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

SUMMARY: The Board has adopted comprehensive amendments to Regulation Y

that improve the competitiveness of bank holding companies by

eliminating unnecessary regulatory burden and operating restrictions,

and by streamlining the application/notice process. Among other

revisions, the final rule incorporates a streamlined and expedited

review process for bank acquisition proposals by well-run bank holding

companies with a number of modifications intended to broaden and

improve public notice of bank acquisition proposals, to assure that the

regulatory filing is made well within the public comment period, and to

better assure that proposals reviewed under the streamlined procedures

do not raise issues under the statutory factors in the Bank Holding

Company Act.

The final rule also implements the changes enacted in the Economic

Growth and Regulatory Paperwork Reduction Act of 1996 that eliminate

certain notice and approval requirements and streamline others that

involve nonbanking proposals by well-run bank holding companies. The

final rule also includes a reorganized and expanded regulatory list of

permissible nonbanking activities and removes a number of restrictions

on those activities that are outmoded, have been superseded by Board

order or do not apply to insured banks that conduct the same activity.

In addition, the final rule incorporates several amendments to the

tying restrictions, including removal of the regulatory extension of

those restrictions to bank holding companies and their nonbank

subsidiaries. A number of other changes have also been included to

eliminate unnecessary regulatory burden and to streamline and modernize

Regulation Y, including changes to the provisions implementing the

Change in Bank Control Act and section 914 of the Financial

Institutions Reform, Recovery, and Enforcement Act of 1989.

EFFECTIVE DATE: April 21, 1997.

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

Counsel (202/452-3583), Diane A. Koonjy, Senior Attorney (202/452-

3274), Thomas R. Corsi, Senior Attorney (202/452-3275), Lisa R.

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

3818), Gregory A. Baer, Managing Senior Counsel (202/452-3236), Legal

Division; Molly Wassom, Assistant Director (202/452-2305), Sid Sussan,

Assistant Director (202/452-2638), Nicholas A. Kalambokidis, Project

Manager (202/452-3830), David Reilly, Supervisory Financial Analyst

(202/452-5214), Division of Banking Supervision and Regulation, Board

of Governors of the Federal Reserve System. For the hearing impaired

only, Telecommunication Device for the Deaf (TDD), Dorothea Thompson

(202/452-3544), Board of Governors of the Federal Reserve System, 20th

Street and Constitution Avenue, NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Background and Summary of Final Action

On August 28, 1996, the Board proposed comprehensive revisions to

Regulation Y designed to eliminate unnecessary regulatory burden and

paperwork, improve efficiency and eliminate unwarranted constraints on

credit availability while faithfully implementing the statutory

requirements that form the bases for Regulation Y. (61 FR 47242

(September 6, 1996)). The Board proposed these revisions after

conducting the review of its regulations required by section 303 of the

Riegle Community Development and Regulatory Improvement Act of 1994

(``Riegle Act''). Regulation Y governs the corporate practices and

nonbanking activities of bank holding companies, sets forth the

procedures for a company to become a bank holding company and for a

bank holding company to seek Federal Reserve System (``System'')

approval for a bank acquisition or a nonbanking proposal under the Bank

Holding Company Act (``BHC Act''), implements the prohibitions on

tying, implements the prior notice requirements of the Change in Bank

Control Act (governing the acquisition of control of a bank or bank

holding company by an individual) and section 914 of the Financial

Institutions Reform, Recovery, and Enforcement Act of 1989 (governing

appointment of senior officers and directors of certain banks and bank

holding companies), and implements other provisions of law applicable

to bank holding companies.

The changes proposed by the Board to Regulation Y included removal

of a number of restrictions on the permissible nonbanking activities of

bank holding companies, expansion and reorganization of the regulatory

list of permissible nonbanking activities, streamlining of the

application/notice process, revisions to the tying rules, and

streamlining of the procedures governing change in bank control notices

and senior executive officer and director appointments. On September

30, 1996, Congress, in the Economic Growth and Regulatory Paperwork

Reduction Act of 1996 (``Regulatory Relief Act''), enacted several

complementary changes to the BHC Act, primarily reducing the burden

associated with seeking approval of nonbanking proposals. On October

23, 1996, the Board proposed, on an interim basis, a definition of a

well-capitalized bank holding company for purposes of the procedures

enacted in the Regulatory Relief Act. (61 FR 56404 (November 1, 1996)).

The Board received over 300 comments regarding its proposal. The

comments reflected the views and suggestions of a wide cross-section of

interested persons, including bank holding companies, community groups

and representatives, trade associations, individuals, law firms,

Congressional representatives, state and local government and

supervisory officials, and others. The commenters enthusiastically

supported the Board's proposal to establish a streamlined procedure for

well-run bank holding companies to engage in nonbanking activities and

make nonbanking acquisitions, to remove unnecessary or outmoded

restrictions on nonbanking activities, and to expand the regulatory

list of permissible nonbanking activities. Commenters also applauded

the proposed amendments to the tying provisions that would enhance the

ability of banking organizations to provide customer discounts on

services. In addition, commenters supported the proposed streamlining

of the provisions governing a change in control of state member banks

and bank holding companies and the appointment of new directors and

senior executive officers.

A significant number of commenters, representing primarily bank

holding companies and banking industry trade associations and

representatives, also strongly supported the Board's proposal to

establish a streamlined procedure for well-run bank holding companies

to seek System approval to acquire additional banks within certain

limits. On the other hand, a large number of commenters, consisting

primarily of community representatives and groups, and individuals,

strongly opposed any change to the Board's current procedure

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governing bank acquisitions, in general, and adoption of the Board's

proposed streamlined review process, in particular.

After carefully reviewing the comments, the Board has adopted a

final rule that largely incorporates the initiatives contained in its

proposal. The Board has made a number of revisions in response to

concerns, suggestions and information provided by commenters. In

particular, the Board has changed in several respects the streamlined

procedure governing bank acquisitions and has adopted a number of

measures designed to broaden and improve public notice of acquisition

proposals. These changes focus on assuring that interested persons will

have a meaningful opportunity to provide the Board with information

regarding acquisition proposals. These and other changes adopted by the

Board in response to concerns and suggestions raised by commenters are

discussed in more detail below.

A number of comments addressed matters that are better addressed in

supervisory policy statements or guidelines governing specific

activities or in the context of an individual proposal. Many other

matters raised by commenters, including suggestions regarding venture

capital and portfolio investment activities and the scope of a bank

holding company's authority to acquire shares of investment companies

under section 4(c)(7) of the BHC Act, were not addressed in the

original proposal and remain under active review.

Explanation of Final Rule

A. Process for Seeking Approval of Bank and Nonbank Acquisitions

The Board's review of its current procedures for evaluating

applications and notices identified two important principles that could

be applied by the Board to reduce the burden associated with those

procedures. One principle is that well-run bank holding companies that

meet objective and verifiable measures for each of the criteria set

forth in the BHC Act should be able to expect little burden or delay

from the approval process unless special circumstances demonstrate that

a closer review is warranted. The other principle is that the

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

of the specific proposal and should not become a vehicle for

comprehensively evaluating and addressing supervisory and compliance

issues that can more effectively be addressed in the supervisory

process.

These principles guided the Board's decision to propose both

procedural and substantive changes to the application/notice process in

August 1996. In particular, the Board proposed to use the application/

notice process as a gateway for identifying (and rejecting)

organizations that do not have the resources or expertise to make an

acquisition or conduct a particular activity, and to rely on the on-

site inspection and supervisory process as the most effective way to

determine if a particular organization is in fact managing its

subsidiaries or conducting an approved activity in a safe and sound

manner and within its authority.

In addition, the Board proposed to establish a streamlined process

for reviewing proposals by well-run bank holding companies and reducing

the information required to be filed for proposals that qualify for the

streamlined procedure. The Board also proposed a number of other

revisions that would eliminate unnecessary burden from the application/

notice process, including eliminating the pre-acceptance procedure for

all bank acquisition proposals, permitting public notice of an

acquisition proposal to be published up to 30 days before the final

regulatory filing was submitted to the System, and permitting the

waiver of applications involving solely internal corporate

reorganizations.

The final rule adopted by the Board incorporates these proposed

changes with a number of important modifications discussed below.

1. Streamlined Procedure

The Board proposed a streamlined 15-day notice procedure for

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

with satisfactory or better performance ratings under the Community

Reinvestment Act of 1977 (``CRA'') to acquire banks and nonbanking

companies within certain size limits. The Board's original proposal

retained the Board's current requirements that public notice of all

bank acquisitions be provided (both by newspaper and by Federal

Register) and that the public be provided at least a 30-day opportunity

to submit comments to the System regarding a proposed bank acquisition.

These notice and comment provisions applied equally to proposals that

qualified for the streamlined procedure and to proposals reviewed under

the normal 30/60-day procedures.

Many commenters strongly supported the establishment of a

streamlined procedure for proposals by well-run bank holding companies

that do not raise significant issues. These commenters indicated that

the current approval procedure is burdensome and costly, particularly

in the case of smaller acquisitions that do not raise any significant

issue under the BHC Act. Commenters stated that the current process

increases the risks and costs associated with an acquisition by

imposing unnecessary delay in consummating both bank and nonbank

acquisition proposals. This delay also increases the potential for loss

of key employees, customer relationships and franchise value. In

addition, commenters argued that delay in approving clearly permissible

transactions postpones the realization by the holding company and the

community of the benefits of the transaction and, in the case of a

nonbanking proposal, puts bank holding companies at a disadvantage in

competing with unregulated entities vying for the same target company.

Moreover, commenters indicated that the management, legal and other

resources required to prepare an application/notice under the current

procedures are significant.

These commenters agreed that a streamlined procedure would reduce

regulatory burden substantially by reducing the costs to bank holding

companies of preparing applications as well as the costs associated

with the delay inherent in the regulatory review process. Many

commenters also stated that these changes would improve the ability of

bank holding companies to be competitive with unregulated entities in

making nonbanking acquisitions and engaging de novo in permissible

nonbanking activities.

Several of these commenters urged the Board to take the additional

step of reducing or eliminating the public comment period for proposals

by banking organizations, or permitting a safe-harbor from comments if

the banking organization maintains satisfactory or better CRA

performance ratings or the comment relates to a matter that was

reviewed in the CRA examination. These commenters argued that neither

the BHC Act nor the CRA requires that public notice be provided for

bank acquisition proposals, and that comments on the CRA performance of

insured institutions would be more effective if provided in the CRA

examination process. These commenters also contended that the delay

associated with the requirement that the Board consider all public

comments under a more protracted procedure is costly and delays the

ability of well-run organizations to pass on benefits of an acquisition

to the affected communities. In addition, they argued that providing a

safe harbor from public comments for

[[Page 9292]]

organizations with satisfactory or better CRA performance ratings would

provide an incentive for institutions to achieve better CRA performance

ratings.

On the other hand, a significant number of commenters, including

various community groups, believe that the current procedures for

reviewing bank acquisition proposals work well and that no change to

the current process is necessary. These commenters argued that the

current 30/60-day procedure strikes an important balance between the

banking industry's need for regulatory action within a limited period

of time and the community's need to have a meaningful opportunity to

discuss with the acquiring company the potential effects of a proposed

bank acquisition and participate in the System review process. These

commenters also expressed concern that the revisions proposed by the

Board would weaken the review process for bank acquisition proposals by

reducing the attention the System would pay to certain proposals, and

would erode the ability of interested members of the public to provide

information to the System for consideration in an analysis of the

convenience and needs factor, the CRA performance record, and other

aspects of a bank acquisition proposal. In addition, a number of these

commenters argued that the Board should not adopt its proposed

streamlined procedure for bank acquisition proposals by well-run bank

holding companies because the Regulatory Relief Act adopts streamlined

procedures only for nonbanking proposals and indicates that Congress

rejected applying a similar streamlined approach to reviewing bank

acquisitions.

The Board believes that it is important to address the concerns of

both sets of commenters. The Board believes that it is sound public

policy, in addition to being consistent with the Riegle Act, that the

Board revise its application/notice process to reduce any unnecessary

regulatory costs and burdens associated with that process. At the same

time, the Board believes that revisions to its application/notice

process should not diminish the quality of its review of transactions.

In addition, the Board strongly believes that public participation in

the application/notice process is important because it provides the

Board with useful information, in particular, information regarding the

effect of transactions on the relevant communities.

As the Board noted in its original proposal, the Board reviews

approximately 1,300 applications and notices each year under the BHC

Act. While these proposals include some complex and large proposals,

the overwhelming preponderance are relatively simple proposals that

raise no issues under the statutory factors that the Board is required

to consider. In more than 90 percent of the cases submitted to the

System, no public comment is submitted. Currently, these cases are

largely considered and approved by the Reserve Banks under delegated

authority in a process that involves a pre-acceptance period of on

average 25 days and final action about 30 days following the date of

acceptance of a filing.

In these cases, the Board believes that there is room to revise the

current review process to reduce paperwork and regulatory burden. The

Board believes that this reduction in burden can be accomplished

without diminishing the System's review of the statutory factors in any

case or the opportunity for the public to provide information to the

System that is relevant to the statutory factors. Importantly, the

Board is maintaining the public notice and period for public comment

that currently apply to bank acquisitions, including bank acquisitions

reviewed under the streamlined procedures.

Accordingly, the final rule adopts the streamlined review process

originally proposed by the Board, with several important modifications.

These changes are in response to specific concerns raised by commenters

and are designed to provide earlier and broader public notice of

acquisition proposals, better access to regulatory filings, and to

assure that the public continues to have a meaningful opportunity to

provide the System with relevant information regarding proposals

subject to System review. The Board believes that adoption of a

streamlined process for bank acquisitions as well as all of the other

revisions proposed by the Board to Regulation Y are within the

authority of the Board under the current BHC Act and do not require

statutory changes.

The changes to the original proposal adopted in the final rule are

discussed more fully below and include the following:

* Timing of Publication. The regulatory filing for a bank or

nonbank acquisition proposal must be made within 15 calendar days of

publication of the request for comment on the proposal (as opposed to 7

days under the current procedure and 30 days under the original

proposed revisions);

* New Methods of Public Notice. In order to make public notice

available earlier, a new list of all bank and nonbank acquisition

proposals subject to System review will be prepared weekly and updated

every 3 days, and made available to all interested parties using three

methods: by mail (on a weekly basis), through a dedicated fax-on-demand

facility (available 24 hours every day), and on the Board's Internet

Home Page;

* Information Regarding Convenience and Needs. The regulatory

filing under the streamlined procedure will retain the current

requirement that the filer briefly describe the proposed transaction

and the parties to the transaction, and, in the case of a bank or

thrift acquisition, will require (as under the current procedure) a

brief discussion of the effects of the proposal on the convenience and

needs of the community and of steps that are being taken by the

acquiring company to address weaknesses at insured institutions that

have not received at least a satisfactory CRA performance rating;

* Convenience and Needs Standard. In the case of a bank or thrift

acquisition, the standards for qualifying for the streamlined procedure

have been modified to require the acquiring bank holding company to

show that the transaction is consistent with the convenience and needs

standard in the BHC Act as well as requiring that the CRA performance

rating of the lead insured institution and insured institutions with at

least 80 percent of the assets of the acquiring bank holding company be

satisfactory or better;

* Timely Comments Require Full Consideration. A provision has been

added specifying that a proposal filed under the streamlined procedure

will be reviewed under the normal 30/60 day review process if a

substantive written comment is received by the System during the public

comment period;

* Guidance in Defining Substantive Comments. A provision has been

added describing generally the types of comments that would be

considered substantive (this provision contemplates that the vast

majority of comments that are now considered by the Board would

continue to be reviewed by the Board);

* Extensions to Obtain Filing. A provision has been added

incorporating the Board's current policy of exercising discretion,

based on the facts and circumstances, to grant an extension of the

public comment period of 1 to 15 days to an interested member of the

public that has made a timely request for a copy of the regulatory

filing on a proposal (this extension will not itself disqualify a

proposal from consideration under the streamlined procedure);

* Joint Extension Requests. A provision has been added reflecting

the Board's current policy of permitting a

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reasonable extension of the public comment period where the extension

is jointly requested by an interested person and the applicant (for

example, in order to permit completion of discussions between the

applicant and the interested person); and,

* Size Limitation. A size limitation of $7.5 billion on any

individual acquisition that may qualify for the streamlined procedures

has been added as well as a limitation of 15 percent of the

consolidated total capital of the acquiring company on the total

consideration that may be paid in the case of the acquisition of a

nonbanking company.

Under the new rule, bank and thrift acquisition proposals that meet

the qualifying criteria in the regulation would be considered under a

streamlined procedure that allows System action 3 business days

following the close of the public comment period. This streamlined

review process will allow System action on a qualifying proposal

typically between 18 and 21 calendar days after the regulatory filing

is made with the System. In addition, the regulatory filing required in

these cases includes less paperwork than under the current procedures.

Cases that are complex, or that raise an issue of first impression,

issues of safety and soundness or other concerns, or that raise

concerns regarding the effect of the proposal in the relevant

communities will, as under the Board's current rules and policies,

receive more in-depth analysis. Moreover, the Board retains the ability

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

notice procedure is not available and that the normal 30/60-day

procedure must be followed.

The final rule eliminates unnecessary delay in all bank acquisition

proposals by eliminating the current pre-acceptance period. Elimination

of this period reduces the System review process by an average of 25

days. The function of this pre-acceptance period was to collect

information regarding the specific proposal that may not be described

in the original filing. The Board's experience in reviewing nonbanking

proposals (which are not subject to a pre-acceptance review period)

indicates that this period is not necessary and that the System is able

to request and obtain additional information in a timely fashion during

the normal review period that begins after acceptance of the regulatory

filing. The final rule allows the System to continue to request

additional information at any time and to return as incomplete any

filing that does not contain the information prescribed in the

regulation.

The final rule also adopts the procedures established in the

Regulatory Relief Act regarding nonbanking proposals. These provisions

eliminate the prior notice and approval requirements of the BHC Act for

any bank holding company that meets the qualifying criteria to engage

de novo in any nonbanking activity approved by the Board by regulation.

In addition, the Regulatory Relief Act established a streamlined 12-

business day review process for proposals by well-run bank holding

companies to acquire a company (other than an insured depository

institution) engaged in permissible nonbanking activities or to engage

de novo in nonbanking activities approved only by order.

A company or proposal that does not qualify for the streamlined

procedure would follow the current application process, which provides

for Reserve Bank action within 30 days of filing and for Board action

within 60 days of filing. In the event that the System determines that

a proposal filed under the streamlined procedure must be reviewed under

the normal 30/60-day procedure, the final rule provides that the notice

filed under the streamlined procedure would be accepted under the

normal procedure and the normal procedure would be deemed to have begun

at the time the notice was filed under the streamlined procedure. In

cases that have been shifted from the streamlined to the normal

processing schedule, the Reserve Bank and the Board would determine

whether information supplementing the streamlined filing is needed to

address the relevant issues. As in any case, the System may request any

additional information during the processing period necessary to

resolve issues related to the proposal.

2. Public Participation in Review Process

a. Public Notice

The original proposal retained the current requirement for public

notice of all acquisition proposals, including a full 30-day public

comment period for bank acquisition proposals. As noted above, the

final rule retains the current public notice requirement and 30-day

public comment period for bank acquisition proposals, including

proposals that qualify for the streamlined procedure. Public notice of

these proposals would continue to be given through newspaper

publications in the affected communities and through publication in the

Federal Register, as required under the Board's current procedures.

The Regulatory Relief Act amended section 4 of the BHC Act to

eliminate the requirement for public notice of certain nonbanking

acquisition proposals by qualifying bank holding companies. The final

rule implements the statutory changes enacted by the Regulatory Relief

Act. Public notice of all acquisitions of insured depository

institutions, including savings associations, is still required,

however, and would mirror the notice requirements applicable to bank

acquisition proposals. In addition, public notice would continue to be

required for nonbank proposals that do not qualify for the streamlined

procedures under the Regulatory Relief Act, and for any proposal that

involves a new activity that has not previously been determined by the

Board to be closely related to banking.

b. Steps To Improve Public Notice

In connection with its revision of the current procedures, the

Board will implement three steps that are designed to improve the

effectiveness and timeliness of the public notice of acquisition

proposals. First, the Board will publish a new listing of all

acquisition proposals submitted for System approval under the BHC Act.

This new document will include all bank acquisition proposals that have

been published for comment, whether submitted under the streamlined or

normal procedures, as well as proposals to acquire a nonbanking company

that require public notice. This new document will be updated at least

weekly and will indicate the applicant and target organization, the

date that the public comment period closes, and the Reserve Bank to

which public comments may be sent. The new document will be a more

comprehensive list of cases open to public comment than the current H-2

(which includes only application/notices that have been filed with the

System and does not generally indicate proposals that have been

published for comment but not yet filed), and will be more quickly

available than the current H-2 (which includes a list of Board and

Reserve Bank final actions and other information that often requires a

longer time to assemble). This document will be available by mail.

Second, to expedite distribution of this information, the Board

will make the new document available through a fax-on-demand call-in

facility. This facility will be available 24 hours a day, 7 days a

week, and will automatically fax a copy of the new document to any

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caller. The information available on the fax call-in facility will be

updated at least every three business days.

Third, the Board will make the new document available on its

Internet Home Page, along with other information, including a list of

actions taken by the System on applications and notices. Thus, the

Board's Internet Home Page will include a list of all acquisition

proposals requiring System approval under the BHC Act that have been

published for public comment. This list will identify the applicant,

target organization, closing date for the public comment period, and

the Reserve Bank to which comments may be submitted. This information,

like the fax call-in information, will be updated at least every 3

business days to reflect the addition of new proposals.

As a complement to providing broader and earlier public notice, the

Board will make regulatory filings more quickly available to the

public. The System expects to make the public portion of all pending

applications/notices available to the public within 3 business days of

filing.

c. Timing of Publication

Several commenters supported allowing an applying bank holding

company to publish notice of a proposal up to 30 days in advance of

filing the required application/notice for System approval. This would

permit publication at a time closer to the announcement date of a

proposed acquisition.

A large number of other commenters, however, suggested that

permitting an applicant to publish notice 30 days before submitting an

application/notice to the System would effectively deprive the public

of an opportunity to comment on the information contained in the

filing. These commenters were particularly concerned that this would

result in less informed comments and would force commenters to express

concerns relating to factors, such as the effect of the proposal on the

convenience and needs of the community or CRA performance, without

reviewing the plans of an applicant to address these matters or

discussing these plans with the applicant.

In light of the comments, the Board has determined to adopt a

revised approach that permits publication up to 15 days prior to the

submission of the required filing. Under the Board's current rules,

publication may occur up to 7 days prior to submission of the

application. Allowing a slightly earlier publication date will allow

for a shorter regulatory process in cases that meet the criteria for

expedited action while at the same time assuring that the required

filing will be available to the public for a significant part of the

public comment period.

To address the possibility that a filing may not be submitted

during the first 15 days of the public comment period, the final rule

incorporates the Board's current policy that the Board may, in its

discretion and based on the facts and circumstances, permit an

extension of the public comment period, of an appropriate length up to

15 days, for an interested person that makes a timely request for both

a copy of the required regulatory filing and additional time to file a

comment regarding a proposal. In considering whether to grant a request

for an extension, and the length of the extension to be granted, the

Board has in the past and will continue to take into account such

factors as when the proposal was announced and the regulatory filing

made available to the public, when the request for the regulatory

filing was made, and the specific reasons given by the requester for

being unable to file a timely comment. A decision to grant an extension

of the public comment period would not disqualify a proposal from

action under the streamlined procedure.

d. Joint Requests To Extend the Comment Period

A number of commenters argued that a shortened processing period

would frustrate the ability of community groups to conduct discussions

with applicants in connection with a bank acquisition proposal

regarding lending and other programs to help meet the convenience and

needs of the community. These commenters indicated that a shorter

regulatory review period would truncate the period for these

discussions and potentially force premature objections to acquisition

proposals, especially in situations that involve the initial entry of a

banking organization into the community.

The Board believes that discussions between an insured institution

and community representatives for purposes of identifying and helping

to serve the banking needs of the community are appropriately and most

effectively conducted throughout the year and should not be confined to

the period when an acquisition proposal is under review. In the

application/notice context, the Board has granted requests for an

extension of the public comment period that were made jointly by an

interested party and an applicant for the purpose of allowing

completion of discussions regarding a matter, such as CRA performance

or competitive divestitures, that is relevant to the statutory factors

the Board must consider in reviewing the proposal. The final rule

specifically incorporates this policy and states that a reasonable

extension of the public comment period will be granted upon a joint

request of an interested member of the public and the applicant. This

type of extension will not disqualify an otherwise qualifying proposal

from consideration under the streamlined procedure.

e. Protested Cases

The streamlined procedure proposed by the Board provided that the

Board could require an applicant to follow the current 30 or 60 day

procedure if the Board indicates to the applicant for any reason that

the proposal does not qualify for the streamlined process. The Board

also stated that it expected that proposals by well-run bank holding

companies would be disqualified only sparingly and in extraordinary

situations. Among the situations identified by the Board as meriting

review under the normal 30/60-day procedure is the situation where a

timely substantive public comment is received by the System that raises

an issue that cannot be resolved by the Reserve Bank under its

delegated authority.

A number of commenters argued that the Board should not disqualify

a proposal from consideration under the streamlined process on the

basis of a public comment regarding CRA or fair lending performance if

the applicant organization's insured depository institutions have

satisfactory or better CRA performance ratings or if the comment

relates to a matter that was reviewed in the CRA examination process.

Other commenters argued that a proposal should not be disqualified from

streamlined processing if a comment is submitted that relates to

information that is available to the Board outside the application

process (such as HMDA data) or a matter uniquely within the Board's

expertise (such as financial, managerial or competitive matters), or if

the commenter has not first attempted to discuss the concerns with the

acquiring organization outside the approval process.

On the other hand, a large number of community groups and

representatives argued that the application/notice process provides an

important opportunity for members of the public and representatives of

affected communities to provide information to the System relating to

the impact of a proposal on the community. These

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commenters argued that it is critical to preserve the ability of the

public to have input into the government review process and for the

Board to take a close look at proposals that raise concern in the

affected community. These commenters argued that the Board should

indicate in the regulation that submission of a comment would trigger

the normal 30/60-day processing period.

The Board had indicated in its original proposal that the filing of

a timely comment could trigger the normal review process, and has

adopted the suggestion of commenters that this be specifically included

in the rule. Thus, the final rule provides that the normal 30/60-day

process applies in any case in which a timely substantive comment

regarding a proposal is received by the System. A proposal that is

considered under the normal process will be acted on as soon as the

System completes its review of the proposal, which may be before

expiration of the 30 or 60 day period.

The final rule provides that a comment will be considered timely if

it is submitted in writing and is received by the appropriate Reserve

Bank or by the Board before the expiration of the public comment

period. A comment will be considered to be substantive unless the

comment involves individual complaints, or raises frivolous,

previously-considered or unsubstantiated claims, or irrelevant

issues.1 The Board notes that under this standard the vast

majority of comments that have in the past been considered by the Board

will continue to be viewed as substantive and will continue to be

reviewed by the Board. A comment that is delegable will be carefully

weighed in the review process by the Reserve Bank and any action taken

by the Reserve Bank is subject to review by the Board. The Reserve Bank

may seek additional information necessary to evaluate any delegable

comment and may refer a comment for investigation to the appropriate

federal banking agency or other relevant agency, if appropriate.

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

\1\ The Board will develop supervisory guidance identifying the

limited types of comments that may be considered under delegated

authority.

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

f. Late Comments

In its original proposal, the Board proposed to adhere to its

current rules governing consideration of public comments, and to

discontinue its practice of routinely considering comments, including

supplemental comments filed by a timely commenter, that are filed after

the close of the public comment period. The Board's Rules of Procedure

currently provide that the Board is required to consider a comment

involving an application or notice only if the comment is in writing

and is received by the System prior to the expiration of the public

comment period.

A number of commenters argued that the Board should continue

routinely to consider late comments. Many of these comments focused on

the potential under the original proposal that the public comment

period could expire prior to the time that the regulatory filing was

made and that any comment based on the regulatory filing was,

therefore, likely to be late. Other commenters contended that public

notice of proposals and of the closing date of the comment period is

not adequate under the current rule, and, consequently, that late

comments should be accepted and considered. In addition, commenters

argued that the approval process is an important opportunity for the

community to participate in the review of transactions that will

directly affect the community, and that leeway should be given to the

community to submit late comments. A number of community groups

indicated that discussions with applicants, particularly applicants

entering a community for the first time, often require substantial time

and cannot always be completed during the public comment period.

The Board believes that the public often provides the System with

important information in connection with acquisitions subject to System

review. Consequently, the Board has determined to provide public notice

and a significant period for public comment for all bank acquisition

proposals subject to System review under the BHC Act, including

proposals that qualify for the streamlined procedures.

As noted above, the Board has also taken a number of significant

steps to improve the effectiveness of the public notice regarding bank

acquisition proposals, including establishing a public listing focused

on acquisitions that are subject to public comment and System review

and making this list available by mail, Internet and fax. In addition,

the Board has amended its original proposal to assure that the

regulatory filing will be submitted at least 15 days prior to the

expiration of the public comment period, and has reiterated its

policies regarding extensions of the public comment period to

accommodate joint discussions between members of the public and

applicants as well as timely requests for a regulatory submission that

has been filed after the start of the public comment period.

Moreover, the Board notes that the public may at any time submit

comments regarding the effectiveness of an insured depository

institution in meeting the convenience and needs of the community for

consideration in connection with the on-site examination of the CRA

performance of the institution. The CRA examination process involves a

review of the actual lending performance of an institution and includes

discussions by examiners with members of the public regarding the

institution's performance. Comments submitted for consideration in the

CRA examination process provide the most effective opportunity for the

public to affect the CRA performance and CRA rating of any institution

and provide a regularly re-occurring opportunity for public input.

For these reasons, the Board has determined to adhere to its

established rules regarding the filing of comments on proposals subject

to System review. Accordingly, the Board will not consider comments,

including supplemental comments filed by a timely commenter, that are

submitted after the close of the public comment period and the filing

of a late comment will not disqualify a proposal from review under the

streamlined procedure. The Board continues to reserve the right to

consider late comments at its discretion, but expects to exercise that

discretion only in extraordinary circumstances.

3. Information Requirements

For transactions that qualify for the streamlined procedure, the

Board proposed to reduce substantially the information required to be

filed with the System. For example, the Board proposed to eliminate the

requirement that the applicant submit financial information otherwise

available to the System and the requirement that the applicant provide

competitive data in cases that meet the Board's and the Department of

Justice's policies.

Many commenters applauded the reduction in information requirements

for proposals that meet the criteria for streamlined processing.

Commenters noted that the costs of preparing an application/notice are

often substantial and argued that these costs are unnecessary in cases

that meet objective criteria and do not raise any regulatory issue.

Commenters believed that the savings would be substantial from reducing

the paperwork associated with applications and notices.

A number of other commenters expressed concern that elimination of

certain information requirements from the regulatory filing would

reduce the

[[Page 9296]]

ability of the System adequately to review a proposal and of commenters

to assess the consequences of the proposal for the communities

involved. In particular, a large number of commenters objected to

eliminating the portion of the current application that requires an

applicant to explain the effect of a bank acquisition on the

convenience and needs of the affected communities. Commenters found

this information especially helpful in understanding the effect of a

proposal by an organization located outside the community to make its

initial entry into the community.

The original proposal retained the requirement that applicants

briefly describe the proposed transaction and the institutions

involved, as well as the type of funding proposed. The final rule

continues to require this information.

As an initial matter, the Board believes that very little

additional information is needed to evaluate the financial, managerial

and competitive factors regarding the types of non-complex proposals

that qualify for streamlined processing. The System already receives,

through reports and examinations, substantial information regarding the

financial and managerial resources of bank holding companies and their

subsidiaries. In addition, in order to qualify for the streamlined

procedure, the proposal must meet objective competitive criteria

designed to assure that the proposal does not raise an issue under

those factors.

The Board agrees with commenters that the information regarding the

effect of a proposal on the convenience and needs of affected

communities currently provided by an acquiring bank holding company in

its regulatory submission is new information relevant to the System's

decision on the proposal that may not otherwise be available. Bank

holding companies currently provide a brief description of the effects

of an acquisition proposal on the convenience and needs of affected

communities in the regulatory filing. The Board's experience has been

that the description provided in the initial application is useful and

is not burdensome. Accordingly, the Board has determined to retain the

requirement that, as part of its initial filing for approval, an

applicant briefly explain the effect of a proposal on the convenience

and needs of the affected communities. As under the current

application/notice procedure, this explanation may contain a discussion

of the CRA performance record of the acquiring organization and any

actions that the organization proposes to take in order to help address

the credit and other banking needs of the affected communities.

In addition, the final rule requires the applicant to outline the

steps the organization is taking to address weaknesses in the CRA

performance of insured depository institution subsidiaries of the

acquiring holding company that have received a less than satisfactory

CRA performance rating. The Board currently requests this information

in the application process and believes this information is important

for evaluating the ability of an acquiring organization to meet the

convenience and needs of communities in which a bank or savings

association acquisition is proposed. A holding company may satisfy this

information requirement by filing copies of information prepared for

the primary federal banking supervisor of the relevant institution,

other documents already prepared by the organization, or a summary of

the steps taken and being implemented.

The final rule also modifies, in certain respects, the information

related to the financial, managerial and competitive factors that must

be provided. These changes require limited information regarding the

funding of an acquisition, certain pro forma financial information

regarding the acquiring bank holding company and financial information

regarding any nonbanking company that is proposed to be acquired. In

addition, limited information regarding proposed new management is

requested in certain cases. The final rule also clarifies the

information needed for a new principal shareholder of a bank holding

company to fulfill the notice requirement of the Change in Bank Control

Act in connection with a transaction that is reviewed under the

streamlined procedures of section 3 of the BHC Act.

In connection with nonbanking proposals, the final rule modifies

the requirement that market index information be submitted in every

case in light of the fact that competition in many nonbanking

activities is broad and is measured on a national or regional basis

that often makes calculation of market indexes burdensome and

unnecessary. The rule requires instead a brief description of the

competitive effects of the proposal in the relevant market and, in

markets that are local in nature, a list of major competitors. It is

expected that the Board or the appropriate Reserve Bank would indicate

to an applicant when market index information is necessary. Finally,

the rule requires a bank holding company that seeks approval under the

streamlined procedure for a nonbanking proposal to describe briefly the

public benefits of the proposal.

4. Criteria To Qualify for Streamlined Procedures

Many commenters lauded the use of objective criteria for

identifying proposals that would qualify for streamlined review. These

commenters found reliance on criteria that identify well-run bank

holding companies to be a constructive method of rewarding

organizations that are well run and encouraging other organizations to

take steps to meet these criteria. A significant number of commenters

also generally agreed that the standards proposed by the Board would

establish appropriate levels for identifying proposals that clearly

meet the statutory factors that the Board must consider under the BHC

Act.

As discussed below, many other commenters expressed concern that

establishing a streamlined procedure based on objective criteria would

result in too little analysis of proposals under the streamlined

procedure. A large number of commenters also argued that it is

inappropriate to rely on CRA performance ratings as qualifying criteria

for the convenience and needs standard.

The Board has adopted several modifications to the qualifying

criteria to address concerns raised by commenters.

a. Definition of Well-Capitalized and Well-Managed Bank Holding

Companies

In connection with its interim implementation of the Regulatory

Relief Act,2 the Board proposed to define a ``well-capitalized

bank holding company'' for purposes of determining qualification for

the streamlined procedure as any bank holding company that:

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

\2\ The Board specifically requested comment on the definition

of well-capitalized bank holding company in connection with

enactment of the Regulatory Relief Act. Because the definition is

contained in Regulation Y, the Board considered comments regarding

that proposed definition in connection with this overall revision of

Regulation Y.

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

* Maintains a total risk-based capital ratio of 10.0 percent or

greater and a Tier 1 risk-based capital ratio of 6.0 percent or

greater, on a consolidated basis both before and immediately following

consummation of the proposal;

* Maintains either a Tier 1 leverage ratio of 4.0 percent or

greater or, if the bank holding company has a composite examination

rating of 1 or has implemented the risk-based capital measure for

market risk, a Tier 1

[[Page 9297]]

leverage ratio of 3.0 percent or greater, on a consolidated basis both

before and immediately following consummation of the proposal; and

* Is not subject to any written agreement, order, capital

directive, asset maintenance requirement, or prompt corrective action

directive to meet or maintain a higher capital level for any capital

measure.

Commenters generally supported these levels for defining a well-

capitalized bank holding company. Commenters noted that the risk-based

levels parallel the level at which an insured bank is considered to be

well-capitalized for purposes of various provisions of federal law.

Most commenters that addressed these requirements agreed that the

leverage ratio can be an inexact measure of capital adequacy for many

bank holding companies, particularly for holding companies that engage

in significant nonbanking activities or for bank holding companies that

have significant trading portfolios and fee-generating off-balance

sheet activities. Accordingly, a number of commenters requested that

the Board eliminate or further reduce the leverage requirement. Large

domestic banking organizations contended that the arguments for

adopting a lower leverage ratio for defining a well-capitalized bank

holding company than is used in defining a well-capitalized bank--

namely that the leverage ratio is an inexact measure in certain

situations--also militate for elimination of the leverage ratio.

Foreign banks in particular assert that adoption of a leverage

requirement would violate the principle of national treatment and would

exclude strong and well-capitalized foreign banking organizations from

the streamlined procedure because a leverage ratio is not required

under the Capital Accord developed by the Basle Committee on Banking

Regulations and Supervisory Practices (``Basle Capital Accord'') and,

consequently, is not applicable to banks in many foreign countries.

Smaller bank holding companies, on the other hand, argued that the

leverage ratio should be applicable to all organizations equally. These

organizations argued that eliminating or adopting a lower leverage

standard would create an advantage for large organizations in making

acquisitions.

The Board believes that, in the limited context of determining the

qualifying criteria for the streamlined procedure, reliance on the

risk-based capital ratios is sufficient. As noted above, the risk-based

levels adopted are the same levels required in defining a well-

capitalized bank.

The final rule does not establish a minimum leverage ratio for a

bank holding company to qualify for the streamlined procedures because,

as noted above and in the Board's original proposal, the leverage ratio

is an inexact measure in certain situations. The Board has thus

determined to apply a definition that applies equally to all

organizations, regardless of size, origin or composition of balance

sheet. The Board retains the ability to disqualify any organization

from using the streamlined procedure if any financial or other factor,

including the organization's leverage ratio, indicates that a closer

review of the proposal is appropriate. The leverage ratio continues to

be a criterion in defining whether an insured depository institution

subsidiary of the holding company is well-capitalized.

To qualify for the streamlined procedure, a bank holding company

must meet the risk-based capital levels on a consolidated basis. The

Board generally will not apply these definitions to intermediate-tier

bank holding companies involved in the transaction. The procedure

allows the Board to notify a bank holding company that it should follow

the normal 30/60-day procedure if the System has concern about the

financial strength of an intermediate-tier bank holding company that,

for example, is itself an operating company or that contains

significant debt.

Several commenters argued that the Board should adopt a process for

granting exceptions to the capital requirements where the applicant can

demonstrate that capital ratios do not adequately indicate the

financial strength of the organization. In light of the other changes

that have been adopted, the Board does not believe that a special

exceptions process is necessary or appropriate. The capital criteria

are based on internationally accepted risk-based standards, and are for

the limited purpose of identifying companies that qualify for a

streamlined review process. Banking organizations that do not qualify

under these criteria are still permitted to make acquisitions and

engage in permissible nonbanking activities by following the normal 30/

60 review process. As noted above, the standard of 10 percent total

risk-based capital and 6 percent Tier 1 risk-based capital applies to

all organizations, including foreign banking organizations, seeking to

take advantage of the streamlined procedures. In its request for

comment, the Board specifically requested comment on ways in which the

qualifying criteria should be defined for foreign banking organizations

in order to assure national treatment of foreign banking organizations

under the streamlined procedures. Based on these comments, the final

rule includes a number of provisions specifically applicable to foreign

banking organizations.

Several commenters argued that, for purposes of determining whether

a foreign banking organization meets the capital levels necessary to

qualify for the streamlined procedure, a foreign banking organization

should be permitted to use the definition of capital adopted by the

home country of the foreign banking organization. For foreign banking

organizations from countries that have adopted capital standards in all

respects consistent with the Basle Capital Accord, the Board generally

agrees that this permits the least burdensome approach to applying

equivalent standards. Accordingly, the final rule provides that, for

purposes of determining whether a foreign banking organization meets

the capital ratios described above for a well-capitalized bank holding

company, a foreign banking organization may use the capital terms and

definitions of its home country provided that those standards are

consistent in all respects with the Basle Capital Accord. If the home

country has not adopted those standards, the foreign banking

organization may use the streamlined procedures if it obtains from the

Board a prior determination that its capital is equivalent to the

capital that would be required of a U.S. banking organization for these

purposes.

The Regulatory Relief Act provides that, for purposes of

determining qualification for the streamlined procedures for nonbanking

proposals, U.S. branches and agencies of foreign banking organizations

are considered banks and must meet the capital and managerial standards

applicable to U.S. banks. The Board recognizes that branches and

agencies are a part of the foreign banking organization and that

capital is not allocated separately to a branch or agency. Accordingly,

for purposes of determining the qualification for the streamlined

procedures, the final rule deems the capital ratios of U.S. branches

and agencies of foreign banking organizations to be the same as the

capital level of the foreign banking organization.

For purposes of determining whether a foreign banking organization

meets the managerial definition for the streamlined procedures, the

final rule requires that: (1) The largest U.S. branch, agency or

depository institution controlled by the foreign bank have

[[Page 9298]]

received at least a ``satisfactory'' composite examination rating from

its U.S. banking supervisor; (2) U.S. branches, agencies and depository

institutions representing at least 80 percent of the U.S. risk-weighted

assets controlled by the foreign banking organization at such offices

have received at least a ``satisfactory'' composite examination rating

from the U.S. banking supervisors; and (3) the overall rating of the

foreign banking organization's combined U.S. operations is at least

``satisfactory.'' Further, no branch, agency or depository institution

may have received one of the two lowest composite ratings at its most

recent examination. In addition, as with domestic bank holding

companies, no U.S. branch, agency or insured depository institution may

be subject to an asset maintenance agreement with its chartering or

licensing authority. Under the final rule, the System may disqualify

any banking organization, including a foreign banking organization,

from using the streamlined procedure for any appropriate reason,

including if information from the primary supervisor of a domestic bank

or home country supervisor for a foreign bank indicates that a more in-

depth review of proposals involving that organization is warranted.

The final rule also retains the requirement that, in order to

qualify for the streamlined procedure for bank acquisition proposals, a

foreign banking organization must meet the home country supervision and

information sufficiency requirements of the BHC Act.

Several commenters requested clarification of the types of

supervisory actions that would disqualify a bank holding company from

using the streamlined procedures. In this regard, the Regulatory Relief

Act provides that, for purposes of the streamlined nonbanking

procedures contained in that Act, a bank holding company may not be

subject to certain types of administrative enforcement proceedings. The

final rule clarifies that a bank holding company may not use the

streamlined procedures for any nonbanking proposal or any bank

acquisition proposal if any formal order, including a cease and desist

order, written agreement, capital directive, asset maintenance

agreement or other order or directive, is outstanding or any formal

administrative action is pending against the bank holding company or

any of its insured depository institutions. The System may, if

appropriate, require a bank holding company to follow the normal 30/60-

day procedure if an informal action, such as a memorandum of

understanding or supervisory letter, pending against the bank holding

company or any affiliate indicates that a more in-depth review is

appropriate.

The Regulatory Relief Act permits exclusion of recently acquired

insured depository institutions under certain circumstances in

determining whether a bank holding company is well-managed. This

exclusion has been adopted in the final rule for purposes of

determining a bank holding company's qualification for the streamlined

procedures for bank acquisition proposals as well as for nonbanking

proposals.

The Regulatory Relief Act also permits the Board to adjust the

level of insured depository institutions that must meet the well-

managed definition for purposes of the streamlined nonbanking

procedures, so long as the level adopted by the Board is consistent

with safety and soundness and the purposes of the BHC Act. For purposes

of the streamlined nonbanking procedures, the Board had proposed that

the parent bank holding company, the lead insured depository

institution and insured depository institutions controlling at least 80

percent of the insured depository institution assets of the holding

company be well-managed (rather than 90 percent as in the Regulatory

Relief Act). In addition, no insured depository institution controlled

by the bank holding company (other than a recently acquired

institution, subject to the limitations discussed above) may have

received one of the 2 lowest composite examination ratings.

As noted above, commenters addressing this issue were largely in

favor of this definition. The Board believes that, in the limited

context of determining the availability of the streamlined procedures,

the definition proposed and adopted in the final rule, and in

particular, the level of insured depository institutions that must be

well-managed, will adequately identify organizations that merit a more

in-depth review and is a definition that is consistent with safety and

soundness and the purposes of the BHC Act. The Board notes that the

Board retains the authority and discretion to require any organization

to follow the normal procedures if appropriate.

b. Competitive Criteria

A few commenters suggested that the Board amend the competitive

criteria by eliminating or raising the qualifying threshold levels of

the Herfindahl-Hirschman Index (``HHI''), by increasing or eliminating

the market share test, and by allowing a bank holding company to meet

the competitive criteria after making divestitures. The Board has

determined not to change its formulation of the competitive standard

for the streamlined procedures.

The competitive criteria proposed and adopted by the Board reflect

the HHI thresholds above which a bank acquisition proposal comes under

close scrutiny by the Department of Justice (``DOJ'') under the DOJ's

Horizontal Merger Guidelines as applied to bank acquisitions, and by

the Board under its existing delegation rules. In conducting a

competitive analysis, both the Board and the courts have found the

resulting market share to be an important indicator of the competitive

effects of a proposal. Finally, divestitures to address competitive

issues are not a normal event and typically indicate a transaction that

requires an evaluation of information and factors beyond what may be

accomplished in a streamlined procedure.

c. Convenience and Needs

Many commenters objected to the use of the CRA examination rating

as a measure of whether a proposal would meet the convenience and needs

of the communities affected by a bank acquisition proposal. These

commenters argued that CRA performance ratings are often outdated, are

as a rule too high and, at best, represent an average of an

institution's overall performance. These commenters also argued that

reliance on CRA ratings would amount to a safe-harbor for virtually all

institutions, and would represent a step that Congress considered and

rejected in adopting the Regulatory Relief Act. In addition, commenters

objected that use of these criteria would eliminate an in-depth review

of the convenience and needs standard in all but protested cases.

Commenters also objected to permitting an organization with up to 20

percent of its assets in institutions with unsatisfactory CRA

performance ratings to take advantage of streamlined procedures.

Other commenters argued that CRA ratings provide the most reliable

indicator of an institution's record of helping to meet the credit and

other banking needs of the institution's existing communities and

represent a strong indicator of the institution's willingness and

ability to meet the banking needs of new communities. Several of these

commenters also contended that reliance on CRA performance ratings as a

criterion for streamlined processing of acquisition proposals would

encourage organizations to meet and maintain satisfactory performance

levels.

[[Page 9299]]

After review of the comments, the Board has determined to amend the

criteria for qualifying for the streamlined procedure. The criteria

adopted require that the record show that the proposal is consistent

with the convenience and needs standard under the BHC Act and that the

acquiring organization have satisfactory or outstanding performance

ratings under the CRA at its lead insured depository institution and

insured institutions representing at least 80 percent of the

organization's banking assets.

As noted above, the Board has determined to retain the portion of

the current regulatory filing in which the applicant describes the

effect of the proposal on the convenience and needs of the affected

communities. The System would evaluate this information as well as

other information available to the System, including CRA performance

ratings, in determining whether a proposal meets the convenience and

needs factor in connection with the System's review of the proposal.

The Board continues to believe that the CRA performance rating is a

valuable and important measure of the record and ability of an

applicant to meet the convenience and needs of a community, and the

Board would, as currently, give significant weight to that performance

record in the streamlined process.

The Board believes that it may adopt the streamlined procedures as

amended without any statutory changes to the BHC Act. The provisions

under consideration by Congress in connection with the Regulatory

Relief Act would have taken additional steps, including eliminating any

public notice and opportunity for comment on bank acquisition proposals

and eliminating consultation with the primary supervisor for the banks

involved in the transaction.

d. Size

The Board proposed to limit to 35 percent of the acquiring holding

company's assets the aggregate amount of bank and nonbanking assets

that may be acquired during a 12-month period using the streamlined

procedures. This aggregate limit would be calculated by reference to

transactions approved under the streamlined procedure and would not

include transactions that are reviewed under the normal 30/60-day

process.

Several commenters argued that the 35 percent asset test would

allow very significant proposals by large bank holding companies to be

considered under the streamlined procedures, including mergers among

institutions that rank among the ten largest banking organizations in

the United States. These commenters contended that transactions that

are large in absolute terms always require in-depth agency review.

A few other commenters argued, on the other hand, that it was

important to assure that the streamlined procedures are available to

acquisition proposals by large bank holding companies because

acquisitions by these institutions allow the benefits of reduced

regulatory costs to be shared by a larger number of consumers. These

commenters suggested that the Board expand the size criteria in various

ways.

Still other commenters argued that the size restriction would

disproportionately limit transactions by small bank holding companies.

These commenters contended that a higher limit should be established

for small organizations because the objective criteria proposed by the

Board are particularly effective in identifying transactions that would

not raise statutory issues for small bank holding companies.

In addition to these comments, the Board considered that the

Regulatory Relief Act applies a limit on nonbanking acquisitions of 10

percent of the acquiring bank holding company's assets, unless the

Board finds that a higher limit is consistent with safety and soundness

and the purposes of the BHC Act. The Regulatory Relief Act also

includes a limit of 15 percent of the holding company's consolidated

Tier 1 capital on the gross consideration that may be paid by a bank

holding company in a nonbanking acquisition that is reviewed under the

streamlined procedures contained in that Act.

In view of these comments and enactment of the Regulatory Relief

Act, the Board has made two amendments to the size criterion originally

proposed. First, the Board has adopted an absolute limit of $7.5

billion to the size of an individual acquisition that may be reviewed

under the streamlined procedures. This limit would require an in-depth

review--on the basis of size alone--of any combination between

organizations within approximately the one-hundred largest bank holding

companies or involving nonbanking companies with a significant amount

of assets.

The second change to the size criterion involves adoption of a

limit on the gross consideration that may be paid in a nonbanking

acquisition by a bank holding company under the streamlined process. As

noted above, this limit was included in the Regulatory Relief Act. The

Board believes that, in the context of a nonbanking acquisition, a

measure based on consideration paid often represents a better test of

the potential impact of a proposal on the financial resources of the

acquiring organization than a test based on the amount of assets

acquired because nonbanking acquisitions often involve the purchase of

expertise and fee-based businesses that do not involve significant

assets.

As noted above, the Regulatory Relief Act adopted a limit of 10

percent of assets on the size of any individual nonbanking acquisition

that may occur under the streamlined procedures. The Regulatory Relief

Act allows the Board, by regulation, to adopt an asset size limit that

exceeds the 10 percent limit if the Board determines that a different

percentage is consistent with safety and soundness and the purposes of

the BHC Act.

The Board has determined to adopt its proposed 35 percent limit.

The size limit adopted by the Board takes account of the aggregate size

of all acquisitions--both bank and nonbank acquisitions--reviewed under

the streamlined procedures over a period of time that approximates the

supervisory examination schedule for most banking organizations. This

aggregate limit allows better monitoring of the overall growth of an

organization than does an individual transaction limit. As noted above,

the Board has also adopted an absolute limit of $7.5 billion on any

individual acquisition that may be reviewed under the streamlined

procedure, as well as a limit on the amount of consideration that may

be paid in a nonbanking acquisition. The Board has also retained the

ability to require review of any transaction using the normal 30/60-day

process if warranted for safety and soundness or other reasons. The

Board believes that, in view of these other limitations, the aggregate

35 percent size limit is consistent with safety and soundness and the

purposes of the BHC Act.

The Board has determined not to raise the size of its proposed

exception from the growth limit for smaller bank holding companies. The

Board proposed to permit a qualifying bank holding company to make

acquisitions without regard to the 35 percent of asset limitation so

long as the total assets of the bank holding company remained below

$300 million on a pro forma basis. The Board believes that it is

important to monitor rapid growth in the relative size of an

organization and that an examination rating may not accurately reflect

the financial and managerial strength of an organization that has grown

significantly since the last examination was conducted. The Board also

notes that a significant

[[Page 9300]]

number of acquisitions by smaller bank holding companies that exceed

the growth limit are likely to continue to qualify for the normal 30-

day delegated action procedure.

e. Notice to Primary Bank Supervisor

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

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

days in which to submit comments on the transaction. A similar

provision was enacted in the Regulatory Relief Act that requires 30

days notice to be given to the Director of the Office of Thrift

Supervision of a proposal by a bank holding company to acquire a

savings association.

Financial, managerial, legal, safety and soundness, and other

concerns that are known to the primary bank supervisor generally are

shared with the System through ongoing arrangements for sharing

supervisory information. Similarly, the System and the Office of Thrift

Supervision regularly coordinate efforts and share information.

Consequently, in practice, the primary supervisor generally allows the

notice period regarding an application to expire without filing

comments.

To implement this statutory requirement, the final rule requires

the appropriate Reserve Bank to provide notice of each bank acquisition

proposal to the primary supervisor for the relevant banks and of each

savings association acquisition to the Director of OTS. The final rule

allows the System to act on any proposal that qualifies for the

streamlined procedure even though the period for obtaining comments

from the primary supervisor has not expired. The final rule provides,

however, that the System's action is subject to revocation if the

primary supervisor objects to a transaction within the relevant notice

period. Because bank acquisition proposals may not be consummated for

at least 15 days after System action--which is the minimum post-

approval period permitted by statute to allow DOJ review of a bank

acquisition--it is expected that the notice period for the primary

supervisor will expire prior to consummation of a bank acquisition

proposal. In the case of thrift acquisitions, the OTS is working with

the Board to streamline the comment process.

5. Preacceptance Review Period

The Board proposed to eliminate the current period prior to

acceptance of a regulatory filing regarding a bank acquisition proposal

during which the Reserve Bank reviews the informational sufficiency of

the filing. Instead, the Board proposed to accept immediately any

submission that contains the information specified in the rule for the

proposed type of transaction. This change eliminates a pre-acceptance

period that typically averages 25 days.

While commenters were generally in favor of this change, a number

of commenters objected that elimination of the pre-acceptance period

would reduce the ability of the System to obtain information needed to

evaluate properly the merits of a proposal. The Board disagrees. The

elimination of the pre-acceptance period does not in any way diminish

the ability of the System at any time to request, or the responsibility

of the applicant/notificant to provide, additional relevant information

needed to evaluate a proposal. In addition, the Board has retained the

right to return as incomplete any submission that does not contain the

information specified in the regulation or appropriate form.

The Board had previously eliminated a similar pre-acceptance period

that applied to nonbanking acquisitions. The Board's experience with

elimination of the pre-acceptance period for nonbanking acquisitions

has indicated that a similar period is not necessary for bank

acquisition proposals.

6. Hart-Scott-Rodino Act

One commenter expressed concern whether bank and nonbanking

acquisitions approved under the Board's streamlined procedures would be

exempt from the notification requirements of section 7A of the Clayton

Act. Section 7A of the Clayton Act, as added by the Hart-Scott-Rodino

Antitrust Improvements Act of 1976 (15 U.S.C. 18A) (``HSR Act''),

requires that persons contemplating certain mergers and acquisitions

provide notice of the transaction to the Federal Trade Commission

(``FTC'') and the DOJ. The HSR Act, however, specifically provides an

exemption from these filing requirements for transactions that require

agency approval under section 3 of the BHC Act (i.e., the acquisition

of shares or control of a bank or bank holding company). In addition,

the HSR Act provides an exemption for transactions that require agency

approval under section 4 of the BHC Act (i.e., the acquisition by a

bank holding company of a nonbanking company) if the acquiring company

provides to the FTC and DOJ copies of all information filed with the

Board.

The Board believes that the streamlined procedures under Regulation

Y continue to satisfy the requirement for an exemption from the HSR Act

for both bank and nonbanking acquisitions. The streamlined procedures

represent a more streamlined procedure for obtaining System approval

for the acquisition of a bank or bank holding company under section 3

or the acquisition of a nonbanking company under section 4 of the BHC

Act. As provided in the HSR Act, bank holding companies would continue

to be required to file with the DOJ and FTC the information submitted

to the Board in connection with a nonbanking acquisition. The staff of

the DOJ and FTC have informally agreed with this position.

7. Conditional Approval

The Board has authority to impose conditions in connection with its

action on any proposal, and has in fact imposed conditions that address

safety and soundness, CRA, conflicts of interest, and competitive

issues in a number of prior cases. The final rule incorporates this

policy in order to make clear that this authority is available in

connection with action on any case, including a case that qualifies for

the streamlined procedure.

8. Waiver Process

The Board's current regulation permits bank holding companies to

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

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

instant in time as part of a bank-to-bank merger reviewed by another

federal banking agency under the Bank Merger Act. The Board proposed

three changes to this portion of the regulation. First, the Board

proposed to reduce the period for its review of waiver requests to 10

days from 30 days. Second, the Board proposed to specify in the

regulation the information that must be provided with a waiver request.

Third, the Board proposed to make the waiver process available for

certain internal corporate reorganizations.

Commenters discussing this proposal generally supported these

changes. Several commenters suggested that the Board make waivers

automatic and eliminate the filing and review requirement altogether.

Another commenter argued, on the other hand, that the Board should not

allow the waiver of any application and should require application

filings in every case.

The Board continues to believe that the waiver process represents a

sensible reduction in duplication of regulatory review of proposals

that are subject to review under identical standards in two different

federal statutes. Accordingly, the Board has determined to retain the

waiver process with the changes proposed. The Board believes that a 10-

[[Page 9301]]

day review process is adequate and necessary to allow the System to

identify any aspect of the proposal that may have a material effect on

the bank holding company or otherwise fall outside the purview of the

federal banking agency that is reviewing the merits of the underlying

transaction.

The Board also believes that, as a general matter, corporate

reorganizations (such as the formation of a wholly owned intermediate-

tier holding company, the merger of wholly owned holding companies, and

the transfer of a bank from one part of an organization to another part

of the same organization) do not generally require agency review. In

each case, the bank holding company already has System approval to

control and operate the banks involved in the transaction. In these

cases, the Board agrees with commenters that a waiver should be

automatic. The supervisory process provides the Board with ample

authority and opportunity to address concerns that may arise from

internal corporate reorganizations. Accordingly, the Board has adopted

its proposal to extend the waiver process to internal corporate

reorganizations and has made these waivers available without any filing

requirement.3

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\3\ Under the final rule, the waiver process is not available

for transactions by a holding company that is organized in mutual

form or for transactions that occur outside the United States. These

cases typically raise a variety of issues that require review in the

application/notice process.

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

9. Small Bank Holding Company Policy Statement

As published in the proposed revision to Regulation Y, the Board's

policy statement on one-bank holding companies was revised to

generalize its applicability beyond the formation of a bank holding

company to include acquisitions by qualifying small bank holding

companies, to reduce the burden in the applications process, to

incorporate previously informal policies that evolved since the

original publication of the statement, and to remove obsolete language.

Specifically, the Board proposed to permit small bank holding companies

whose subsidiary banks are well managed and well-capitalized and whose

proposals result in parent company debt to equity of less than 1.0:1,

to be eligible for streamlined processing. These companies would also

be permitted to pay dividends under certain conditions that are more

clearly defined than in the existing statement. Proposals involving

higher parent company leverage or a bank in less-than-satisfactory

condition would be subjected to a focused review of the parent-level

debt servicing ability, or other issue presented, under the Board's

normal procedures. These organizations would also be restricted from

paying dividends until their leverage was reduced to a 1.0:1 level and

the organization is otherwise in satisfactory condition.

The final statement incorporates several changes that further

reduce burden and make the policy statement more consistent with the

general revisions to Regulation Y. It also incorporates suggestions

from commenters and further clarifies the statement.

The major substantive change eliminates a disparity between larger

and smaller bank holding companies in qualifying for the Board's

streamlined procedures. The final statement incorporates the

requirement that, to qualify for the new streamlined procedure, banks

controlling 80 percent of the organization must be well-managed and

well-capitalized, as opposed to the requirement in the previous version

of the statement that all banks meet these criteria.

To address concern about the availability of the streamlined

procedures to small bank holding companies that have not yet received

an inspection rating, the final rule permits any unrated bank holding

company, including a small bank holding company, to be eligible for

streamlined processing as long as its subsidiary bank(s) are well-

capitalized and well-rated and the bank holding company obtains a

determination from the System that the company qualifies for the

streamlined procedures.

Several commenters urged the Board to raise the $150 million size

limit to qualify as a small bank holding company. The Board has

determined not to raise this level at this time. The Board is concerned

that an increase in the availability of higher levels of debt without

consolidated capital requirements would raise overall risks to the

banking system, including increased risk to the Bank Insurance Fund,

without sufficient offsetting public benefits.

The statement was also reformatted to make it more understandable

and several technical and conforming changes have been adopted.

10. One-Bank Holding Company Formations

The Board proposed a number of modifications to the streamlined

notice procedure governing proposals by existing shareholders of a bank

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

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

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

substantially the same proportion as the shareholders' bank ownership,

all shareholders must certify that the shareholders are not subject to

any supervisory or administrative action, and the bank holding company

must identify the shareholders of the new bank holding company.

The Board proposed to reduce the percentage of the bank holding

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

percent and to require only the principal shareholders (i.e.,

shareholders owning in excess of 10 percent of the bank holding

company) to certify that they are not subject to any supervisory or

administrative action. In addition, the Board proposed to eliminate the

publication requirement for this category of bank holding company

formation because no publication is required for these transactions

under the Riegle Act and because no regulatory purpose is served by

requiring publication of these transactions, which represent only a

corporate reorganization.

Only two commenters addressed these proposed revisions. Both

supported the revisions and stated that the changes would help reduce

unnecessary burden on individuals forming small bank holding companies.

Accordingly, the Board has adopted the proposed changes in the final

rule.

B. Explanation of Proposed Changes to the Nonbanking Provisions

1. General Review and Updating of Nonbanking Activities

Section 4(c)(8) of the BHC Act generally provides that a bank

holding company may engage in, or acquire shares of a company engaged

in, activities that the Board has determined, after notice and

opportunity for comment, ``to be so closely related to banking or

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

Board may make this determination by order or by regulation. The Board

has to date determined by regulation that 24 activities are ``closely

related to banking'' and has determined by individual order that a

number of additional activities are also ``closely related to

banking.''

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

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

make that determination again in subsequent cases. Review of subsequent

cases is limited to determining whether the

[[Page 9302]]

conduct of the nonbanking activity by the applying bank holding company

would result in public benefits that outweigh the potential adverse

effects (the ``proper incident'' test).

The list of nonbanking activities contained in Regulation Y (the

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

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

has found to be closely related to banking and therefore permissible

for bank holding companies. The Regulation Y laundry list also

designates the activities that may be approved by the Reserve Banks

under delegated authority, although the Board has delegated authority

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

approved by order during intervals between modifications of Regulation

Y.

The Board has adopted its proposed reorganization and revision of

the list of permissible nonbanking activities contained in Regulation

Y. Commenters generally agreed that reorganizing the list into

categories of functionally related activities would make the list

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

obtain approval to engage in related activities. The Board intends that

this new organization of the laundry list permit a bank holding company

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

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

at the holding company's choosing, any specific activity within a

category.

As explained above, the Board has also amended Regulation Y to

incorporate the changes enacted in the Regulatory Relief Act that

eliminate the prior approval requirement for well-run bank holding

companies that propose to engage de novo in nonbanking activities that

have been permitted by regulation. This change will significantly

reduce regulatory burden and improve the ability of well-run bank

holding companies to respond quickly to changes in the marketplace by

eliminating the requirement that these companies obtain System approval

prior to commencing de novo an activity permitted by regulation. This

change will also permit a well-run bank holding company, without any

prior notice or Board approval, to commence immediately any activity

that is currently on the laundry list, any activity that has been added

to the regulatory list of permissible activities in this final rule,

and any new activity that is added to the regulatory laundry list in

the future, provided that the bank holding company meets the qualifying

criteria at the time the nonbanking activity is commenced. A bank

holding company that does not qualify under the final rule may file a

notice seeking approval to engage in any or all activities contained on

the laundry list, as reorganized in this final rule.

The Board has also adopted a streamlined procedure for well-run

bank holding companies to obtain System approval to make nonbanking

acquisitions that fall within the size limits noted above. This

streamlined procedure is also available for proposals to engage de novo

in nonbanking activities that have been permitted only by order.

As explained more fully below, the Board has amended the regulatory

list of permissible activities to include nonbanking activities that

previously have been determined by order to be closely related to

banking. Among the activities that have been included are: (1) Riskless

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

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

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

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

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

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

providing real-estate settlement services.

In addition, the Board has broadened the scope of permissible

derivatives and foreign exchange activities to assure that bank holding

companies may conduct these activities to the same degree as banks. As

explained below, the final rule also removes several restrictions on

these activities that apply to bank holding companies but do not apply

to banks that conduct these activities.

2. Removal of Restrictions Governing Permissible Activities

The Board has determined to remove a significant number of

restrictions currently contained in the regulation that are outmoded,

have been superseded by Board order, or do not apply to insured

depository institutions that conduct the same activity. The removal of

these restrictions from the regulation does not affect the Board's

determination that each activity contained on the laundry list is so

closely related to banking as to be a proper incident thereto. A

detailed discussion of the restrictions that have been removed is

contained in subsections (3), (5) and (6), or the section below

explaining ``Restrictions Removed from Permissible Nonbanking

Activities.''.

The Board has determined to grant relief from these conditions to

all bank holding companies authorized to conduct each activity, without

the need for a specific filing by any individual bank holding company.

Henceforth, a bank holding company authorized to conduct an activity on

the revised laundry list may conduct that activity subject to the

limitations retained in this final rule and to other applicable laws.

This relief extends only to the restrictions described as being removed

in subsections (3), (5) or (6), or the section below explaining

``Restrictions Removed from Permissible Nonbanking Activities.'' In

particular, the relief does not extend to commitments or conditions

that relate to the financial resources of a particular bank holding

company or its subsidiaries, or to commitments or conditions that

relate to the risk management polices of the organization, periods for

divestiture of impermissible assets or shares, or other commitments or

conditions that are not discussed in subsections (3), (5), or (6) or

the section below explaining ``Restrictions Removed from Permissible

Nonbanking Activities.'' Bank holding companies that have committed to

comply with restrictions not described in those sections as being

removed may in writing request a determination that the condition or

commitment is no longer appropriate.

In granting this relief, the Board notes that some of the

conditions removed from activities on the Regulation Y laundry list

involve restrictions imposed under other laws and regulations, such as

the federal securities laws or the Commodity Exchange Act. The Board's

action does not relieve any bank holding company of its obligation to

conduct each activity in accordance with relevant state and federal law

governing the activity. Other restrictions that have been removed

describe good business practice but are not required to define the

lawful scope of permissible activity. The Board will continue through

the inspection process to monitor carefully the conduct of nonbanking

activities by individual bank holding companies and reserves the right

to impose any condition on the nonbanking activities or operations of

any bank holding company as appropriate to assure that the activity is

conducted in a safe and sound manner and within the authority granted

by the Board.

3. Revision of Policy Statement Governing Investment Advisory

Activities

The Board proposed to remove four restrictions contained in its

1972

[[Page 9303]]

interpretive rule regarding the investment advisory activities of bank

holding companies with respect to mutual funds and other investment

companies. These restrictions prohibit a bank holding company from:

* Owning any shares of a mutual fund advised by the bank holding

company;

* Lending to a mutual fund advised by the bank holding company;

* Accepting shares of a mutual fund that the holding company

advises as collateral for any loan to a customer for the purpose of

purchasing those mutual fund shares; and

* Serving as an investment adviser to an investment company or

mutual fund that has a name that is similar to, or a variation of, the

name of the bank holding company or any of its subsidiary banks.

These restrictions are intended to ensure that a bank holding

company does not control a mutual fund in violation of the Glass-

Steagall Act, as well as to mitigate potential conflicts of interests

and the potential for customer confusion about the uninsured nature of

investment company shares. The Board had previously removed a

prohibition on a bank holding company purchasing, as a fiduciary,

shares of a mutual fund advised by the holding company as well as

restrictions contained in a staff letter (the ``Sovran letter'') on the

sale of mutual funds by employees of a holding company and its

affiliates.

As the Board noted in its proposal, existing statutory provisions

appear adequate to address concerns about the ownership of shares of a

mutual fund by the bank holding company. In particular, the investment

limitations of section 4 of the BHC Act appear adequate to mitigate

potential conflicts of interests that could result from removal of the

investment restriction and limit the ability of a bank holding company

to acquire more than 5 percent of the voting shares of or to control a

mutual fund it advises.

Removal of the two lending restrictions would permit bank holding

companies and their affiliates to make certain loans to the extent

permissible under applicable federal or state law. For example, federal

law permits insured banks, within limits, to make loans to a mutual

fund advised by the bank, and the federal securities laws govern the

extension of credit by any broker/dealer to a customer to purchase

shares of a mutual fund. The System expects that extensions of credit

by the holding company to a mutual fund or to a customer who uses the

shares as collateral for the loan would be done on a safe and sound

basis.

The Board proposed to replace the fourth restriction with a

provision permitting similar names so long as: (1) The investment

company name is not identical to that of the holding company or an

affiliated insured depository institution; (2) the investment company

name does not include the term ``bank,''; and (3) the holding company

or investment company discloses to customers in writing the role of the

holding company as an adviser to the investment company and that shares

of the investment company are not federally insured and are not

obligations of or guaranteed by any insured depository institution. The

SEC permits an investment company to have a name similar to that of an

insured depository institution provided that the investment company

makes a number of disclosures that advise customers that the investment

company is not federally insured or guaranteed by the insured

depository institution.4

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\4\ Letter of May 13, 1993, [1993 Transfer Binder] Fed. Sec. L.

Rep. (CCH) Paragraph 76,683.

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

Many commenters strongly supported these proposed revisions.

Commenters stated that these changes would remove restrictions

addressed more directly by other provisions of law and would allow bank

holding companies to compete on a more equal basis with other

investment advisors. Several commenters urged the Board to allow an

investment company advised by a bank holding company to have a name

identical to that of the bank holding company so long as the name is

not identical to that of any subsidiary bank of the holding company.

These commenters also contended that the Board's disclosure

requirements in this area are duplicative and therefore should be

eliminated. A small number of other commenters objected that the

Board's proposal would cause increased confusion among customers

regarding the nature of uninsured investment products.

After review of the comments, the Board believes that the proposed

revisions to the interpretive rule are appropriate, and has adopted the

revisions as proposed. The revised name restriction will allow

increased flexibility in the marketing of investment companies advised

by bank holding companies, and enhance the ability of bank holding

companies to compete with other bank and nonbank-affiliated investment

advisers. At the same time, the limitation on identical names and on

the use of the word ``bank,'' when coupled with the disclosure

requirements, should substantially mitigate the potential for customer

confusion about the un-insured nature of investment company shares.

The Board believes that the disclosure requirements also continue

to be appropriate to address the potential for customer confusion in

situations in which the holding company or its affiliates advise a

mutual fund and the sale of the mutual fund shares is not covered by

the disclosure provisions of the Interagency Statement on Retail Sales

of Nondeposit Investment Products. The disclosure requirements are

increasingly proving to be an effective method for addressing potential

customer confusion and do not appear to be onerous.

4. Procedures for Determining the Permissibility of Nonbanking

Activities

The Board has adopted two provisions to Regulation Y to ease the

burden associated with determining the authorization and scope of

permissible nonbanking activities. First, the regulation specifically

reflects the fact that the Board may, on its own initiative, begin a

proceeding to find that an activity is permissible for bank holding

companies, as the Board did in the case of many of the earlier

nonbanking activities. As required by the BHC Act, the Board would

provide public notice that it is considering the permissibility of a

given activity and would provide an opportunity for public comment.

The Board expects to consider amending the laundry list, for

example, as new activities are authorized for banks, as experience with

a narrowly defined activity indicates that the activity should be more

broadly defined, or as developments occur in technology or the

marketplace for financial products and services. The System will

actively track market developments as well as decisions that authorize

banks to conduct new activities and evaluate adding these activities to

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

engage in these activities.

Several commenters urged the Board to add a provision limiting the

processing period for evaluating proposals regarding the permissibility

of a particular new activity, much as the Board has proposed for

determining the scope of a currently permissible activity. On the other

hand, other commenters argued that the Board should seek public comment

on all proposals involving the permissibility of new activities or the

scope of currently permissible nonbanking activities.

The BHC Act, as amended by the Regulatory Relief Act, requires that

the

[[Page 9304]]

Board provide notice and opportunity for public comment prior to

determining that an activity is closely related to banking. The

Regulatory Relief Act eliminated the requirement that the Board provide

an opportunity for a formal hearing regarding the permissibility of an

activity. The final rule reflects both of these statutory actions. In

particular, the final rule retains the provision currently in

Regulation Y for public notice and opportunity for comment in

connection with consideration of the permissibility of a new activity,

and eliminates the requirement for a hearing. The Board retains

discretion to order a formal or informal hearing regarding the

permissibility of an activity where a hearing may be useful in

resolving disputes of fact regarding an activity. Because of the

complexity of many of the issues raised in determining the

permissibility of a new activity, the Board has determined not to

establish a specific limit on the time for evaluating these proposals.

The Board has amended the regulation to establish a streamlined

procedure outside the application process through which any bank

holding company or other interested person may request an advisory

opinion from the Board that a particular variation on an activity is

permissible under an existing authorization and is not deemed to be a

new activity. The Board would issue an advisory opinion within 45 days,

and make this opinion available and applicable to all similarly

situated bank holding companies. At the time the Board reviews an

activity, the Board would determine whether it is appropriate to permit

bank holding companies to engage in this activity without additional

approval (as, for example, a variation of one or more previously

authorized activities) or to require bank holding companies to obtain

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

activity does not fall within a previously approved activity or

category or involves special risks or concerns). As noted above, well-

run bank holding companies may, without prior Board approval, engage de

novo in any activity added to the regulatory laundry list.

Commenters agreed that these two procedures should make it easier

for bank holding companies to participate in marketplace developments

in permissible nonbanking activities. In addition, these procedures

will eliminate a number of applications that are currently filed by

bank holding companies that are uncertain about the scope of

permissible activities.

5. Nonbanking Activities That Are Incidental to a Permissible Activity

The Board has adopted its proposal to permit a subsidiary of a bank

holding company engaged in financial data processing or management

consulting activities, as an incidental activity, to derive up to 30

percent of its annual revenue from nonfinancial data processing or

management consulting services, respectively. Commenters discussing

this aspect of the proposal strongly supported this proposal and

contended that bank holding companies engaged in data processing and

management consulting activities have substantial expertise in these

areas that allow them safely and soundly to provide these services

involving nonfinancial data or nonfinancial customers. In addition,

several commenters argued that bank holding companies currently are at

a competitive disadvantage in providing data processing and management

consulting services and in hiring employees because of the strict

limitations tying these services to financial data and financial

consulting.

A number of commenters argued that the Board should permit a

greater amount of incidental activity, some arguing for no limit. Two

commenters argued, on the other hand, that bank holding companies

should not be permitted to engage in any nonfinancial data processing

because the commenters believed that the benefits of access to the

Federal discount window and the payments system and the unique products

that banks can provide combine to give bank holding companies and banks

an unfair advantage in competing with nonfinancial firms to provide

nonfinancial products and services, including firms owned by women and

minorities.

After considering the comments, the Board has adopted the revisions

to the data processing and management consulting provisions as

proposed. The Board believes that these revisions are necessary to

allow bank holding companies to compete effectively in providing

financial data processing and management consulting services.

The strict limitations on providing non-financial data processing

and management consulting activities that were previously applied to

bank holding companies inhibit the ability of bank holding companies

effectively to compete with other providers who often combine financial

and nonfinancial products. In a number of recent cases reviewed by the

Board, for example, the record has indicated that it is common practice

for a software provider to integrate financial data processing software

and nonfinancial data processing software in the same package.

Similarly, commenters indicated that it is common for management

consultants to provide advice on general matters in connection with

providing advice on financial, accounting and similar matters. The

strict limitations have also reduced the ability of bank holding

companies to attract the most qualified employees--who often have

expertise, clients, proprietary rights, and interests--that span

financial and nonfinancial matters.

The Board believes that its proposed limit--30 percent of the

revenue derived from permissible financial data processing activities,

and 30 percent of the revenue derived from permissible financial

management consulting services, respectively--represents a reasonable

level of incidental activity that assures that the bank holding company

is significantly involved in financial data processing or management

consulting.5 The Board does not believe that this limited

participation will permit bank holding companies an unfair competitive

advantage over other providers of data processing or management

consulting services. As the Board and the industry gain experience in

data processing and management consulting activities, the Board will

review and adjust the level of incidental activities as appropriate.

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

\5\ In the data processing area, this 30 percent basket would

not include revenue derived from the use of excess capacity or the

sale of general purpose hardware that is currently permitted in

accordance with the Board's regulation and policies governing those

activities.

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

6. Expanded Exception for Acquisitions of Lending Assets in the

Ordinary Course of Business

The Board proposed to revise the regulatory language permitting a

bank holding company, without additional approval, to acquire lending

assets from a third party in the ordinary course of business. The Board

currently permits a bank holding company, without additional approval,

to acquire assets of an office of another company related to making,

acquiring or servicing loans so long as the bank holding company and

the transaction meet certain qualifications. Among the qualifications

are that the assets relate to consumer or mortgage lending, and that

the acquired assets represent the lesser of $25 million or 25 percent

of the consumer lending, mortgage banking or industrial banking assets

of the acquiring bank holding company. The office must also be

[[Page 9305]]

located in the geographic area served by the bank holding company.

The Board has revised this provision in three ways. First, since

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

engage in nonbanking activities, this restriction has been removed.

Second, the scope of the exception has been broadened to permit the

acquisition of assets related to any lending activity. Third, the

threshold limits have been raised to permit the acquisition of assets

representing up to the lesser of $100 million or 50 percent of the

lending assets of the bank holding company.

Commenters generally favored the modifications proposed by the

Board for expanding the scope and size of transactions that could be

conducted in the ordinary course of business under this exception. The

proposed broadening of the exception would eliminate an unnecessary

approval requirement and paperwork for transactions that are relatively

small and represent the ordinary course of business.

7. Consummation Period for Certain Proposals

The Board had originally proposed to eliminate the requirement that

a bank holding company exercise its authority to engage de novo in a

nonbanking activity within one year of receiving System approval. While

several commenters expressed support for this approach, the final rule

does not include a specific provision adopting this change for two

reasons. First, since the date of the original proposal, the Regulatory

Relief Act eliminated altogether the prior approval requirement for

well-run bank holding companies that choose to engage de novo in

nonbanking activities permissible by regulation. This statutory change

eliminates a substantial portion of the cases that would have

benefitted by the proposal to eliminate the consummation period.

Second, the Board may, without any regulatory change, adjust the

consummation period on a case-by-case basis. The Board believes this is

a more appropriate approach in cases that do not qualify for the

statutory exception in the Regulatory Relief Act.

C. Explanation of the Restrictions Removed From Permissible Nonbanking

Activities

As noted above, the Board has removed restrictions contained in the

current regulation that are outmoded, have been superseded by Board

order or would not apply to an insured depository institution

conducting the same activity. The limitations that remain are necessary

to establish a definition of the permitted activity or to prevent

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

following discussion explains, by functional group of activities, the

restrictions that the Board has eliminated as well as certain

limitations that the Board has retained. In several areas, the Board

expects to develop supervisory policy statements to address potential

adverse effects that may be associated with certain activities. The

Board may seek comment on those supervisory policy statements as

appropriate.

1. Extending Credit and Servicing Loans

Lending activities are already broadly defined and contain no

restrictions. Permissible lending activities include the types of

lending activities that were previously listed by way of example in

Regulation Y, such as lending activities conducted by consumer,

mortgage, commercial, factoring, and credit card companies. Removal of

those specific examples from the proposed rule was intended to make

clear that making, acquiring, brokering and servicing all types of

loans or extensions of credit are considered permissible lending

activities, and elimination of these examples from the final rule does

not diminish the scope of the activity or the permissibility of those

examples of lending activities. Nevertheless, at the request of a

number of commenters, factoring has been re-included as an example of a

permissible lending activity.

2. Activities Related to Extending Credit

A new category has been added authorizing activities that the Board

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

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

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

the Board has previously determined are related to credit extending

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

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

settlement activities.

Restrictions governing disclosures to customers, tying,

preferential treatment of customers of affiliates, disclosure of

confidential customer information without customer consent and similar

restrictions previously contained in Regulation Y have been removed

from these activities. These restrictions do not apply to banks that

conduct these activities and, to the extent these restrictions are

appropriate, supervisory guidance on the conduct of the activity will

be developed.

Several commenters requested that the Board eliminate all

restrictions governing the acquisition of debt in default, in

particular, the requirement that the period for disposing of shares or

assets securing debt in default be calculated as of the date the

defaulted debt is acquired. The Board believes the three restrictions

adopted in the regulation are necessary to define the scope of the

activity and to assure that the activity remains the acquisition of

debt rather than an impermissible acquisition of securities or other

assets. The requirement regarding the calculation of the period for

disposing of the underlying shares or assets subjects the activity to

the same limitations that apply under the terms of the BHC Act to the

acquisition of shares or assets in satisfaction of a debt-previously-

contracted. During this period, the holding company may divest the

property or, as in the case of any debt that has been previously

contracted, restructure the debt.

3. Leasing Personal or Real Property

The changes to the leasing provision have been adopted as proposed.

Specifically, the regulation removes a number of restrictions from the

two types of leasing activities permissible for bank holding companies,

full-payout leasing and high residual value leasing,6 including

the following restrictions:

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

\6\ A full-payout lease is the functional equivalent of an

extension of credit and relies primarily on rental payments and tax

benefits to recover the cost of the leased property and related

financing costs. High residual value leasing may involve significant

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

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

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

property and related financing costs. Under the current regulation,

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

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

value leases only for personal property.

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

* The lease must serve as the functional equivalent of an extension

of credit (permissible high residual value leasing may not be the

functional equivalent of an extension of credit);

* The property must be acquired only for a specific leasing

transaction;

* Leased property must be re-leased or sold within 2 years of the

end of each lease;

* The maximum lease term may not exceed 40 years; and

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

Commenters favored removal of these restrictions and noted that

removal of these restrictions from the regulation would permit bank

holding companies

[[Page 9306]]

greater flexibility to acquire property in quantity in the expectation

of leasing activities and would allow more flexibility in selling or

re-leasing property at the expiration of a lease. It is expected that

supervisory guidance would be developed to address potential issues

arising from removal of the restrictions.

The provision limiting to 100 percent of the initial acquisition

cost the amount of reliance that may be placed on the residual value of

leased personal property has also been removed. This limit does not

apply to national bank leasing activities. While commenters favored

removal of the requirement that the estimated residual value of real

property be limited to 25 percent of the value of the property at the

time of the initial lease, this restriction was retained in order to

distinguish real property leasing from real estate development and

investment activities.

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

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

These requirements were developed in the course of litigation regarding

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

courts in distinguishing bank leasing activities from general property

rental and real estate development businesses. The requirement that a

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

high residual value leasing activities of national banks.

The regulation has been modified at the request of commenters to

clarify that, as a general matter, the requirement that a lease be non-

operating means that the bank holding company may not itself (or

through a subsidiary) repair, operate, maintain or service the

equipment or property being leased during the lease term. The Board has

applied this interpretation since 1974 in order to help distinguish

bank holding company leasing activities from general commercial

activities. A more detailed definition of a nonoperating lease in the

automobile rental context, which was developed in litigation and

adopted by the courts, has also been retained. The regulation provides

that, in either case, a bank holding company is permitted to arrange

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

connection with a lease.

4. Operating Nonbank Depository Institutions

This category permits ownership of a savings association and an

industrial loan company. The proposed regulation retains the

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

``bank'' for purposes of the BHC Act 7 and that the activities of

the institution conform to the relevant statutory provisions of the BHC

Act. As noted above, by the terms of the Regulatory Relief Act, the

operation of a savings association requires prior System approval.

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

\7\ The BHC Act contains an exception from the definition of

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

meet requirements listed in the BHC Act.

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

5. Trust Company Functions

The current regulation limits the deposit-taking and lending

activities of trust companies. These limitations are already

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

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

deleted from the regulation.

6. Financial and Investment Advisory Activities

Like the initial proposal, the final rule groups together all

investment and financial advisory activities and broadly permits acting

as investment or financial adviser to any person, without restriction.

Without limiting the breadth of the advisory authority, the rule also

lists specific examples of certain types of investment or financial

advice, counseling and related services that previously had been

separately authorized. These examples are:

* Advising an investment company and sponsoring, organizing and

managing a closed-end investment company;

* Furnishing general economic information and forecasts;

* Providing financial advice regarding mergers and similar

corporate transactions;

* Providing advice regarding commodities and derivatives

transactions; and

* Providing consumer educational courses and providing tax-planning

and tax-preparation.

The final rule removes the few restrictions that have in the past

been imposed by the Board on financial and investment advisory

activities. These restrictions do not apply to banks that provide

investment advisory services.

Specifically, the final rule removes the restriction that

discretionary investment advice be provided only to institutional

customers, thereby allowing bank holding companies to manage retail

customer accounts outside of the trust department of an affiliated bank

(to the extent otherwise permitted by law). This activity would

continue to be governed by the fiduciary principles in relevant state

law. Moreover, the final rule permits bank holding companies to provide

retail customers with investment advice concerning derivatives

transactions and to provide discretionary investment advice regarding

derivatives transactions to institutional or retail customers as an

investment adviser, commodity trading advisor, or otherwise. This

includes providing discretionary investment advice to any person

regarding contracts relating to financial or nonfinancial assets. The

conduct of these activities would, of course, be subject to the

requirements of applicable law, including applicable state and federal

laws governing fiduciary activities or advisory activities.

The final rule permits bank holding companies to engage in any

combination of permissible nonbanking activities listed in Regulation

Y. Accordingly, bank holding companies may provide financial and

investment advice (including discretionary investment advice) together

with permissible agency transactional services, investment or trading

transactions as principal, or any other listed activities. Supervisory

guidance may be developed, as needed, to address conflicts of interest

that may arise from providing certain services in combination.

The final rule also deletes restrictions in the areas of tax-

planning, tax-preparation and consumer counseling services that

prohibited bank holding companies from promoting specific products and

services and from obtaining or disclosing confidential customer

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

apply to banks that engage in these activities.

The commenters addressing this activity strongly supported the

consolidation of the various advisory activities, the expansion of

permissible advisory activities, and the removal of existing

restrictions imposed by the Board on these activities. These commenters

argued that the provision of all types of financial and investment

advice is within the expertise of banking organizations and, therefore,

closely related to banking.

Several commenters requested further guidance on the scope of

permissible advisory activities and urged the inclusion of examples of

additional specific types of advisory activities, such as advisory

activities related to real estate, in order to clarify the

permissibility of these activities. Other commenters requested

clarification that the use of examples did not imply that advisory

activities that are omitted from the list of examples are not

permissible.

[[Page 9307]]

As noted above and in the original proposal, the final rule includes

any investment or financial advisory activity without restriction. The

examples included in the final rule are not intended in any way to

limit the scope of the financial and investment advisory activity. The

examples are illustrative rather than exclusive examples of permissible

advisory activities, and have been retained to recognize that certain

advisory activities have been specifically approved under other

provisions of Regulation Y and continue to be permissible.

Some commenters suggested revisions to the proposal's description

of certain examples. In response to these comments, the final rule

clarifies that the provision regarding advice on mergers, acquisitions

and other transactions includes ``other similar transactions.'' At the

suggestion of several commenters, the final rule has been revised to

clarify the permissibility of providing investment advice regarding

transactions with respect to any transactions in foreign exchange,

swaps and similar transactions, commodities, and forwards contracts,

futures, options, options on futures, and similar instruments.

Several commenters noted that there currently is uncertainty

regarding the jurisdiction of the CFTC over some transactions involving

foreign exchange. The final rule is not affected by the scope of CFTC

jurisdiction. The Board intends that references to transactions ``in

foreign exchange'' throughout the regulation include transactions in

foreign exchange, options on foreign exchange, futures on foreign

exchange, options on futures on foreign exchange, swaps in foreign

exchange, and similar foreign exchange-related instruments. A bank

holding company must, of course, comply with the rules of any other

federal or state agency to the extent that the bank holding company

conducts an activity subject to that agency's jurisdiction, as

determined by the relevant statute, agency rule or court decision.

7. Agency Transactional Services for Customer Investments

The final rule reorganizes into a single functional category the

various transactional services that a bank holding company may provide

as agent. This category includes securities brokerage activities,

private placement activities, riskless principal activities, execution

and clearance of derivatives contracts, foreign exchange execution

services, and other transactional services.

a. Securities Brokerage Activities

The current regulation differentiates between securities brokerage

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

securities brokerage services provided in combination with investment

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

rule permits securities brokerage without distinguishing between

discount and full-service brokerage activities.

Under the current regulation, bank holding companies providing

full-service brokerage services must make certain disclosures to

customers regarding the uninsured nature of securities and may not

disclose confidential customer information without the customer's

consent. These requirements were deleted in the proposal.

The Board sought comment on whether elimination of these

restrictions from the regulation would lead to adverse effects,

including customer confusion about the uninsured nature of non-deposit

investment products sold through bank holding companies. Several

commenters opposed the elimination of the disclosure requirements in

the regulation, contending that the interagency policy statement and

SEC regulations are not providing adequate consumer protection. A

number of commenters, however, supported the elimination of the

disclosure requirements in the regulation on the basis that these

requirements were duplicative of requirements contained in the

interagency policy statement and SEC regulations.

The final rule deletes the disclosure requirements. The disclosure

requirements--along with a number of other requirements that

specifically address the potential for customer confusion, training

requirements, suitability requirements and other matters--are already

contained in an interagency policy statement that governs the sale of

securities and other non-deposit investment products on bank premises

as well as in rules adopted by the SEC. In addition, similar disclosure

requirements are required by the Board's policy statement governing the

sale by bank holding companies of shares of mutual funds and other

investment companies that the bank holding company advises.

Recent supervisory experience indicates that banking organizations

and their affiliates, in general, are becoming more effective in

implementing the regulatory disclosure requirements and that customers

are becoming increasingly aware that investment products purchased at

banking organizations and their affiliates are not federally insured.

Moreover, the Board and the SEC have adequate supervisory authority to

ensure that bank holding companies comply with the regulatory

disclosure requirements. To the extent that disclosures to customers

are appropriate in areas not covered by the regulatory policy

statements or SEC regulations, the Board will consider whether to

develop supervisory guidance, on an interagency basis where

appropriate.

b. Riskless Principal Activities

The Board recently reduced the restrictions that govern riskless

principal activities.8 The restrictions that were retained were

designed to ensure that bank holding companies do not avoid the Glass-

Steagall Act provisions by classifying underwriting and dealing

activities as riskless principal activities. The restrictions that the

proposal retained prohibit:

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

\8\ The Bank of New York Company, Inc., 82 Federal Reserve

Bulletin 748 (1996).

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

* Selling bank-ineligible securities at the order of a customer who

is the issuer or in a transaction in which the bank holding company has

an agreement to place the securities of the issuer;

* Acting as riskless principal in any transaction involving a bank-

ineligible security for which the bank holding company or an affiliate

makes a market;

* Acting as riskless principal for any bank-ineligible security

carried in the inventory of the bank holding company or any affiliate;

and

* Acting as riskless principal on behalf of any U.S. affiliate that

engages in bank-ineligible securities underwriting or dealing

activities or any foreign affiliate that engages in securities

underwriting or dealing activities outside the U.S.

The Board requested comment on whether these restrictions, and in

particular the second and third restrictions, are necessary to assure

compliance with the Glass-Steagall Act. The majority of commenters

discussing the riskless principal activity argued for the deletion of

all four restrictions, contending that none of the restrictions are

necessary to ensure that a nonbanking subsidiary does not engage in

underwriting or dealing through its riskless principal transactions and

that any concern in this regard would be addressed by a requirement

that the subsidiary not hold itself out as a dealer with respect to any

security. Several commenters noted that the restrictions would prohibit

riskless principal

[[Page 9308]]

transactions on behalf of a section 20 affiliate even if this affiliate

was not the underwriter or dealer for the security in question. These

commenters maintained that this would put bank holding companies with

section 20 affiliates at a competitive disadvantage.

Several commenters also suggested that the Board permit riskless

principal transactions in the primary market generally. Some of these

commenters specifically urged the Board to allow bank holding companies

to act as riskless principal for the sale of commercial paper in the

primary market because commercial paper tends to have short maturities.

The final rule retains the requirement that riskless principal

transactions be conducted in the secondary market. The Board has

determined, however, to eliminate all but two restrictions in the final

rule. The final rule retains the first proposed restriction, which

prohibits a bank holding company from using its riskless principal

authority to sell bank-ineligible securities at the order of a customer

who is the issuer or in a transaction in which the bank holding company

has an agreement to place the securities of the issuer. This

restriction, as well as the requirement that the transactions be

conducted in the secondary market, is designed to distinguish riskless

principal activities from private placement and underwriting or dealing

activities. This classification of riskless principal transactions does

not prevent bank holding companies from engaging pursuant to other

authority in permissible private placement activities or in

underwriting and dealing activities, both of which permit transactions

in the primary market and with an issuer.

The Board has also determined to revise the second restriction to

focus on transactions involving a bank-ineligible security for which

the bank holding company or any affiliate acts as underwriter (during

the underwriting period and for 30 days thereafter) or dealer. This

revision narrows the scope of the restriction while addressing the

Board's concern that a nonbanking subsidiary not use its riskless

principal authority to engage in underwriting or dealing activities. As

modified, this provision also addresses the concerns covered by the

third and fourth restrictions. Consequently, the final rule deletes the

last two restrictions in the proposal.

c. Private Placement Activities

The Board proposed to add private placement activities to the

laundry list, using the definition of private placement activities

adopted by the SEC and the federal securities laws. The proposal

removed all but one restriction that had been imposed by Board order on

the conduct of this activity. That restriction prohibits a bank holding

company from purchasing for its own account securities that it is

placing and from holding in inventory unsold portions of securities it

is attempting to place.

Among the restrictions that the proposal removes from the conduct

of private placement activities are prohibitions on:

* Extending credit that enhances the marketability of a security

being placed;

* Lending to an issuer for the purposes of covering the funding

lost through the unsold portion of securities being placed;

* Lending to the issuer for the purpose of repurchasing securities

being placed;

* Acquiring securities through an account for which the bank

holding company has fiduciary authority;

* Providing advice to any purchaser regarding a security the bank

holding company is placing; and

* Placing securities with any non-institutional investors (the SEC

rules allow sales to institutional investors and up to 35 non-

institutional investors).

None of these restrictions have been applied to national banks that

conduct private placement activities.

The Board sought comment on whether any of these restrictions must

be retained to address potential adverse effects, including potential

conflicts of interest or customer confusion, or to assure fulfillment

of fiduciary duties. The commenters discussing private placement

activities strongly supported the removal of these restrictions from

private placement activities.

Several comments urged the Board, however, not to adopt the

definition of private placement in the federal securities statutes,

contending that such definition is too restrictive. The final rule, as

the proposal, defines private placement in accordance with the

Securities Act of 1933 (1933 Act) and the rules of the SEC. For

purposes of including private placement activities on the laundry list,

the Board believes it is reasonable to look to the definition of

private placement adopted by the SEC, the primary federal regulator of

securities activities, and the distinctions the SEC has drawn between

private placement and underwriting or dealing activities. This

definition does not limit bank holding companies from seeking to engage

in other securities activities pursuant to Board order.

One commenter also requested that the definition of private

placement be broadened to include private resales of securities to

institutional buyers and private placements of securities of registered

investment companies. The final rule would permit private resales of

privately placed securities if the transaction is conducted in

accordance with the requirements of the 1933 Act and the rules of the

SEC, the bank holding company acts only as agent for such private

resales by third parties, and the bank holding company neither

purchases for its own account securities that it is placing nor holds

in inventory unsold portions of securities it is attempting to place.

This would not include acting as a dealer with respect to resales of

privately placed securities, an activity that bank holding companies

may seek to engage in pursuant to Board order. Similarly, the final

rule would permit bank holding companies to act as agent for the

private placement of securities issued by any company, including an

investment company, to the extent that these private placements are

conducted in accordance with the requirements of the 1933 Act and the

SEC rules and the Board's restrictions on purchasing or inventorying

such securities.

Some commenters also recommended that the Board remove the

prohibition on a bank holding company purchasing or repurchasing the

securities it places. Several of these commenters contended that such

purchases should be permissible if the company made the decision to

purchase the securities for its own account simultaneously with or

after, and separate from, the decision to engage in the private

placement. One commenter maintained that a company engaged in private

placement activities should be permitted to invest in the securities

being placed so long as it had a bona fide expectation of and made a

bona fide effort in placing the securities. The final rule retains the

proposal's restriction on purchasing or repurchasing the securities

that are privately placed. The Board believes this restriction is

appropriate to prevent a bank holding company from classifying as

private placement activities its securities underwriting activities,

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

decisions.

The final rule does not contain a limitation on the amount of a

particular issue of securities that a company may place with an

affiliate. As the Board noted when it first authorized a bank holding

company to place securities with an affiliate, banks privately place

securities with affiliates and no

[[Page 9309]]

particular supervisory problem appears to have arisen from these

investments.9 The Board continues to recognize the increased

potential for certain conflicts of interests if affiliates purchase a

substantial portion of an issue of securities placed by an affiliate.

In this regard, insured depository institutions that purchase

securities privately placed by an affiliate must comply with section

23B of the Federal Reserve Act as well as the limitations in the Glass

Steagall-Act relating to the purchase of investment securities. The

Board expects that nonbank affiliates that purchase these securities

will do so in accordance with appropriate internal policies and

procedures.

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

\9\ J.P. Morgan & Company Inc., 76 Federal Reserve Bulletin 26,

28 (1990)

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

d. Futures Commission Merchant Activities

i. In General

The current regulation authorizes bank holding companies to execute

and clear derivatives on certain financial instruments on major

exchanges, subject to a number of restrictions. The Board has, by

order, broadened this authority in two key respects. First, the Board

has by order permitted bank holding companies to execute and clear

derivative contracts on a broad range of nonfinancial commodities.

Second, the Board has permitted bank holding companies to clear

derivative contracts without simultaneously providing execution

services, and to provide execution services without also providing

clearing services. Commenters strongly favored modification of the

current regulation to reflect these Board orders.

As noted above, the final rule removes the restriction in the

current regulation prohibiting a bank holding company from providing

foreign exchange transactional services in the same subsidiary that

provides advice regarding foreign exchange. Banks are not subject to

this restriction. The final rule also would permit a bank holding

company to perform permissible futures commission merchant (``FCM'')

activities through a section 20 subsidiary.

The final rule permits a nonbanking subsidiary to act as an FCM

regarding any exchange-traded futures contract and options on a futures

contract based on a financial or nonfinancial commodity. The final rule

also deletes the restriction that a bank holding company not act as an

FCM on any exchange unless the rules of the exchange have been reviewed

by the Board. All U.S. commodities exchanges are supervised by the CFTC

and a review by the Federal Reserve System of the rules of an exchange,

whether domestic or foreign, would not be the most effective method for

addressing the safety of conducting FCM activities on the exchange. A

more effective method for addressing the risks of FCM activities--

whether on domestic or foreign exchanges--is through the on-site

inspection and supervision of the risk management systems of the bank

holding company. Accordingly, the Board would use the supervisory

process, which includes regular inspections of the holding company and

its affiliates, to address concerns about the effectiveness of the

holding company's risk management systems.

The final rule removes several other requirements, including that

the FCM subsidiary:

* Time stamp all orders and execute them in chronological order;

* Not trade for its own account;

* Not extend margin credit to customers; and

* Maintain adequate capital.

The CFTC has not found it necessary to prohibit FCMs from trading

for their own account, and removal of that restriction from the Board's

regulation allows an FCM affiliated with a bank holding company to

compete on the same basis as an FCM not affiliated with a holding

company. Experience has not indicated that the affiliation of an FCM

with a bank holding company itself increases the risks or conflicts

that could arise from the combination of FCM and proprietary trading

activities. Conduct in the other areas listed above is addressed in

rules of the CFTC or the relevant self-regulatory organizations, which

are applicable to any FCM.

Like the initial proposal, the final rule retains the requirements

of the current regulation that a bank holding company conduct its FCM

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

through the parent bank holding company). The proposal retained the

requirement of the current regulation that the subsidiary not become a

member of an exchange that requires the parent bank holding company

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

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

contingent obligations under the loss sharing rules of exchange

clearinghouses in order to preserve the holding company's ability to

serve as a source of strength to its subsidiary insured depository

institutions. The Board invited comment, however, on whether this

restriction was appropriate and on whether the Board's concern could be

addressed more effectively by an alternative restriction, such as a

requirement that the parent bank holding company not provide a

guarantee of non-proprietary trades conducted by an FCM subsidiary.

Most commenters that discussed FCM activities supported the

alternative restriction as sufficient to address a bank holding

company's potential exposure to contingent obligations under loss

sharing rules of clearinghouses and to establish clear parameters for a

bank holding company's involvement on an exchange or clearing

association. Four commenters suggested that bank holding companies be

given the option of choosing which restriction is more suitable to

business conducted on a particular exchange. If a choice must be made

between a prohibition against membership or against a guarantee of non-

proprietary trades, these commenters generally preferred the latter,

noting that holding company membership is a prerequisite on a number of

exchanges for receiving reductions in fees or other benefits.

Based on its experience and a review of the comments, the Board has

determined that an alternative restriction that prohibits the parent

bank holding company from guaranteeing or otherwise becoming liable for

non-proprietary trades conducted by or through its FCM subsidiary more

effectively addresses the Board's concern about a parent bank holding

company's exposure to an exchange's or clearinghouse's loss sharing

rules than the current provision limiting the holding company's

membership on an exchange. This alternative restriction effectively

protects the parent bank holding company from potential exposure from

customer trades and open-ended contingent liability under loss sharing

rules while recognizing that most exchanges require a parent to

guarantee proprietary trades. Accordingly, the final rule revises the

regulation to prohibit the parent bank holding company from

guaranteeing or otherwise becoming liable to an exchange or

clearinghouse for trades other than those conducted by the subsidiary

for its own account or for the account of an affiliate. The final rule

eliminates the existing prohibition on an FCM subsidiary becoming a

member of an exchange that requires the parent bank holding company

also to become a member.

Other commenters requested confirmation that an FCM subsidiary may,

as an incidental activity, provide various futures-related financing to

customers, such as financing to cover margin obligations. Lending is a

[[Page 9310]]

permissible activity for bank holding companies, and the final rule

would not prohibit permissible lending activities in combination with

FCM activities. This permits an FCM owned by a bank holding company to

compete on the same terms with an FCM that is not affiliated with a

bank holding company. The Board notes, however, that some exchanges

prohibit FCMs from providing margin financing, and CFTC rules require

full capitalization for any extensions of credit to customers. An FCM

controlled by a bank holding company must continue to abide by the

rules of the CFTC and any exchange on which the FCM is a member or

trades.

Several commenters requested clarification that the authority for

an FCM subsidiary to become a member of an exchange included authority

to open an office in the country were the exchange is located. In

addition, several commenters requested clarification that the expanded

FCM activities permitted under Regulation Y also would be permitted

under the Board's Regulation K.

Regulation Y currently provides, and the final rule continues to

provide, that a nonbanking company permitted under section 4(c)(8) of

the BHC Act to engage in a nonbanking activity may open offices outside

the United States to conduct that same activity unless the bank holding

company has not received approval to conduct the activity outside the

United States. A bank holding company that currently has authority to

engage in FCM activities on a geographically limited basis may, if it

qualifies for the streamlined procedures, conduct these activities de

novo outside the U.S. through direct offices of its 4(c)(8) affiliate

without further approval. The scope of FCM and other activities that

fall under Regulation K will be considered by the Board in connection

with its review of Regulation K.

ii. Clearing-Only Activities

The Board has by order permitted bank holding companies to clear

trades that the FCM has not executed itself, and the final rule

incorporates this activity in the laundry list. The proposal retained

two restrictions currently imposed by Board order. These restrictions:

(1) Prohibit the clearing subsidiary from serving as the primary or

qualifying clearing firm for a customer; and (2) require the clearing

subsidiary to have a contractual right to decline to clear any trade

that the subsidiary believes poses unacceptable risks (a so-called

``give-up'' agreement).

The Board adopted these restrictions to ensure that the clearing

subsidiary of a bank holding company could limit its exposure to

traders that execute trades themselves or through third parties. In

particular, these restrictions prevent a bank holding company from

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

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

clearing trades for exchange locals and market makers because of

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

control its credit exposures during the trading day. The Board found

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

potential adverse effects of conducting the activity outweighed the

potential public benefits.10

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\10\ Stichting Prioriteit ABN AMRO Holding, 77 Federal Reserve

Bulletin 189 (1991).

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

The Board sought comment on whether these two restrictions on the

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

retained. The Board also invited comment on whether and how bank

holding companies are able to monitor and limit adequately the

potential exposure from conducting these activities.

Commenters who discussed FCM activities strongly supported the

removal of these two restrictions on clearing-only activities in favor

of the Board relying on on-site examination and supervision of a

clearing subsidiary's risk management systems for monitoring and

managing its credit exposures. Commenters maintained that the Board's

restrictions are not necessary in light of the risk management tools

currently available to clearing firms. They contended that clearing

firms can effectively monitor and limit their potential credit

exposures through various risk management procedures, including:

establishment of trading limits for each customer; adjustment of such

limits based on market conditions and ongoing credit evaluations;

monitoring of customer market risk, trading exposure and compliance

with trading limits; assessment and collection of initial and

maintenance performance bond or margin; and payment of gains and

collection of losses associated with open positions through a mark-to-

market process on both an intra-day and end-of-day basis.

Commenters explained that all exchanges provide clearing members

with complete information regarding trades cleared through that

member's account at the end of the trading day, which thereby limits a

clearing FCM's exposure to a client to the trading transactions on that

day. Commenters noted that technological improvements have enabled a

growing number of exchanges to develop systems that collect and report

intra-day trade matching information. Commenters also noted that, in

many markets, a clearing firm can, pursuant to exchange rules or

contractual arrangements, advise an executing broker that it will not

accept further trades of that customer. In agreements with customers,

clearing brokers also typically reserve the right to liquidate a

customer's position if the required margin is not posted promptly.

Commenters added that potential exposure is further mitigated by

various exchange rules relating to position limits, and large trading

position reporting. In addition, commenters contended that oversight by

the CFTC or the SEC, which includes capital, reporting, performance

bond and margin, and recordkeeping requirements, assists in monitoring

the management of risks associated with acting as a primary clearing

firm, including clearing trades executed by exchange locals and market

makers.

In light of these comments, the final rule deletes the proposal's

restrictions relating to primary clearing or qualifying firm activities

and customer ``give-up'' agreements.11 Examiners will assess and

supervise FCM policies, procedures and practices relating to clearing-

only activities, taking into consideration the nature of the FCM's

clients, the particular exchanges through with the subsidiary provides

clearing services, and the related risks involved. It is expected that

the Board would develop supervisory guidance on management of risks

involved in clearing-only activities.

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\11\ A commenter requested that the Board clarify in the

regulation that the securities brokerage activity permitted in

Regulation Y encompasses clearing apart from executing trades in

securities. Both the current and final rule permit securities

brokerage activities broadly, including executing-without-clearing

and clearing-without-executing trades in securities. The final rule

specifies this.

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e. Other Transactional Services

The proposal added a provision allowing a bank holding company to

provide transactional services for customers involving any derivative

or foreign exchange transaction that a bank holding company is

permitted to conduct for its own account. Commenters supported the

inclusion of these activities on the regulatory laundry list. Inclusion

of this activity is not intended to limit the securities brokerage,

FCM, private placement or riskless principal activities permitted under

the final rule.

[[Page 9311]]

Several commenters suggested that the scope of this provision be

expanded to include acting as a broker with respect to forward

contracts based on financial and nonfinancial commodities, regardless

of whether the bank holding company could invest in or trade such

instrument as principal. The commenters contended that providing

brokerage services, as agent, to customers with respect to forward

contracts on either financial or nonfinancial commodities should not be

dependent on whether the bank holding company may take a principal

position in the contract. In view of these comments, the final rule

clarifies that a bank holding company may act as a broker with respect

to forward contracts based on a financial or nonfinancial commodity

that also serves as the basis for an exchange-traded futures contract.

This permits a bank holding company to act as agent in a forward

contract that involves the same commodities and assessment of risk that

underlay the permissible FCM activities of bank holding companies

without extending this authority to forward contracts for the delayed

sale of commercial products (such as automobiles, consumer products,

etc.) or real estate.

Several commenters requested that acting as a commodity pool

operator (``CPO''), including acting as the general partner of a

partnership that invests in commodities as well as futures and options

on financial and nonfinancial commodities, be added to the list of

permissible activities. The commenters noted that the Board recently

permitted by order a bank holding company to act as a CPO, subject to a

number of limitations.12 Although some proposals to act as a CPO

may involve a combination of permissible activities, certain proposals

raise supervisory issues and open-end pool structures may raise Glass-

Steagall Act issues. In addition, some proposals raise questions about

the proper treatment of the CPO's interest in the commodity pool for

capital adequacy purposes.13 These issues can be evaluated more

effectively on a case-by-case basis through the application review

process. Accordingly, the Board has determined not to add acting as a

CPO as a separate activity on the laundry list at this time.

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\12\ See The Bessemer Group, Incorporated, 82 Federal Reserve

Bulletin 569 (1996).

\13\ For example, the limitations in the case cited above

included a requirement to consolidate, for regulatory capital

purposes, the assets and liabilities of subsidiary partnerships for

which a wholly owned subsidiary of the bank holding company would

serve as a general partner. The subsidiary partnerships were to

employ leverage (including margin debt and short sales) in making

investments.

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8. Investment or Trading Transactions as Principal

The final rule, as the proposal, incorporates decisions

This text is long and has been trimmed here. Open the source document for the complete record.