approved for an operating

subsidiary, these understandings will be correct.

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

The OCC has carefully considered all of these concerns, and, for

the reasons discussed below, has determined to adopt various changes to

this portion of the proposal to address issues raised by the

commenters. In sum, under the procedures prescribed by Sec. 5.34 of the

final rule, a national bank may establish or acquire an operating

subsidiary to conduct, or may conduct in an existing operating

subsidiary, activities that are part of or incidental to the business

of banking, as determined by the Comptroller of the Currency, pursuant

to 12 U.S.C. 24(Seventh), and other activities permitted for national

banks or their subsidiaries under other statutory authority. In certain

circumstances, as described in Sec. 5.34(f), this may include

permitting a national bank to acquire or establish an operating

subsidiary to conduct, or to conduct in an existing operating

subsidiary, an activity that is permissible for the subsidiary under

the foregoing standards but different from that permissible for the

parent national bank. In these circumstances the activity will be

subject to a number of safeguards, discussed below, and the OCC will

publish a notice in the Federal Register and request comment prior to

taking action on the application if the proposed activity has not been

previously approved by the OCC.2 For subsequent applications for

the same activity, the OCC also may publish a notice and seek comment.

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

\2\ This new notice process will allow commenters to present

any issues they believe the OCC should take into account in

connection with the particular bank and its proposed activity, e.g.,

legal issues, safety and soundness concerns, and service to the

bank's community.

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

The final rule contains a number of built-in safeguards, responding

to issues raised by commenters, to ensure that any new activities are

conducted safely and soundly. Moreover, new activities will be approved

only after case-by-case consideration has afforded the OCC the

opportunity not only to require conformance with the conditions

detailed in the final rule but also with any additional conditions that

may be appropriate for a particular activity and for the particular

applicant bank. This approach--tailoring the scope of the approval, if

approval is appropriate, to the circumstances of the activity in

question--allows the OCC to fulfill its continuing obligation to ensure

that risk is identified, managed and controlled.

The following sections discuss in detail the particular concerns

raised by certain commenters.

1. Authority Under 12 U.S.C. 24(Seventh) for the Final Operating

Subsidiary Rule

Some commenters asserted that 12 U.S.C. 24(Seventh) prohibits a

national bank from owning stock for its own account and that the OCC

does not have the authority to permit national bank operating

subsidiaries. These commenters also contended that, because of this,

the OCC lacks the authority under 12 U.S.C. 24(Seventh) to issue a

final rule permitting a national bank subsidiary to conduct an activity

deemed to be part of the business of banking or incidental thereto, but

different from that permitted for its parent bank to conduct directly.

The commenters who asserted that 12 U.S.C. 24(Seventh) precludes a

national bank from owning any stock in a corporation point to the

language in 12 U.S.C. 24(Seventh) that states: ``Except as hereinafter

provided or otherwise permitted by law, nothing herein contained shall

authorize the purchase [by the bank] of any shares of stock of any

corporation.''

This language, which was added to 12 U.S.C. 24(Seventh) by section

16 of the 1933 Act has, for decades, been consistently interpreted by

the OCC as preventing national banks from undertaking the types of

speculative stock purchases that were the object of the 1933 Act, not

as a bar to the ability of national banks to have subsidiaries or to

own stock, where such ownership is otherwise authorized. This

interpretation is entirely consistent with the language of 12 U.S.C.

24(Seventh) cited above--that the new provisions added in 1933 do not

authorize national banks to purchase corporate stock, but to the extent

other authority exists to do so, that authority remains intact.\3\

Thus, such ownership as is ``otherwise permitted by law'' remains

permissible. One such ``law'' is the powers sentence in 12 U.S.C.

24(Seventh), which was unaffected by the section 16 changes. This

analysis is amply supported by the legislative history accompanying the

enactment of this language.\4\

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\3\ See Legal Opinion from Julie L. Williams, Chief Counsel, to

Eugene A. Ludwig, Comptroller of the Currency, ``Legal Authority for

Revised Operating Subsidiary Regulation,'' (November 18, 1996),

(Legal Opinion), at 9-14.

\4\ See Legal Opinion at 8-11.

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The key national bank powers portion of section 24(Seventh), which

has existed essentially unchanged since its enactment in 1864, states

that a national bank is expressly authorized to carry on the business

of banking and to exercise ``all such incidental powers as shall be

necessary'' to carry on that business. The courts have construed the

term ``necessary'' to mean ``convenient and useful''. See Arnold Tours,

Inc. v. Camp, 472 F.2d 427 (1st Cir. 1972).

In NationsBank of North Carolina, N.A. v. Variable Annuity Life

Insurance Co., 115 S.Ct. 810, 130 L.Ed. 2d 740 (1995), (VALIC), the

Supreme Court confirmed that a national bank's permissible activities

are not limited to the five enumerated powers described in the powers

sentence of 12 U.S.C. 24(Seventh) and activities incidental to those

enumerated powers. ``[T]he Comptroller * * * has discretion to

authorize activities beyond those specifically enumerated. The exercise

of the Comptroller's discretion, however, must be kept within

reasonable bounds.'' Id. at 814, n.2.

It is clear that the authority under 12 U.S.C. 24(Seventh) includes

activities that are incident to being in business generally, and that a

bank, as a business, may engage in activities that are

[[Page 60352]]

convenient and useful to the conduct of that business. For example,

such powers as having employees and borrowing money to conduct

operations fall into this category. Moreover, Congress has repeatedly

recognized and regulated these business activities of banks without

deeming it necessary to authorize them explicitly because they are

authorized by the powers sentence in 12 U.S.C. 24(Seventh). Thus, for

example, various statutes refer to duties of bank employees and place

limits on the ownership of bank premises, assuming their existence in

each case.5

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\5\ See Legal Opinion at 2-5.

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The use of subsidiaries is convenient and useful to national banks

in conducting their banking business, and the ability of national banks

to own subsidiaries under the authority of 12 U.S.C. 24(Seventh) is

well founded. For example, the changes made to 12 U.S.C. 24(Seventh) by

the 1927 McFadden Act, (Act of February 25, 1927, Ch. 191, section

2(b), 44 Stat. 1226) (1927 Act) and the 1933 Act confirm that national

banks have authority to own subsidiaries pursuant to their incidental

powers. In each instance, the statute placed limitations on bank

subsidiary activities, presupposing the ability of the bank to own and

operate a subsidiary in the first place, even though such ownership was

not expressly identified in the statute as a bank power. For example,

the 1927 Act limited the amount a national bank could invest in a

corporation conducting a safe deposit business, thereby acknowledging

that banks already had authority to own this type of corporation under

12 U.S.C. 24(Seventh). Similarly, in one of many examples from the 1933

Act supporting this proposition, that Act limited the amount that a

national bank could invest in a bank premises subsidiary corporation,

thereby acknowledging the continued lawfulness of the investment.6

The 1933 Act also imposed limits on transactions by national banks (and

state member banks) with their ``affiliates,'' which were defined to

include companies that were controlled by a bank.7 The scope of

these provisions would make no sense unless Congress believed that

national banks had the authority in the first place to control a

company as a subsidiary.

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\6\ See Legal Opinion at 4-7, 13.

\7\ See Legal Opinion at 12-14.

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Nor does the OCC believe that the ownership of a subsidiary is

convenient or useful to its parent bank only when the subsidiary can do

no more than duplicate the activities permissible for its parent bank.

Clearly, the ability to operate something other than a precise clone of

itself could be convenient or useful to a bank in various situations.

Those situations have boundaries, however, since not just the ownership

of the subsidiary, but also what it does, must be part of or incidental

to the business of banking, or otherwise authorized for the bank or the

subsidiary.

Accordingly, under the final rule, a national bank operating

subsidiary remains limited in its activities to those that are part of

or incidental to the business of banking as determined by the OCC, or

otherwise permissible for national banks or their subsidiaries under

other statutory authority. The final rule confirms, however, that this

may include activities different from what the parent national bank may

conduct directly, if, in the circumstances presented, the reason or

rationale for restricting the parent bank's ability to conduct the

activity does not apply to the subsidiary, and if the ability of the

subsidiary to conduct the activity would not frustrate a congressional

purpose of preventing the activity from being undertaken by its parent

bank.8

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\8\ See Legal Opinion at 19-24.

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Under the final rule, therefore, the OCC must evaluate an operating

subsidiary application involving this type of activity on a case-by-

case basis. For each activity, the OCC will consider the particular

activity at issue, and weigh: (1) the form and specificity of the

restriction applicable to the parent bank; (2) why the restriction

applies to the parent bank; and (3) whether it would frustrate the

purpose underlying the restriction on the parent bank to permit a

subsidiary of the bank to engage in the particular activity. The OCC's

evaluation of all these factors will also take into account safety and

soundness implications of the activity, the regulatory safeguards that

apply to the operating subsidiary and to the activity itself, any

conditions that may be imposed in conjunction with an application

approval, and any additional undertakings by the bank or the operating

subsidiary that address the foregoing factors.

2. Consistency of the Final Rule With Past OCC Precedent

Some commenters have asserted that prior OCC characterizations of a

national bank operating subsidiary as a ``department of the bank'' and

other statements on the permissible activities of an operating

subsidiary preclude the OCC from determining that an operating

subsidiary may conduct an activity not directly permissible for the

parent bank, even if the activity is part of or incidental to the

business of banking. The OCC recognizes that some may have viewed the

terminology it has used as representing a legal conclusion regarding

the outer bounds of the activities permissible for a national bank

operating subsidiary. However, neither the OCC's position nor judicial

precedent is that limiting.

It is true that the OCC has generally taken a policy position that

the Federal banking laws applicable to a national bank should also

apply to its operating subsidiary. That this did not represent a legal

determination that an operating subsidiary may never permissibly

conduct activities different from those allowed its parent bank is

illustrated, however, by exceptions contained in even relatively early

OCC approvals. See, e.g., Letter from Deputy Comptroller DeShazo

(October 25, 1967); Letter from Deputy Comptroller Watson (January

1968). See also, Interpretive letter No. 289, reprinted in [1983-1984

Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,453 (approving an

operating subsidiary to act as a general partner of a partnership

formed to establish ATMs).9 See also Independent Bankers Ass'n of

Georgia v. Board of Governors of the Federal Reserve System, 516 F.2d

1206 (D.C. Cir. 1975) (a national bank could lawfully conduct, through

a subsidiary that was a holding company, banking operations at various

locations in a state that would have been barred for the bank directly

under the state's branching laws).

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\9\ See Legal Opinion at 21-23.

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

The final rule resolves the ambiguities of OCC precedents by

clarifying that the permissible activities of an operating subsidiary

are not necessarily a carbon copy of the permissible activities of its

parent. However, the activities still must qualify as a part of the

business of banking or incidental thereto, or be permissible for

national banks or their subsidiaries under other statutory authority,

and the final rule also provides a specific (and public) process for

evaluating applications that involve this type of activity.

This approach is based not only on extensive reanalysis of the

relevant statutes and legislative history, but also on the availability

of enhanced supervisory tools for ensuring that these activities are

conducted safely and soundly. The OCC is not precluded from modifying

its policies where the modification is lawful and where enhanced

flexibility can be appropriately monitored and contained via the

imposition of conditions as

[[Page 60353]]

warranted and the availability of improved supervisory tools. Cf.

Smiley v. Citibank, 116 S.Ct. 1730, 135 L.Ed. 2d 25 (1996). For

example, as discussed later, Congress has provided the bank regulatory

agencies enhanced authority to levy civil money penalties and issue

cease and desist orders to deter unsafe or unsound activities. In

addition, an extensive ``prompt corrective action'' regime of mandatory

and discretionary supervisory tools was enacted in 1991 to enable

regulators to protect the financial stability of all types of insured

depository institutions.

3. Consistency With the Glass-Steagall Act

Some commenters also suggested that the proposal would not be

consistent with various provisions of the Glass-Steagall Act. These

commenters contended that Secs. 16 and 21 of the Glass-Steagall Act

prevent commercial and investment banking functions from being

conducted by a single entity.

The OCC notes that these comments are premised on the assumption

that the OCC will approve specific types of activities under this

regulation and go on to provide the commenters' views about the

legality of conducting those types of activities in an operating

subsidiary. However, the final rule only establishes a process that

enables the OCC to consider and act on a broader range of corporate

activities than is permitted for operating subsidiaries under former

part 5. By issuing this portion of the final rule, the OCC is not

addressing or approving any particular activity for national bank

operating subsidiaries. The OCC will evaluate applications to engage in

any new operating subsidiary activity on a case-by-case basis following

a comprehensive review of any supervisory, policy or legal concerns,

consistent with the new procedures for public notice and comment set

forth in the final rule.

4. Consistency With the Bank Holding Company Act

Some commenters asserted that the regulation is inconsistent with

the Bank Holding Company Act (BHCA) because the BHCA is the exclusive

means by which bank holding company affiliates can engage in activities

not permissible for banks to conduct themselves. Some of these

commenters asserted, for example, that the BHCA, which permits bank

holding companies to engage in ineligible securities activities through

nonbank subsidiaries provides the exclusive method by which Congress

intended to permit bank affiliates to engage in activities such as

ineligible securities activities.

As noted above, however, this final rule only establishes a process

for the OCC to consider a broader range of subsidiary activities.

Approval of a particular activity will be subject to the application

process set forth in the regulation. To the extent that specific

activities are questioned by commenters those issues will be addressed

in the context of a specific application; they are not presented by a

rule that only establishes an application process. Moreover, the

process in the regulation does not authorize ``nonbank'' activities;

only activities that are ``part of the business of banking or

incidental thereto,'' or permitted for national banks or their

subsidiaries under other statutory authority, could be permitted.

The OCC also notes that courts have specifically held that the BHCA

does not govern the permissible activities of banks or their

subsidiaries. For example, in Independent Insurance Agents of America,

Inc. v. Board of Governors of the Federal Reserve System, 890 F.2d 1275

(2d Cir. 1989) (Merchants II), cert. denied, 498 U.S. 810 (1990), the

Second Circuit upheld a Federal Reserve Board (FRB) order concluding

that the BHCA's activity restrictions did not apply to the activities

of a bank subsidiary of a bank holding company. In upholding the order,

the court noted that the FRB had a ``reasonable'' interpretation of the

BHCA, one that confided decisions regarding the scope of permissible

activities of bank subsidiaries to the banks' national and state

chartering authorities. Id. at 1284.

Shortly thereafter, in Citicorp v. Board of Governors of the

Federal Reserve System, 936 F.2d 66 (2nd Cir. 1991), cert. denied, 502

U.S. 1031 (1992), the court applied the reasoning of Merchants II to a

situation involving a subsidiary of a bank in a bank holding company

structure. In vacating a FRB order that required a state bank owned by

a bank holding company to terminate certain activities conducted

through the state bank's subsidiary, the court found that the BHCA

``cannot sensibly be interpreted to reimpose the authority of the [FRB]

on a generation-skipping basis to regulate the subsidiary's

subsidiary.'' Id. at 68. The activities of the bank's subsidiary in

question were, according to the court, appropriately the responsibility

of the bank's chartering authority to address.10

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\10\ Cf. Section (4)(c)(5) of the Bank Holding Company Act, 12

U.S.C. 1843(c)(5), that provides that the investment and activities

restrictions contained in section 4 of that Act do not apply to

``shares which are of the kinds and amounts eligible for investment

by national banking associations'' under section 24 of the National

Bank Act.

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5. OCC Authority Under 12 U.S.C. 93a

Some commenters asserted that the OCC lacks the authority under 12

U.S.C. 93a to issue Sec. 5.34. Federal law at 12 U.S.C. 93a authorizes

the Comptroller of the Currency to issue rules and regulations to carry

out the responsibilities of the office, except that the authority

conferred by 12 U.S.C. 93a does not apply to 12 U.S.C. 36 or the Glass-

Steagall Act. These commenters contended that 12 U.S.C. 93a does not

confer authority on the OCC to establish national bank powers that they

do not have under existing law.

The OCC believes that these commenters misunderstood the effect of

the proposal. As already described earlier, the final rule establishes

a procedure under which the OCC will consider applications for

activities for operating subsidiaries on a case-by-case basis.

Moreover, as discussed earlier, these activities must be part of or

incidental to the business of banking, or permitted for national banks

or their subsidiaries under other statutory authority.

Further, Sec. 5.34 does not purport to diminish or otherwise affect

the application of the Glass-Steagall Act to national banks. Glass-

Steagall Act prohibitions are still applicable to the same degree as

prior to the adoption of the rule. The final rule only recognizes that

operating subsidiaries are entities, distinct from a bank, whose

activities are not necessarily required to be an exact duplicate of the

activities permitted for their parent bank. In other words, the final

rule only recognizes the possibility that some activity restrictions

that apply to a national bank may not apply to a bank's subsidiary.

Thus, in this rulemaking, the OCC has not exercised its authority under

12 U.S.C. 93a to adopt that principle as a matter of law or as a final

interpretation.

6. Safety and Soundness Considerations

Some commenters also argued that the proposal would permit banks

through their operating subsidiaries to engage in risky activities that

would jeopardize the deposit insurance system.

The OCC does not today, and will not under this revised rule,

approve applications for operating subsidiaries to engage in activities

that would endanger the stability of their parent banks. Moreover, the

OCC does not assume that new activities would necessarily involve more

risk than many well-recognized banking activities conducted by banks

today. The OCC also has available a number of measures to address

safety and soundness issues that may arise in connection with

[[Page 60354]]

activities conducted under the authority of this section. These

safeguards include certain requirements added to the final rule in

response to commenters' suggestions, the ability to condition

application approvals on a case-by-case basis, and statutory changes in

recent years that have provided the banking agencies with additional

supervisory tools.

For example, in the proposal the OCC noted that it would impose

appropriate conditions in connection with the approval of a particular

operating subsidiary application in order to ensure bank safety and

soundness. After careful deliberation, the OCC has decided to include

in the final rule a number of additional conditions that would apply to

the parent bank and/or the subsidiary when the subsidiary engages in an

activity authorized under Sec. 5.34(d), but different from that

permitted for the bank directly to conduct.

The safeguards that are built into the final rule fall into two

categories. First, because the use of a separate subsidiary structure

can enhance the safety and soundness of conducting new activities by

distinguishing the subsidiary's activities from those of the parent

bank (as a legal matter) and allowing more focused management and

monitoring of its operations,11 the final rule contains a number

of requirements that are intended to emphasize the importance of the

subsidiary's independent legal and corporate existence.

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\11\ See e.g., OCC Interpretive Letter No. 725 (May 10, 1996)

reprinted in Fed. Banking L. Rep. (CCH) Para. 81,040 (special

purpose subsidiary established by NationsBank, N.A.). The FDIC in a

recent proposal also recognized that conducting activities in a

subsidiary can be helpful in containing risks to the bank. See 61 FR

43,486 (August 23, 1996).

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Specifically, the final rule requires the subsidiary to: (1) be

physically separate and distinct in its operations from the parent

bank, including ensuring that the employees of the subsidiary are

compensated by the subsidiary, although this requirement would not be

construed to prohibit the parent bank and the subsidiary from sharing

the same facility, provided that any area in which the subsidiary

conducts business with the public is distinguishable, to the extent

practicable, from the area in which customers of the bank conduct

business with the bank; (2) be held out as a separate and distinct

entity from the bank in its written material and direct contact with

outside parties, with all written marketing material clearly stating

that the subsidiary is a separate entity from the bank and the

obligations of the subsidiary are not obligations of the bank; (3) not

have the same name as its parent bank, and if the subsidiary has a name

similar to its parent bank to take appropriate steps to minimize the

risk of customer confusion, including clarifying the separate character

of the two entities and the extent to which their respective

obligations are insured or not insured by the Federal Deposit Insurance

Corporation; (4) be adequately capitalized according to relevant

industry measures and maintain capital adequate to support its

activities and to cover reasonably expected expenses and losses; (5)

maintain separate accounting and corporate records; (6) conduct its

operations pursuant to independent policies and procedures that are

also intended to inform customers that the subsidiary is an

organization separate from the bank; (7) contract with the bank for any

services only on terms and conditions substantially comparable to those

available to or from independent entities; (8) observe appropriate

separate corporate formalities, such as separate board of directors'

meetings; (9) maintain a board of directors at least one-third of whom

shall not be directors of the bank and shall have relevant expertise

capable of overseeing the subsidiary's activities; and (10) have

internal controls appropriate to manage the financial and operational

risks associated with the subsidiary. These internal controls should

also be maintained by the bank.

Second, if the subsidiary is engaged in a principal capacity in

activities authorized under Sec. 5.34(f), certain supervisory tools

will be particularly useful to protect the financial soundness of the

bank. For example, the final rule provides that the bank's capital and

total assets shall each be reduced by an amount equal to the amount of

the bank's equity investment in the subsidiary, and the subsidiary's

assets and liabilities shall not be consolidated with those of the

bank. For risk-based capital purposes, 50 percent of the bank's equity

investment in the subsidiary must be deducted from Tier 1 capital and

50 percent from Tier 2 capital. In addition, the OCC may require the

bank to calculate its capital on a consolidated basis for purposes of

determining whether the bank is adequately capitalized under 12 CFR

part 6.

The final rule also provides that a national bank must satisfy the

eligible bank criteria contained in Sec. 5.3(g) before commencement of

the activity, and thereafter, taking into account the required capital

deduction described above. The eligible bank criteria helps to ensure

that only financially strong and well-managed banks will undertake

these activities through their subsidiaries. If the bank ceases to be

well capitalized for two consecutive quarters, it must submit a plan to

the OCC detailing how it will become well capitalized.

The final rule also contains safeguards on transactions between the

bank and this type of subsidiary. Under the final rule, the standards

of sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. 371c and

371c-1, shall apply to, and shall be enforced and applied by the OCC

with respect to, transactions between the bank and the subsidiary. The

application of these sections will limit a bank's investments in and

extensions of credit to this type of subsidiary to 10 percent of the

bank's capital, require extensions of credit to be fully

collateralized, and apply arm's-length safeguards to transactions

between the bank and the subsidiary.

Collectively, these conditions will help to contain risk, reduce

potential conflicts of interest, and help to ensure the safe and sound

operation of the parent bank. The arm's-length standards also address

concerns regarding inappropriate subsidization by the bank of its

subsidiary. In addition, the OCC retains the authority to impose

additional safeguards, either on a case-by-case or activity-by-activity

basis, to address safety and soundness issues presented by particular

types of operations. To the extent that the OCC's future experience

with the safeguards contained in the regulation indicates that the

safeguards need to be supplemented, or that other measures would more

effectively or efficiently accomplish their intended objectives, the

OCC will propose appropriate changes to the regulation.

Finally, Federal legislation in recent years has provided the

federal banking agencies with additional supervisory tools to address

promptly supervisory concerns that may arise in connection with

activities engaged in by banks or their subsidiaries. For example, the

Financial Institutions Reform, Recovery, and Enforcement Act of 1989

provided substantial civil money penalties for national banks engaging

in unsafe and unsound banking practices or for violations of conditions

imposed in writing in connection with the grant of an application or

other request by a national bank. Likewise, the Federal Deposit

Insurance Corporation Improvement Act of 1991, (Pub. L. 102-242, Dec.

19, 1991, 105 Stat. 2236), established a framework for prompt

corrective action when banks fail to meet specified capital

requirements, including the ability of the OCC to require an

undercapitalized institution to divest any subsidiary that may pose

[[Page 60355]]

a significant risk to the parent bank or that is likely to cause a

significant dissipation of the institution's assets or earnings. These

and other available supervisory actions provide the OCC with a

substantial array of tools--not available until relatively recently--to

address risks presented by national bank operating subsidiaries.

Bank Service Companies (Sec. 5.35)

Proposed Sec. 5.35 streamlined the application requirements and

clarified certain aspects of the rule. The proposal also minimized

regulatory burden with respect to low-risk activities by implementing

changes resulting from the Riegle Community Development and Regulatory

Improvement Act of 1994, Public Law 103-325, Sept. 23, 1994, 108 Stat.

2160 (Riegle Act), and conforming Sec. 5.35 with the procedures

proposed for operating subsidiaries.

The commenters supported the proposal, and, specifically, the

expedited review procedure and parallel construction to Sec. 5.34.

The OCC adopts this section as proposed, with modifications and

other technical changes to conform this section to Sec. 5.34. The

section is also changed from the proposal to account for the new

provisions in section 2613 of the Economic Growth and Regulatory

Paperwork Reduction Act of 1996 that authorize bank service companies

to organize as limited liability companies.

Other Equity Investments (Sec. 5.36)

The proposal restructured the section and removed OCC approval

requirements for equity investments in an agricultural credit

corporation or in a savings association to be acquired under section 13

of the Federal Deposit Insurance Act (FDIA), 12 U.S.C. 1823. Instead,

the proposal covered only investments authorized by statutes enacted

after February 12, 1990, that are not covered by other OCC regulations.

The proposal also incorporated an application process that

conformed with other sections in part 5. The proposal maintained the

30-day time frame for approval of other equity investments but

simplified the language to correspond to other similar provisions. The

OCC also requested comment on whether to remove the section.

The OCC received two comment letters, each supporting removal of

the provision. However, the OCC continues to believe that although an

application may not be warranted, some notification to the OCC of

certain equity investments by national banks facilitates examiner

supervision and bank safety and soundness. Therefore, the final rule

clarifies that 12 U.S.C. 24(Seventh) and other statutes authorize

national banks to make various types of equity investments. With

respect to equity investments in an agricultural credit corporation, a

savings association eligible to be acquired under section 13 of the

FDIA, 12 U.S.C. 1823, and equity investments authorized by statute

after February 12, 1990 and not covered by other applicable OCC

regulation, the OCC will continue to require the bank to file a notice

with the appropriate district office within 10 days after the

investment. Other types of equity investments permitted for national

banks will be reviewed by the OCC, as appropriate, on a case-by-case

basis.

Investment in Bank Premises (Sec. 5.37)

The proposal transferred certain provisions previously located in

12 CFR part 7, clarified the circumstances under which OCC approval is

required for national bank investment in bank premises in excess of the

bank's capital stock, and described the procedures for submitting an

application for OCC review. The proposal also provided that,

notwithstanding the capital stock limitation, an eligible bank may

provide an after-the-fact notice for aggregate investments in bank

premises up to 20 percent of the bank's ``capital and surplus'' as

defined in Sec. 5.3(d).

Commenters generally supported the proposed provision, especially

the expedited review process. However, a number of commenters had

additional recommendations. Most suggestions focused on proposed

Sec. 5.37(c)(3), which provided for a notice procedure for eligible

banks making qualifying investments in bank premises.

The OCC has reviewed the commenters' suggestions and the after-the-

fact notice procedures and determined that the examination and

supervision process contains sufficient safeguards to prevent excessive

investments in bank premises. Therefore, the final rule makes a number

of changes to further increase the amount a national bank may invest in

bank premises without seeking OCC approval and to conform with recent

changes in the Economic Growth and Regulatory Paperwork Reduction Act

of 1996. Under the final rule, a bank that has a CAMEL rating of 1 or 2

may make an aggregate investment in bank premises up to 150 percent of

the bank's capital and surplus (as defined in Sec. 5.3(d)) without

submitting an application for prior approval to the appropriate

district office, provided that the bank is well capitalized both before

and after the loan or investment is made. The bank must provide a

description of the investment to the appropriate district office within

30 days following the transaction.

The final rule also defines the term ``bank premises'' by adopting

certain provisions of the Call Report line item on Bank Premises and

Fixed Assets. Under the final rule, ``bank premises'' is defined as:

(1) premises that are owned and occupied (or to be occupied, if under

construction) by the bank, its branches, or its consolidated

subsidiaries; (2) capitalized leases and leasehold improvements,

vaults, and fixed machinery and equipment; (3) remodeling costs to

existing premises; (4) real estate acquired and intended, in good

faith, for use in future expansion; or (5) parking facilities that are

used by customers or employees of the bank, its branches, and its

consolidated subsidiaries. The inclusion of this definition will

clarify the types of investments and loans subject to this section.

Another commenter suggested the OCC clarify whether the entire

investment in bank premises must be made within eighteen months to

avoid the expiration of approval. The changes in the final rule to

Sec. 5.13(g) for situations beyond the control of the applicant

adequately address this concern.

Change in Location of Main Office (Sec. 5.40)

The proposal reorganized this section and streamlined the

procedures to change the location of a national bank's main office.

All comments received by the OCC on this section supported the

proposal. One commenter suggested including a notice procedure for a

temporary relocation of a main office in the event that the permanent

location is not immediately available. The OCC plans to include further

guidance on this issue in the Manual. The OCC adopts this section

substantially as proposed.

Corporate Title (Sec. 5.42)

The proposal rearranged this section for greater clarity and

specifically alerted banks to the restrictions in 18 U.S.C. 709

regarding the use of certain titles. No comments were received on this

section. The OCC adopts this section substantially as proposed.

Changes in Permanent Capital (Sec. 5.46)

The proposal restructured and streamlined this section to clarify

the requirements for a change to a national bank's permanent capital

and to reduce regulatory burden. The proposal no longer required

letters of intent, preliminary approval, and notification of changes in

par value (unless related

[[Page 60356]]

to selling stock for consideration other than cash). By dividing the

relevant information by subject matter, the proposal clarified the

procedures by which a national bank may make a change in its permanent

capital and drew a clear distinction between procedures increasing and

decreasing permanent capital.

The proposal also sought to facilitate increases in permanent

capital by clarifying that most increases in permanent capital do not

require OCC approval. Generally, a national bank need only file a

letter of notification with the OCC after the sale or completion of the

transaction. The proposal also provided an expedited review procedure

for eligible banks.

All the comments received on this section supported the OCC's

proposal. The OCC believes these procedures significantly clarify and

streamline the process for changes in permanent capital. Therefore, the

OCC is adopting this section as proposed with an additional change to

further reduce regulatory burden.

Under proposed Sec. 5.46, a national bank had to submit an

application and receive OCC approval each time it intended to decrease

its permanent capital. The final rule provides that an eligible bank

may submit an application for expedited processing that would cover

planned reductions of capital and distributions that would result in a

distribution of cash or assets or a transfer to undivided profits for

up to four consecutive quarters (i.e., one year), rather than requiring

four separate applications and related application fees. To qualify for

this treatment, the bank must continue to be an eligible bank following

each reduction in its capital. In addition, the application must

include the specified information for each quarter covered by the

application.

Subordinated Debt as Capital (Sec. 5.47)

Under the proposal, unless the OCC has previously notified a

national bank that prior approval is required, a national bank needed

no prior approval to prepay subordinated debt.

Most comments received on proposed Sec. 5.47 supported the OCC's

proposal to allow a national bank to issue subordinated debt as Tier 2

capital without prior OCC approval. However, one commenter noted that

prior regulatory approval and knowledge of reductions in capital may be

an important element of monitoring safety and soundness, and thus,

prepayments of subordinated debt should be subject to OCC approval.

The OCC shares the commenter's desire to ensure the safe and sound

operation of banks, particularly those institutions that are not well

capitalized. Therefore, the OCC has changed the proposal to provide

that only banks that remain eligible banks may dispense with prior OCC

approval for the prepayment of subordinated debt. This will ensure the

continued monitoring of prepayments of subordinated debt by

institutions more likely to present safety and soundness concerns

(i.e., banks that are not well capitalized, have a CAMEL rating of 3,

4, or 5, or are subject to certain OCC orders, agreements or

directives). The OCC also retains the authority to notify any other

bank that demonstrates safety and soundness concerns that the bank must

obtain prior OCC approval to issue or prepay subordinated debt. The OCC

believes that this approach ensures continued monitoring of safety and

soundness concerns without unduly restricting well-capitalized, well-

managed banks.

In addition, the final rule adds provisions relating to the

issuance of subordinated debt to count as Tier 3 capital in addition to

Tier 2 capital.

Voluntary Liquidation (Sec. 5.48)

The proposal reorganized and simplified this section. It clarified

that a national bank preparing to voluntarily liquidate must file a

notice with the OCC once the bank's shareholders have voted to

voluntarily liquidate the bank pursuant to 12 U.S.C. 182. The proposal

stated that the bank must also publish a public notice pursuant to that

statute.

The proposal also reduced the burden of dissolving shell banks

remaining after whole-bank purchase and assumptions involving

transactions between affiliated or non-affiliated banks, provided the

acquiring bank is adequately capitalized.

The comment received by the OCC supported this provision.

Therefore, the OCC adopts this section as proposed with minor

clarifying changes.

Change in Bank Control; Reporting of Stock Loans (Sec. 5.50)

The proposal substantially reorganized, clarified, and simplified

this section. Among other things, the proposal removed paragraphs that

were repetitive or confusing and incorporated a number of OCC

interpretations regarding Sec. 5.50. The proposal also applied the

standards of the Change in Bank Control Act of 1978 (CBCA), 12 U.S.C.

1817(j), to uninsured national banks.

The comments received by the OCC supported the proposed changes to

this section and suggested some additional clarifications. The OCC

adopts this section as proposed with a few modifications.

The newspaper publication required by proposed Sec. 5.50(g)(1)

required an applicant to publish a public announcement of its filing in

a newspaper widely available in the geographic area where the affected

national bank is located. This change is similar to that proposed in

Sec. 5.8, and commenters recommended that the OCC retain the language

in the former regulation because they believed that it provides the

public with more effective notice. The OCC agrees with the commenters,

and the final rule retains the language in the former regulation, i.e.,

requiring banks to publish a public announcement in a newspaper of

general circulation in the community where the affected national bank

is located.

Another commenter suggested that the OCC should revise proposed

Sec. 5.50(f)(2)(ii) (A) and (B) so that an acquiror must satisfy both

factors to create a rebuttable presumption that an acquisition is made

by a person with the power to direct the bank's management or policies.

The OCC concluded that this change in the OCC's longstanding policy

would be too restrictive and, therefore, the final rule adopts this

provision as proposed.

One commenter also suggested that the term ``default'' in the

definition of ``good faith'' be defined to mean only a failure to make

timely payments of interest or principal or a material default with

respect to other obligations in a loan agreement. Because these

situations may be fact dependent, the OCC did not add limiting language

in the final rule.

Finally, the final rule reflects recent amendments contained in

section 2226 of the Economic Growth and Regulatory Paperwork Reduction

Act of 1996 to the CBCA stock loan reporting requirements. These

amendments eliminate the stock loan reporting requirements for all

entities other than foreign banks and their affiliates. The OCC notes

that for purposes of reporting loans secured by the stock of a national

bank without FDIC deposit insurance, federal branches and agencies of

foreign banks only are subject to these reporting requirements.

Change in Directors or Senior Executive Officers (Sec. 5.51)

The proposal provided for certain exceptions to reduce unnecessary

regulatory burden, addressed agency appeal issues, and made additional

housekeeping-type changes to conform Sec. 5.51 to the rest of part 5.

[[Page 60357]]

The comments received by the OCC on this section all supported the

changes to this section. The final rule adopts this section as proposed

with additional changes to conform to the recent changes contained in

section 2209 of the Economic Growth and Regulatory Paperwork Reduction

Act of 1996. These changes removed the requirement of this section to

provide prior written notice to the OCC to add or replace directors or

senior executive officers if the national bank: (1) has operated as a

depository institution for less than two years; or (2) has undergone a

change in control within the preceding two years that required it to

file a notice under the CBCA. These changes also extend the prior

review period to 90 days and remove the requirements for suspending the

review period.

Change of Address (Sec. 5.52)

The proposal added this section to part 5 to require a national

bank that changes its address to inform the OCC of that change in a

timely manner.

The OCC received no comments on this section. The final rule adopts

this section substantially as proposed.

Dividends--Subpart E

The proposal organized the information in the current Secs. 5.61

and 5.62 into a new subpart to communicate better the standards and

procedures underlying a national bank's payment of dividends and to

conform to recent statutory changes. The proposal also clarified

definitions and procedures.

Commenters generally supported the proposed changes. A few

commenters suggested providing circumstances under which a bank could

pay dividends in kind without prior OCC approval. The OCC continues to

believe, however, that dividends other than for cash raise potential

valuation issues and should continue to receive prior OCC review.

The OCC adopts this subpart substantially as proposed with one

exception. The final rule clarifies that Sec. 5.64, which implements

the dividend restrictions contained in 12 U.S.C. 60, does not apply to

stock dividends. The provision is intended to prevent impairment of the

bank's capital structure through payment of excessive dividends. The

OCC believes that payments of stock dividends, which do not result in a

distribution of cash or assets, do not raise these concerns.

Federal Branches and Agencies--Subpart F

The proposal discussed relocating provisions relating to

applications of Federal branches and agencies, former Secs. 5.23, 5.25,

5.41, and 5.43, to 12 CFR part 28 to consolidate all of the regulations

concerning Federal branches and agencies and international activities

of national banks in one regulation. The proposal invited comment on

the advisability of relocating these provisions. The OCC received one

comment letter generally supporting the relocation of the provisions

relating to Federal branches and agencies.

The OCC determined that while it is desirable to consolidate all of

the regulations concerning Federal branches and agencies and

international activities of national banks in one regulation, it is

also desirable to address all procedures relating to the filing of

applications and notices in part 5. Therefore, the final rule includes

a new subpart F outlining the corporate procedures for Federal branches

and agencies and refers readers to part 28 for substantive rules and

policies relating to Federal branches and agencies of foreign banks.

Technical Amendment to 12 CFR Part 3

The final rule contains two technical and conforming amendments to

capital adequacy, 12 CFR part 3. These changes clarify that in most

circumstances prior OCC approval is not required for the issuance and

prepayment of subordinated debt.

Technical Amendment to 12 CFR Part 7

The final rule contains two technical changes to part 7 removing

provisions that are now accounted for in part 5. A technical change is

also made to Sec. 7.1000 to cross-reference the applicable provisions

in part 5 relating to investments in bank premises.

Technical Amendment to 12 CFR Part 16

The final rule contains a technical and conforming change to 12 CFR

16.20(d). The final rule changes the reference from Sec. 5.33(b)(6)(ii)

to Sec. 5.33(e)(8).

Technical Amendment to 12 CFR Part 28

The final rule contains technical corrections to Sec. 28.2(b) and

Sec. 28.10.

Derivation Table

[This table directs readers to the provision(s) of the former regulation, if any, upon which the provision in

the final rule is based]

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

Revised provision Original provision Comments

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

Sec. 5.1............................ Sec. 5.1.................... Modified.

Sec. 5.2(a)......................... Sec. 5.2(a)................. Modified.

(b).............................. Sec. 5.2(b)................. Modified.

(c).............................. Sec. 5.14................... Modified.

Sec. 5.3.................... Removed.

Sec. 5.3(a)......................... ............................. Added.

(b).............................. Sec. 5.2(e)................. Significant change.

(c).............................. ............................. Added.

(d).............................. ............................. Added.

(e).............................. ............................. Added.

(f).............................. ............................. Added.

(g).............................. ............................. Added.

(h).............................. ............................. Added.

(i).............................. ............................. Added.

(j).............................. Sec. 5.2(d)................. Modified.

(k).............................. ............................. Added.

(l).............................. ............................. Added.

Sec. 5.4(a)......................... Sec. 5.4.................... Significant change.

(b).............................. Sec. 5.4.................... Modified.

(c).............................. ............................. Added.

(d).............................. Sec. 5.4.................... Significant change.

(e).............................. ............................. Added.

Sec. 5.5............................ Sec. 5.5.................... Significant change.

[[Page 60358]]

Sec. 5.6.................... Removed.

Sec. 5.7(a)......................... Sec. 5.7.................... Modified.

(b).............................. Secs. 5.5(c), 5.7........... No change.

Sec. 5.8(a)......................... Sec. 5.8(a)................. Modified.

(b).............................. Sec. 5.8(a)................. Modified.

(c).............................. Sec. 5.8(a)................. Modified.

(d).............................. ............................. Added.

(e).............................. ............................. Added.

(f).............................. ............................. Added.

Sec. 5.9(a)......................... Sec. 5.9(b)................. Modified.

(b).............................. Sec. 5.9(a)................. Significant change.

(c).............................. Sec. 5.9(a)................. Significant change.

Sec. 5.10(a)........................ Sec. 5.10(a)................ Modified.

(b).............................. Sec. 5.10(a)................ Significant change.

Sec. 5.11(a)........................ Sec. 5.10(b)................ Modified.

(b).............................. Sec. 5.10(b)................ Modified.

(c).............................. Sec. 5.10(c)................ Modified.

Sec. 5.11(d)(1)..................... Sec. 5.11(a)................ Modified.

(d)(2)........................... Sec. 5.11(d)................ Modified.

(e).............................. Sec. 5.11(c)................ Modified.

(f).............................. Sec. 5.10(b)(5)............. Modified.

(g)(1)........................... Sec. 5.11(e)(1)............. Modified.

(g)(2)........................... Sec. 5.11(e)(3)............. Modified.

(g)(3)........................... Sec. 5.11(e)(3)............. Significant change.

(h).............................. Sec. 5.11(f)................ Modified.

(i).............................. ............................. Added.

Sec. 5.12........................... Sec. 5.12................... No change.

Sec. 5.13(a)........................ Sec. 5.13 (b), (c).......... Significant change.

(a)(1)........................... ............................. Added.

(a)(2)........................... ............................. Added.

(b).............................. Sec. 5.13(c)................ Significant change.

(c).............................. Sec. 5.7.................... Modified.

(d).............................. Sec. 5.13(a)................ Modified.

(e).............................. Sec. 5.13(a)................ Modified.

(f).............................. Sec. 5.13(d)................ Significant change.

(g).............................. ............................. Added.

(h).............................. Sec. 5.13(e)................ Significant change.

Sec. 5.14................... Removed.

Sec. 5.20(a)........................ Sec. 5.20(b)................ Significant change.

(b).............................. ............................. Added.

(c).............................. Secs. 5.20(a), 5.21(a), Significant change.

5.22(a)(2), 5.27(b).

(d)(1)........................... Sec. 5.27(c)................ Modified.

(d)(2)-(7)....................... ............................. Added.

(e)(1)........................... Sec. 5.20(b), (d)(4)(v)..... Significant change.

(e)(2)........................... Sec. 5.20(b)................ Modified.

(f)(1)........................... Sec. 5.20(d)................ Significant change.

(f)(2)........................... Sec. 5.20(c), (d)........... Significant change.

(f)(3)........................... Sec. 5.20(d)(1), (d)(1)(ii). Modified.

(g)(1)........................... Sec. 5.20(d)(2)(i).......... Modified.

(g)(2)........................... Sec. 5.20(d)(3)(ii)......... Modified.

(g)(3)(i)........................ Sec. 5.20(d)(2)(ii)......... No change.

(g)(3)(ii)....................... Sec. 5.20(d)(2)(iii)........ No change.

(g)(3)(iii)...................... Sec. 5.20(d)(2)(iv)......... No change.

(g)(4)(i)........................ Sec. 5.20(d)(4)(iii)(A)..... Modified.

(g)(4)(ii)....................... Sec. 5.20(d)(4)(iii)(C)..... Modified.

(g)(5)........................... Sec. 5.20(d)(1)(iv), Significant change.

(d)(2)(iii).

(h)(1)........................... Sec. 5.20(d)(1)(i), (d)(3).. Significant change.

(h)(2)........................... Sec. 5.20(d)(3)(i).......... Modified.

(h)(3)(i)........................ Sec. 5.20(d)(3)(ii)(A)...... Modified.

(h)(3)(ii)....................... Sec. 5.20(d)(3)(ii)(C)...... Significant change.

(h)(4)........................... Sec. 5.20(d)(3)(iii)........ Significant change.

(h)(5)(i)........................ Sec. 5.20(d)(3)(iv), Significant change.

(d)(3)(iv)(A).

(h)(5)(ii)....................... Sec. 5.20(b), (d)(3)(iv).... Modified.

(h)(5)(iii)...................... Sec. 5.20(d)(3)(iv)(B)...... Modified.

(h)(6)........................... Sec. 5.20(d)(3)(v), Modified.

(d)(3)(v)(A).

(h)(7)........................... ............................. Added.

(i)(1)........................... Sec. 5.20(e)................ Significant change.

(i)(2)........................... Sec. 5.20(d)................ Significant change.

(i)(3)........................... Sec. 5.20(d)(1)(iii)........ Significant change.

(i)(4)........................... Sec. 5.20(d)(1)(iii)........ Significant change.

(i)(5)(i)........................ Sec. 5.20(f)................ Modified.

[[Page 60359]]

(i)(5)(ii)....................... Sec. 5.20(d)(4)(ii)......... No change.

(i)(5)(iii)...................... Sec. 5.20(d)(3)(iii), (g)... Modified.

(j).............................. ............................. Added.

(k)(1)........................... Sec. 5.27(e)(1)............. Modified.

(k)(2)........................... Sec. 5.27(e)(2)............. Modified.

(k)(3)........................... Sec. 5.27(d)................ Significant change.

(l).............................. Sec. 5.22(a)(2), (c)........ Significant change.

Sec. 5.21................... Incorporated into Sec. 5.33.

Sec. 5.22................... Incorporated into Sec. 5.20.

Sec. 5.23................... Incorporated into Sec. 5.70.

Sec. 5.24(a)........................ Sec. 5.24(a)................ Modified.

(b).............................. ............................. Added.

(c).............................. ............................. Added.

(d)(1)........................... Sec. 5.24(c)(1)............. Significant change.

(d)(2)(i)........................ ............................. Added.

(d)(2)(ii)....................... Sec. 5.24(c)(2)............. Significant change.

(d)(2)(iii)...................... ............................. Added.

(d)(2)(iv)....................... Sec. 5.24(c)(4)............. Modified.

(d)(2)(v)........................ Sec. 5.24(c)(4)............. Modified.

(d)(3)........................... Sec. 5.24(b)................ No change.

(d)(4)........................... ............................. Added.

(e)(1)........................... Sec. 5.24(d)(1)............. Significant change.

(e)(2)........................... Sec. 5.24(d)(2)............. Modified.

(e)(3)........................... Sec. 5.24(d)(1)............. Modified.

(f).............................. ............................. Added.

Sec. 5.25................... Incorporated into Sec. 5.70.

Sec. 5.26(a)........................ Sec. 5.26(a)................ No change.

(b).............................. Sec. 5.26(d)................ Significant change.

(c).............................. Sec. 5.26(b)................ Significant change.

(d).............................. Sec. 5.26(d)................ Significant change.

(e)(1)........................... Sec. 5.26(d)................ Significant change.

(e)(2)........................... Sec. 5.26(e)................ Significant change.

(e)(3)........................... Sec. 5.26(f)................ Significant change.

(e)(4)........................... Sec. 5.26(g)................ Significant change.

(e)(5)........................... ............................. Added.

(e)(6)........................... Sec. 5.26(b)................ Modified.

(e)(7)........................... Sec. 5.26(h)................ Modified.

Sec. 5.27................... Incorporated into Sec. 5.20.

Sec. 5.30(a)........................ Sec. 5.30(a)................ Modified.

(b).............................. Sec. 5.30(a)................ Modified.

(c).............................. ............................. Added.

(d)(1)........................... Secs. 5.30(b), 5.31(b)...... Significant change.

(d)(2)........................... ............................. Added.

(d)(3)........................... ............................. Added.

(d)(4)........................... ............................. Added.

(d)(5)........................... ............................. Added.

(e).............................. Sec. 5.30(c)................ Significant change.

(f)(1)........................... ............................. Added.

(f)(2)........................... ............................. Added.

(f)(3)........................... ............................. Added.

(f)(4)........................... Sec. 5.30(g)................ No change.

(f)(5)........................... ............................. Added.

(g).............................. ............................. Added.

(h)(1)........................... ............................. Added.

(h)(2)........................... ............................. Added.

(h)(3)........................... ............................. Added.

(h)(4)........................... ............................. Added.

(i).............................. Sec. 5.30(f)................ Modified.

(j).............................. ............................. Added.

Sec. 5.31................... Incorporated into Sec. 5.30.

Sec. 5.32................... Incorporated into Sec. 5.70.

Sec. 5.33(a)........................ Sec. 5.33(a)................ Significant change.

(b).............................. ............................. Added.

(c).............................. ............................. Added.

(d)(1)........................... ............................. Added.

(d)(2)........................... ............................. Added.

(d)(3)........................... ............................. Added.

(d)(4)........................... Sec. 5.21(a)................ Significant change.

(e)(1)........................... Sec. 5.33(b)(2)............. Significant change.

(e)(1)(i)........................ Sec. 5.33 (b)(2)(i), (b)(3), Significant change.

(b)(4).

(e)(1)(ii)....................... Sec. 5.33 (b)(2)(iii), Significant change.

(b)(2)(iv), (b)(6).

[[Page 60360]]

(e)(1)(iii)...................... Sec. 5.33 (b)(2)(ii), (b)(5) Significant change.

(e)(1)(iv)....................... Sec. 5.33 (b)(2)(ii), (b)(5) Significant change.

(e)(2)........................... ............................. Added.

(e)(3)........................... ............................. Added.

(e)(4)(i)........................ Sec. 5.21................... Significant change.

(e)(4)(ii)....................... Sec. 5.21 (e), (f).......... Significant change.

(e)(4)(iii)...................... Sec. 5.21(g)................ Significant change.

(e)(4)(iv)....................... Sec. 5.21(h)................ Significant change.

(e)(5)........................... Sec. 5.33(b)(8)............. Significant change.

(e)(6)........................... ............................. Added.

(e)(7)........................... ............................. Added.

(e)(8)........................... Sec. 5.33(b)(6)(ii)......... Significant change.

(f)(1)........................... ............................. Added.

(f)(2)........................... Sec. 5.21(c)................ Modified.

(f)(3)........................... ............................. Added.

(g)(1)........................... Sec. 5.33(c)(1)............. Significant change.

(g)(2)........................... Sec. 5.33(c)(2)............. Significant change.

(g)(3)(i)........................ Sec. 5.33(h)(1)............. Significant change.

(g)(3)(ii)....................... Sec. 5.33(h)(2)............. Modified.

(g)(3)(iii)...................... Sec. 5.33(h)(3)............. Significant change.

(h).............................. ............................. Added.

(i).............................. ............................. Added.

(j).............................. ............................. Added.

Sec. 5.34(a)........................ Sec. 5.34(a)................ Modified.

(b).............................. ............................. Added.

(c).............................. ............................. Added.

(d)(1)........................... Sec. 5.34 (c), (d).......... Significant change.

(d)(2)........................... Sec. 5.34(c)................ Significant change.

(d)(3)........................... Sec. 5.34(d)(3)............. Modified.

(d)(4)........................... Sec. 5.34(d)(2)(ii)......... Modified.

(e)(1)(i)........................ Sec. 5.34(d)(1)(i).......... Significant change.

(e)(1)(ii)....................... Sec. 5.34(b)................ Modified.

(e)(1)(iii)...................... Sec. 5.34(d)(1)(iii)........ Modified.

(e)(2)........................... ............................. Added.

(e)(3)........................... ............................. Added.

(e)(4)........................... Sec. 5.34(d)(1)(iv)......... Significant change.

(e)(5)........................... ............................. Added.

(f).............................. ............................. Added.

Sec. 5.35(a)........................ Sec. 5.35(a)................ Modified.

(b).............................. ............................. Added.

(c).............................. ............................. Added.

(d)(1)-(5)....................... Sec. 5.35(c)................ Significant change.

(e).............................. Sec. 5.35(d)................ Significant change.

(f)(1)........................... Sec. 5.35 (e)(1), (e)(2).... Significant change.

(f)(2)........................... ............................. Added.

(f)(3)........................... ............................. Added.

(f)(4)........................... Sec. 5.35(e)(1)(i)(D)....... Modified.

(f)(5)........................... Sec. 5.35(e)(1)(i)(B)....... Significant change.

(f)(6)........................... Sec. 5.35(b)................ Modified.

(g).............................. Sec. 5.35(e)(1)(ii)(A)...... Modified.

(h).............................. Sec. 5.35(f)................ Modified.

(i)(1)........................... Sec. 5.35(e)(1)(ii)(A)...... Modified.

(i)(2)........................... ............................. Added.

Sec. 5.36(a)........................ Sec. 5.36(a)................ Modified.

(b).............................. Sec. 5.36(c)................ Modified.

(c)(1)........................... Sec. 5.36(d)(1)............. Significant change.

(c)(2)........................... Sec. 5.36(d)(1)............. Significant change.

(c)(3)........................... Sec. 5.36(d)(1)............. Modified.

(d).............................. Sec. 5.36(b)................ Modified.

Sec. 5.37........................... ............................. Added.

Sec. 5.40(a)........................ Sec. 5.40(a)................ Modified.

(b).............................. ............................. Added.

(c).............................. ............................. Added.

(d)(1)........................... Sec. 5.40(d)(1)............. No change.

(d)(2)........................... Sec. 5.40 (d)(2), (d)(3).... Significant change.

(d)(3)........................... Sec. 5.40(d)(4)............. Modified.

(d)(4)........................... ............................. Added.

(d)(5)........................... Sec. 5.40(c)................ Modified.

(e).............................. Sec. 5.40(h)................ Modified.

Sec. 5.41................... Incorporated into Sec. 5.70.

Sec. 5.42(a)........................ Sec. 5.42(a)................ Modified.

[[Page 60361]]

(b).............................. ............................. Added.

(c).............................. Sec. 5.42(c)................ Significant change.

(d)(1)........................... Sec. 5.42(d)................ Modified.

(d)(2)........................... Sec. 5.42(e)................ Modified.

(d)(3)........................... Sec. 5.42(b)................ Modified.

Sec. 5.43................... Incorporated into Sec. 5.70.

Sec. 5.44................... Removed.

Sec. 5.45................... Removed.

Sec. 5.46(a)........................ Sec. 5.46(a)................ Modified.

(b).............................. ............................. Added.

(c).............................. ............................. Added.

(d).............................. Sec. 5.46(b)................ Modified.

(e)(1)........................... ............................. Added.

(e)(2)........................... ............................. Added.

(e)(3)........................... ............................. Added.

(e)(4)........................... ............................. Added.

(f).............................. Sec. 5.46(f)................ Significant change.

(g).............................. Sec. 5.46(f) (2)-(5)........ Significant change.

(h).............................. Sec. 5.46(f)(5), (f)(6)..... Significant change.

(i)(1)........................... Sec. 5.46(g)(1)............. Significant change.

(i)(2)........................... Sec. 5.46(f)(1)(i).......... Significant change.

(i)(3)........................... Sec. 5.46(g)(2), (g)(3)..... Significant change.

(i)(4)........................... ............................. Added.

(i)(5)........................... Sec. 5.46(g)(4)............. Significant change.

(j).............................. Sec. 5.46(c)................ Modified.

(k).............................. Sec. 5.46(d)................ Significant change.

Sec. 5.47(a)........................ Sec. 5.47(a)................ No change.

(b).............................. Sec. 5.47(b)................ Modified.

(c).............................. Sec. 5.47(c)................ No change.

(d)(1)........................... Sec. 5.47(d)(1)............. No change.

(d)(2)........................... Sec. 5.47(d)(2)............. No change.

(d)(3)........................... ............................. Added.

(e)(1)........................... Sec. 5.47(e)(1)............. No change.

(e)(2)........................... ............................. Added.

(e)(3)........................... Sec. 5.47(e)(2)............. Modified.

(f)(1)........................... Sec. 5.47(f)(1)............. No change.

(f)(2)........................... Sec. 5.47(f)(2)............. Modified.

(g).............................. Sec. 5.47(g)................ Modified.

(h).............................. Sec. 5.47(h)................ No change.

(i).............................. Sec. 5.47(i)................ No change.

Sec. 5.48(a)........................ Sec. 5.48(a)................ Modified.

(b).............................. ............................. Added.

(c).............................. Sec. 5.48(b)................ Modified.

(d).............................. ............................. Added.

(e)(1)........................... Sec. 5.48(c)................ Significant change.

(e)(2)........................... Sec. 5.48(e)................ Significant change.

(e)(3)........................... Sec. 5.48(f)................ Modified.

(f)(1)........................... ............................. Added.

(f)(2)........................... ............................. Added.

(g).............................. Sec. 5.48(d)................ Modified.

Sec. 5.50(a)........................ Sec. 5.50(a)................ Modified.

(b).............................. ............................. Added.

(c)(1)........................... ............................. Added.

(c)(2)(i)........................ Sec. 5.50 (f)(1), (f)(2).... Modified.

(c)(2)(ii)....................... Sec. 5.50(f)(1)............. Modified.

(c)(2)(iii)...................... Sec. 5.50(f)(4)............. No change.

(c)(2)(iv)....................... Sec. 5.50(f)(5)............. No change.

(c)(2)(v)........................ Sec. 5.50(f)(6)............. No change.

(c)(2)(vi)....................... Sec. 5.50(f)(7)............. Modified.

(c)(3)........................... Sec. 5.50(g)(4)............. Significant change.

(d)(1)........................... ............................. Added.

(d)(2)........................... ............................. Added.

(d)(3)........................... Sec. 5.50(d) (ftnt 1)....... Modified.

(d)(4)........................... ............................. Added.

(d)(5)........................... Sec. 5.50(c), (d)(1) (ftnt Modified.

2).

(d)(6)........................... Sec. 5.50(c)................ Modified.

(e)(1)........................... Sec. 5.50(g)(1)(i), Significant change.

(g)(1)(iii).

(e)(2)........................... Sec. 5.50(g)(1)(ii), Modified.

(g)(3)(iii).

(e)(3)........................... Sec. 5.50(g)(1)(iii), (g)(5) Modified.

(f)(1)........................... Sec. 5.50(b)................ Significant change.

(f)(2)(i)........................ Sec. 5.50(d)(1)............. Modified.

[[Page 60362]]

(f)(2)(ii)....................... Sec. 5.50(d)(1)(i), Modified.

(d)(1)(ii).

(f)(2)(iii)...................... Sec. 5.50(d)(2)............. No change.

(f)(2)(iv)....................... Sec. 5.50(d)(1), (d)(3)..... Significant change.

(f)(2)(v)........................ Sec. 5.50(d)(3)............. Significant change.

(f)(3)(i)........................ Sec. 5.50 (e)(2), (g)(2).... Modified.

(f)(3)(i)(A), (B)................ Sec. 5.50(g)(2)............. Modified.

(f)(3)(ii)....................... Sec. 5.50(g)(1)(v).......... Modified.

(f)(3)(ii)(A).................... Sec. 5.50(g)(1)(v).......... Modified.

(f)(3)(ii)(B).................... Sec. 5.50(h)(1)............. Significant change.

(f)(3)(ii)(C).................... ............................. Added(1)

(f)(3)(iii)...................... Sec. 5.50(g)(1)(iv)......... Modified(1)

(f)(4)........................... Sec. 5.50(g)(5)............. Significant change(1)

(f)(5)........................... Sec. 5.50(g)(1)(iv)......... Significant change(1)

(g)(1)........................... Sec. 5.50(h)(1)............. Significant change(1)

(g)(2)........................... Sec. 5.50(h)(2)............. Significant change(1)

(h).............................. ............................. Added(1)

Sec. 5.51(a)........................ Sec. 5.51(a)................ No change(1)

(b).............................. ............................. Added(1)

(c)(1)........................... Sec. 5.51(c)(1)............. Modified(1)

(c)(2)........................... Sec. 5.51(c)(2)............. Modified(1)

(c)(3)........................... Sec. 5.51(c)(3)............. Modified(1)

(c)(4)........................... Sec. 5.51(c)(4)............. Modified(1)

(c)(5)........................... Sec. 5.51(c)(5)............. No change(1)

(c)(6)........................... Sec. 5.51(c)(6)............. No change(1)

(d).............................. Sec. 5.51(d)................ Modified(1)

(e)(1)........................... Sec. 5.51(e)(1)............. Modified(1)

(e)(2)........................... Sec. 5.51(e)(2)............. No change(1)

(e)(3)........................... Sec. 5.51(e)(3)............. Modified(1)

(e)(4)........................... Sec. 5.51(e)(5)............. Modified(1)

(e)(5)........................... Sec. 5.51(e)(6)............. No change(1)

(e)(6)........................... Sec. 5.51(e)(7)............. Modified(1)

(e)(7)........................... Sec. 5.51(e)(8)............. No change(1)

(e)(8)........................... Sec. 5.51(b)................ Modified(1)

(f)(1)........................... Sec. 5.51(f)(1)............. No change(1)

(f)(2)........................... Sec. 5.51(f)(2)............. No change(1)

(f)(3)........................... Sec. 5.51(f)(3)............. No change(1)

(f)(4)........................... Sec. 5.51(f)(4)............. No change(1)

Sec. 5.52........................... ............................. Added(1)

Sec. 5.60(a)........................ Secs. 5.61(a), 5.62(a)...... Significant change(1)

(b).............................. ............................. Added(1)

(c).............................. Secs. 5.61(b), 5.62(b)...... Modified(1)

Sec. 5.61(a)........................ ............................. Added(1)

(b).............................. ............................. Added(1)

Sec. 5.62........................... ............................. Added(1)

Sec. 5.63(a)........................ Sec. 5.61(a)................ Significant change(1)

(b).............................. Sec. 5.61(e)................ Modified(1)

Sec. 5.64(a)........................ Sec. 5.62(a)(1)............. Significant change(1)

(b).............................. Sec. 5.62(a)(2)............. Modified(1)

(c).............................. Sec. 5.61(d)(3)............. Significant change(1)

(c)(1)........................... Sec. 5.61(d)(3)(i).......... No change(1)

(c)(2)........................... Sec. 5.61(d)(3)(ii)......... Modified(1)

Sec. 5.65........................... ............................. Added(1)

Sec. 5.66........................... 12 CFR Sec. 7.2024.......... No change(1)

Sec. 5.67........................... 12 CFR Sec. 7.2023.......... No change(1)

Sec. 5.70........................... Secs. 5.23, 5.25, 5.27, Significant change(1)

5.32, 5.41, 5.43.

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

Regulatory Flexibility Act

It is hereby certified that this final rule will not have a

significant economic impact on a substantial number of small entities.

Accordingly, a regulatory flexibility analysis is not required. This

regulation will reduce somewhat the regulatory burden on national

banks, regardless of size, by simplifying and clarifying existing

regulatory requirements.

Executive Order 12866

The OCC has determined that this final rule is not a significant

regulatory action under Executive Order 12866.

Unfunded Mandates Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded

Mandates Act) requires that an agency prepare a budgetary impact

statement before promulgating a rule that includes a Federal mandate

that may result in the expenditure by state, local, and tribal

governments, in the aggregate, or by the private sector, of $100

million or more in any one year. If a budgetary impact statement is

required, section 205 of the Unfunded Mandates Act also requires an

agency to identify and consider a reasonable number of regulatory

alternatives before promulgating a rule. Because the OCC

[[Page 60363]]

has determined that the final rule will not result in expenditures by

state, local, and tribal governments, or by the private sector, of more

than $100 million in any one year, the OCC has not prepared a budgetary

impact statement or specifically addressed the regulatory alternatives

considered. As discussed in the preamble, the final rule has the effect

of reducing burden and increasing the efficiency of corporate

activities and corporate transactions undertaken by national banks.

List of Subjects

12 CFR Part 3

Administrative practice and procedure, National banks, Reporting

and recordkeeping requirements.

12 CFR Part 5

Administrative practice and procedure, National banks, Reporting

and recordkeeping requirements, Securities.

12 CFR Part 7

Credit, Insurance, Investments, National banks, Reporting and

recordkeeping requirements, Securities.

12 CFR Part 16

National banks, Reporting and recordkeeping requirements,

Securities.

12 CFR Part 28

Foreign banking, National banks, Reporting and recordkeeping

requirements.

Authority and Issuance

For the reasons set out in the preamble, chapter I of title 12 of

the Code of Federal Regulations is amended as follows:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

1. The authority citation for part 3 continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n

note, 1835, 3907 and 3909.

2. In Sec. 3.100, the heading of paragraph (f) and paragraph (f)(1)

are revised to read as follows:

Sec. 3.100 Capital and surplus.

* * * * *

(f) Requirements and restrictions: Limited life preferred stock,

mandatory convertible debt, and other subordinated debt--(1)

Requirements. Issues of limited life preferred stock and subordinated

notes and debentures (except mandatory convertible debt) shall have

original weighted average maturities of at least five years to be

included in the definition of surplus. In addition, a subordinated note

or debenture must also:

(i) Be subordinated to the claims of depositors;

(ii) State on the instrument that it is not a deposit and is not

insured by the FDIC;

(iii) Be unsecured;

(iv) Be ineligible as collateral for a loan by the issuing bank;

(v) Provide that once any scheduled payments of principal begin,

all scheduled payments shall be made at least annually and the amount

repaid in each year shall be no less than in the prior year; and

(vi) Provide that no prepayment (including payment pursuant to an

acceleration clause or redemption prior to maturity) shall be made

without prior OCC approval unless the bank remains an eligible bank, as

defined in 12 CFR 5.3(g), after the prepayment.

* * * * *

3. In appendix A to part 3, section 2, paragraph (b)(4) is revised

and footnote 5 is removed and reserved to read as follows:

Appendix A to Part 3--Risk-Based Capital Guidelines

* * * * *

Section 2. Components of capital.

* * * * *

(b) Tier 2 Capital. * * *

(4) Term subordinated debt instruments, and intermediate-term

preferred stock and related surplus are included in Tier 2 capital,

but only to a maximum of 50% of Tier 1 capital as calculated after

deductions pursuant to section 2(c) of this appendix. To be

considered capital, term subordinated debt instruments shall meet

the requirements of Sec. 3.100(f)(1). However, pursuant to 12 CFR

5.47, the OCC may, in some cases, require that the subordinated debt

be approved by the OCC before the subordinated debt may qualify as

Tier 2 capital or may require prior approval for any prepayment

(including payment pursuant to an acceleration clause or redemption

prior to maturity) of the subordinated debt. Also, at the beginning

of each of the last five years for the life of either type of

instrument, the amount that is eligible to be included as Tier 2

capital is reduced by 20% of the original amount of that instrument

(net of redemptions).

* * * * *

4. Part 5 is revised to read as follows:

PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES

Sec.

5.1 Scope.

Subpart A--Rules of General Applicability

5.2 Rules of general applicability.

5.3 Definitions.

5.4 Filing required.

5.5 Fees.

5.6 [Reserved]

5.7 Investigations.

5.8 Public notice.

5.9 Public availability.

5.10 Comments.

5.11 Hearings and other meetings.

5.12 Computation of time.

5.13 Decisions.

Subpart B--Initial Activities

5.20 Organizing a bank.

5.24 Conversion.

5.26 Fiduciary powers.

Subpart C--Expansion of Activities

5.30 Establishment, acquisition, and relocation of a branch.

5.33 Business combinations.

5.34 Operating subsidiaries.

5.35 Bank service companies.

5.36 Other equity investments.

5.37 Investment in bank premises.

Subpart D--Other Changes in Activities and Operations

5.40 Change in location of main office.

5.42 Corporate title.

5.46 Changes in permanent capital.

5.47 Subordinated debt as capital.

5.48 Voluntary liquidation.

5.50 Change in bank control; reporting of stock loans.

5.51 Changes in directors and senior executive officers.

5.52 Change of address.

Subpart E--Payment of Dividends

5.60 Authority, scope, and exceptions to rules of general

applicability.

5.61 Definitions.

5.62 Date of declaration of dividend.

5.63 Capital limitation under 12 U.S.C. 56.

5.64 Earnings limitation under 12 U.S.C. 60.

5.65 Restrictions on undercapitalized institutions.

5.66 Dividends payable in property other than cash.

5.67 Fractional shares.

Subpart F--Federal Branches and Agencies

5.70 Federal branches and agencies.

Authority: 12 U.S.C. 1 et seq., 93a.

Sec. 5.1 Scope.

This part establishes rules, policies and procedures of the Office

of the Comptroller of the Currency (OCC) for corporate activities and

transactions involving national banks. It contains information on rules

of general and specific applicability, where and how to file, and

requirements and policies applicable to filings. This part also

establishes the corporate filing procedures for Federal branches and

agencies of foreign banks.

Subpart A--Rules of General Applicability

Sec. 5.2 Rules of general applicability.

(a) General. The rules in this subpart apply to all sections in

this part unless otherwise stated.

[[Page 60364]]

(b) Exceptions. The OCC may adopt materially different procedures

for a particular filing, or class of filings, in exceptional

circumstances, such as natural disasters or unusual transactions, after

providing notice of the change to the applicant and to any other party

that the OCC determines should receive notice.

(c) Additional information. The ``Comptroller's Corporate Manual''

(Manual) provides additional guidance, including policies, procedures,

and sample forms. The Manual is sent to all national banks and is

available for a fee by writing to the Comptroller of the Currency, P.O.

Box 70004, Chicago, IL 60673-0004.

Sec. 5.3 Definitions.

(a) Applicant means a person or entity that submits a notice or

application to the OCC under this part.

(b) Application means a submission requesting OCC approval to

engage in various corporate activities and transactions.

(c) Appropriate district office means:

(1) The OCC's Multinational Banking Department for all national

banks that are subsidiaries of a designated multinational holding

company;

(2) The district office for the OCC district where the national

bank's supervisory office is located for all other banks; or

(3) The OCC's International Banking and Finance Department for

Federal branches and agencies.

(d) Capital and surplus means:

(1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's

risk-based capital standards set forth in Appendix A to 12 CFR part 3

as reported in the bank's Consolidated Report of Condition and Income

filed under 12 U.S.C. 161; plus

(2) The balance of a bank's allowance for loan and lease losses not

included in the bank's Tier 2 capital, for purposes of the calculation

of risk-based capital described in paragraph (d)(1) of this section, as

reported in the bank's Consolidated Report of Condition and Income

filed under 12 U.S.C. 161.

(e) Central city means the city or cities identified as central

cities by the Director of the Office of Management and Budget.

(f) Depository institution means any bank or savings association.

(g) Eligible bank means a national bank that:

(1) Is well capitalized as defined in 12 CFR 6.4(b)(1);

(2) Has a composite rating of 1 or 2 under the Uniform Financial

Institutions Rating System (CAMEL);

(3) Has a Community Reinvestment Act (CRA), 12 U.S.C. 2901 et seq.,

rating of ``Outstanding'' or ``Satisfactory''; and

(4) Is not subject to a cease and desist order, consent order,

formal written agreement, or Prompt Corrective Action directive (see 12

CFR part 6, subpart B) or, if subject to any such order, agreement, or

directive, is informed in writing by the OCC that the bank may be

treated as an ``eligible bank'' for purposes of this part.

(h) Eligible depository institution means a state bank or a Federal

or state savings association that meets the criteria for an ``eligible

bank'' under Sec. 5.3(g) and is FDIC-insured.

(i) Filing means an application or notice submitted to the OCC

under this part.

(j) National bank means any national banking association and any

bank or trust company located in the District of Columbia operating

under the OCC's supervision.

(k) Notice means a submission notifying the OCC that a national

bank intends to engage in or has commenced certain corporate activities

or transactions.

(l) Short-distance relocation means moving the premises of a branch

or main office within a:

(1) One thousand foot-radius of the site if the branch is located

within a central city of an MSA;

(2) One-mile radius of the site if the branch is not located within

a central city, but is located within an MSA; or

(3) Two-mile radius of the site if t

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