# Rules, Policies, and Procedures for Corporate Activities

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A96-30058

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** November 27, 1996
- **Citation:** 61 FR 60342

## Text

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

[[Page 60344]]

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

[[Page 60346]]

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

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

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

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

\5\ See Legal Opinion at 2-5.
---------------------------------------------------------------------------

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

\6\ See Legal Opinion at 4-7, 13.
\7\ See Legal Opinion at 12-14.
---------------------------------------------------------------------------

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

\8\ See Legal Opinion at 19-24.
---------------------------------------------------------------------------

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

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

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

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

\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).
---------------------------------------------------------------------------

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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A96-30058. Public record. Not legal advice.