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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A97-4906

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** February 28, 1997
- **Citation:** 62 FR 9290

## Text

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on those activities that are outmoded, have been superseded by Board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

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

\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:
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\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.
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* The lease must serve as the functional equivalent of an extension
of credit (permissible high residual value leasing may not be the
functional equivalent of an extension of credit);
* The property must be acquired only for a specific leasing
transaction;
* Leased property must be re-leased or sold within 2 years of the
end of each lease;
* The maximum lease term may not exceed 40 years; and
* No leased property may be held for more than 50 years.
Commenters favored removal of these restrictions and noted that
removal of these restrictions from the regulation would permit bank
holding companies

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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 mat

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A97-4906. Public record. Not legal advice.