Investment Securities; Rules, Policies, and Procedures for Corporate Activities; and Interpretive Rulings

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 1, 5, and 7

[Docket No. 99-08]

RIN 1557-AB61

Investment Securities; Rules, Policies, and Procedures for

Corporate Activities; and Interpretive Rulings

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Notice of proposed rulemaking.

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

proposing to update and clarify its rules regarding Investment

Securities, Corporate Activities, and Interpretive Rulings. Most of the

proposed changes amend the OCC's regulation codifying interpretive

rulings. These proposed amendments clarify certain existing

interpretive rulings and add new interpretive rulings based on recent

statutory changes, judicial rulings, OCC decisions, and other

developments. The remaining proposed changes would clarify in the OCC's

regulation on investment securities its long-standing treatment of

instruments secured by Type I securities, and make technical amendments

to the OCC's regulation on corporate activities to update the names of

offices within the OCC, to clarify certain definitions, and to amend

references to the CAMEL rating system to reflect the addition of the

sixth element for sensitivity to market risk. This proposal reflects

the OCC's continuing commitment to assess the effectiveness of our

rules and to make further changes where necessary.

DATES: You should submit written comments by August 13, 1999.

ADDRESSES: You should direct written comments to the Communications

Division, Attention: Docket No. 99-08, Third Floor, Office of the

Comptroller of the Currency, 250 E Street, SW, Washington, DC 20219. In

addition, you may send comments by facsimile transmission to (202) 874-

5274, or by electronic mail to [email protected].

FOR FURTHER INFORMATION CONTACT: You can request additional information

on this proposal by calling Jacqueline Lussier, Senior Attorney, or

Mark Tenhundfeld, Assistant Director, Legislative and Regulatory

Activities Division, (202) 874-5090. You can inspect and photocopy the

comments at the OCC's Public Disclosure Room, First Floor, 250 E

Street, SW, Washington, DC 20019, between 9:00 am and 5:00 pm on

business days. You can make an appointment to inspect the comments by

calling (202) 874-5043.

SUPPLEMENTARY INFORMATION:

Section-by-Section Analysis of Proposed Changes

As previously noted, most of the changes proposed amend part 7. The

OCC proposes to amend part 7 to clarify and supplement its provisions

where necessary. In addition, the OCC proposes to add new interpretive

rulings, based on recent statutory changes, judicial rulings, OCC

decisions, and other developments. These changes are described below,

followed by a discussion of the proposed changes to parts 1 and 5.

Part 7--Interpretive Rulings

Messenger Service (Sec. 7.1012)

Under 12 U.S.C. 36(j), a ``branch'' of a bank is defined to include

any branch bank where deposits are received, or checks paid, or money

lent. Current Sec. 7.1012(c) sets forth circumstances under which a

national bank and its customers may use a messenger service for various

purposes without the messenger service being deemed a ``branch'' under

section 36. These criteria are derived from caselaw. However, the

criteria do not reflect two recent federal court decisions.1

This proposal amends Sec. 7.1012(c) to reflect these recent cases.

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\1\ See Cades v. H & R Block, 43 F.3d 869 (4th Cir. 1994), cert.

denied, 515 U.S. 1103 (1995); Christiansen v. Beneficial Nat'l Bank,

972 F. Supp. 681 (S.D. Ga. 1997). These cases addressed the issue of

whether a third party should be considered to be a branch of a

national bank where a tax preparation company originated tax refund

anticipation loans between a national bank and taxpayers and

conveyed the loan proceeds to the customers.

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Under the current rule, in order to avoid being treated as a bank

branch, a messenger service, including both a messenger service

affiliated with a bank and a service that is independent of a bank,

generally must both make its services available to the public,

including other depository institutions, and retain the ultimate

discretion to determine which customers and geographic areas it will

serve. 12 CFR 7.1012(c)(2)(ii)(A) and (B). The recent cases indicate

that this test should apply differently depending on whether the

service is affiliated with a bank. Pursuant to these cases, a

nonaffiliated service need show only that it has the discretion to

determine, in its own business judgment, which customers it will serve

and where. In contrast, an affiliated service, because it may be more

likely to favor its affiliates as a result of its common ownership or

control, must show that it actually serves the public generally,

including nonaffiliated depository institutions.

The OCC concludes that this analysis is appropriate when

determining if a messenger service is a bank branch. Accordingly, the

proposal combines the criteria in Sec. 7.1012(c)(2)(ii)(A) and

(c)(2)(ii)(B) into one new paragraph and applies the resulting criteria

differently depending on whether or not the messenger service is

affiliated with the bank. This means that a nonaffiliated messenger

service need only demonstrate that it has the discretion to determine,

in its own business judgment, whom it will serve and where. In

contrast, since the operations of a messenger service that is

affiliated

[[Page 31750]]

with a bank could be influenced by that bank, an affiliated messenger

service must continue to demonstrate both that it actually provide

services to the general public, including nonaffiliated depository

institutions, and that it has the discretion to determine whom it will

serve and where.

The proposal also makes a stylistic amendment to

Sec. 7.1012(c)(2)(i) to state the rule more economically.

Independent Undertakings To Pay Against Documents (Sec. 7.1016)

Section 7.1016 codifies interpretations concerning the issuance by

national banks of letters of credit and other independent undertakings.

The proposal makes five technical amendments to update this section.

The first amendment changes footnote 1 by clarifying that the

United Nations Convention on Independent Guarantees and Standby Letters

of Credit was adopted by the U.N. General Assembly in 1995 and signed

by the United States in 1997. The second amends footnote 1 by adding

the recently finalized International Standby Practices (ISP-98) to the

footnote as another important source of applicable laws or rules of

practice recognized by law related to independent undertakings. The

third amendment replaces the terms ``account party'' and ``customer''

in the text (which refer to the party for whose account an independent

undertaking is issued) with the term ``applicant'' (which is the term

used in the laws and rules of practice cited in the footnote) in

Sec. 7.1016(a), (b)(1)(iii)(C), and (b)(1)(iv). The fourth clarifies,

in Sec. 7.1016(b)(2)(ii), that the precautions taken when an

independent undertaking is renewed apply only to automatic renewals.

Renewals that are within a bank's discretion necessarily allow the bank

to make a credit assessment before renewing. Finally, the fifth

amendment updates one of the telephone numbers in the footnote.

National Bank as Guarantor or Surety on Indemnity Bond (Sec. 7.1017)

In recent rulemakings 2 that amended part 7 and part 28

(the OCC's rule on international banking activities), the provision on

a national bank's guarantees of its foreign operations was relocated

from former Sec. 7.7012 to Sec. 28.4(c) in order to consolidate the

regulations governing international banking activities in one part of

the OCC's regulations. No substantive change was made to the section

relocated. However, because part 7 still has a section on national

banks acting as guarantors (current Sec. 7.1017) and because this

section no longer addresses guarantees abroad, several people have

asked whether a national bank still may guarantee the liabilities of

its foreign operations. The answer is yes, and, to alleviate this

apparent confusion, the proposal adds a cross-reference in Sec. 7.1017

to Sec. 28.4(c).

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\2\ 61 FR 4862 (Feb. 9, 1996) (amending part 7); 61 FR 19524

(May 2, 1996) (amending 12 CFR part 28).

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Ownership of Stock Necessary To Qualify as Director (Sec. 7.2005)

A national bank director must own a qualifying equity interest

(qualifying shares) in a national bank or the company that controls

that national bank. 12 U.S.C. 72; 12 CFR 7.2005. Current Sec. 7.2005

codifies the OCC's guidance about the various ways in which a director

may comply with the requirement.

The proposed revisions to Sec. 7.2005(b)(4) codify guidance

provided in OCC interpretive letters 3 approving buyback or

repurchase agreements between shareholders and prospective directors.

Generally, under a buyback agreement, the transferring shareholder

sells shares of the bank or its holding company to a director subject

to an agreement that the director will sell the shares back to the

transferring shareholder when the director's service ends. This enables

the director to own qualifying shares while permitting the transferring

shareholder to prevent the transfer of the shares to unknown parties.

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\3\ See, e.g., Letter from Julie L. Williams, Chief Counsel

(Mar. 31, 1997) (unpublished); Letter from Jonathan Rushdoony,

Attorney (Mar. 27, 1986) (unpublished); Letter from Leslie G.

Linville, Senior Attorney (Jan. 9, 1986) (unpublished). You can

inspect and photocopy the unpublished OCC staff interpretive letters

cited in this preamble (in redacted form) at the OCC's Public

Disclosure Room, First Floor, 250 E Street, SW, Washington, DC

20219. You can make an appointment to inspect the letters by calling

(202) 874-5043.

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Consistent with these interpretive letters, proposed new paragraphs

(b)(4)(ii), (iii), and (iv) of Sec. 7.2005 state that a buyback

agreement may give a director the option of transferring shares back to

the transferring shareholder if the director no longer needs those

shares to satisfy the ownership requirement. The transferring

shareholder may retain a right of first refusal to reacquire the shares

if the director seeks to transfer ownership to a third person. Further,

a director may assign the right to receive dividends or distributions

on the shares back to the original shareholder and execute an

irrevocable proxy authorizing the original shareholder to vote the

shares. This change will make it easier for banks, including community

banks in particular, to attract qualified people to serve on bank

boards.

Oath of Directors (Sec. 7.2008)

Current Sec. 7.2008 provides guidance on the methods by which the

oath of directors may be administered. However, this section does not

provide instructions for the filing or retention of executed oaths,

prompting questions about what a national bank should do with the

executed oaths once they are obtained.

To respond to these requests for guidance, the proposal amends

paragraph (c) of Sec. 7.2008 so that it informs national banks to file

the original executed oaths with the OCC and retain a copy in the

bank's records in accordance with the instructions set forth in the

Comptroller's Corporate Manual. This guidance is consistent with 12

U.S.C. 73, which states that each director's executed and subscribed

oath must be transmitted to the Comptroller of the Currency and filed

and preserved in the Comptroller's office for a period of 10 years.

The proposal also amends the last sentence in Sec. 7.2008(b) to

reflect the name for the manual currently in use, namely, the

``Comptroller's Corporate Manual.''

Acquisition and Holding of Shares as Treasury Stock (Sec. 7.2020)

Current Sec. 7.2020 provides that a national bank has authority

under 12 U.S.C. 24(Seventh) to acquire its outstanding shares and hold

them as treasury stock to fulfill a legitimate corporate purpose, as

long as the bank complies with the restrictions and procedures

specified in 12 U.S.C. 59. The only guidance contained in current

Sec. 7.2020 on what qualifies as a legitimate corporate purpose is the

statement that it is impermissible to acquire or hold treasury stock

for speculation.

Several OCC interpretive letters 4 explain the term

further, providing that ``legitimate corporate purpose'' includes: (a)

holding shares in connection with an officer or employee stock option,

bonus or repurchase plan; (b) holding shares for sale to a potential

director to meet ``qualifying share'' requirements; (c) purchasing a

director's qualifying shares upon his or her resignation or death if

there is no ready

[[Page 31751]]

market for the shares; (d) reducing the number of shareholders in order

to qualify the bank for reorganization as a Subchapter S corporation;

and (e) reducing the number of shareholders to lower the bank's costs

associated with shareholder communications and meetings.

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\4\ See, e.g., Interpretive Letter No. 825 (Mar. 16, 1998),

reprinted in [1997-98 Transfer Binder] Fed. Banking L. Rep. (CCH)

para. 81-274; Interpretive Letter No. 786 (June 9, 1997), reprinted

in [1997 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-213

(IL 786); Interpretive Letter No. 660 (Dec. 19, 1994), reprinted in

[1994-95 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,608

(IL 660).

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The proposal revises Sec. 7.2020 to include these examples of

legitimate corporate purposes. The examples listed are not exclusive.

There may be additional circumstances under which a national bank's

acquisition and holding of its shares as treasury stock will serve a

legitimate corporate purpose. While the OCC expects that this guidance

on what is a legitimate corporate purpose will benefit all national

banks, certain of the examples listed as legitimate purposes (namely,

the purchasing of shares upon a director's resignation or death if

there is no ready market for the shares and qualifying the bank for

treatment under the tax laws as a Subchapter S corporation) are

expected to provide a particular benefit to community banks.

Reverse Stock Splits (Proposed New Sec. 7.2023)

In IL 786, the OCC considered the appropriateness of a reverse

stock split, a restructuring of ownership interests in which a national

bank reduces the number of its outstanding shares of stock by, for

instance, replacing outstanding shares with fewer shares of a new

issuance and paying cash to the minority shareholders for their

interests. That opinion determined that the national banking laws

permit a reverse stock split, as long as the bank provides adequate

protection for dissenting shareholders' rights and the transaction

serves a legitimate corporate purpose.

Because the reverse stock split is a device that post-dates most

corporate governance provisions in the national banking laws, those

laws do not explicitly address the authority of a national bank to

effect a reverse stock split. Several provisions of the banking laws--

including 12 U.S.C. 59, 83, 214a, 215, and 215a--authorize components

of a reverse stock split that, when read together, permit the

transaction. One provision (12 U.S.C. 59) permits a national bank to

reduce its capital upon the vote of shareholders holding two-thirds of

its capital stock and OCC approval. Other provisions (12 U.S.C. 214a,

215, and 215a) authorize a national bank to engage in corporate

combinations, including mergers and consolidations, although the bank

must provide rights to shareholders dissenting to these transactions.

Another provision (12 U.S.C. 83) allows national banks to hold treasury

stock for legitimate corporate purposes after obtaining OCC approval

pursuant to section 59.5 The OCC also recognizes that a bank

may acquire its outstanding shares and hold them as treasury stock in

connection with a reverse stock split.

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\5\ See IL 660.

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In light of this statutory authority, IL 786 concluded that a

reverse stock split is permissible if the action serves a legitimate

corporate purpose (in the case discussed in IL 786, a desire to reduce

the number of shareholders to qualify for Subchapter S status) and

dissenters' rights are adequately protected.6 The proposal

codifies this conclusion in new Sec. 7.2023. This conclusion is

expected to benefit all national banks by clarifying the extent of

their flexibility in restructuring their ownership interests, but it is

expected to provide particular benefit to community banks that desire,

for instance, to restructure in order to qualify as a Subchapter S

corporation.

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\6\ This conclusion is consistent with the most recent

applicable court decision, NoDak Bancorp. v. Clarke, 998 F.2d 1416

(8th Cir. 1993), in which the court upheld the OCC's approval of a

cash-out merger in which the OCC found that there was a valid

corporate purpose for the transaction and that minority shareholders

were entitled to dissenters' rights. In an earlier decision, the

Eleventh Circuit found in Lewis v. Clark, 911 F.2d 1558 (11th Cir.

1990), reh'g denied, 972 F.2d 1351 (1991), that the OCC lacked the

authority to approve a bank merger that required minority

shareholders to accept cash for their shares while the majority

shareholders were eligible to receive stock in the resulting bank,

even where the minority shareholders had appraisal rights. The NoDak

court distinguished Lewis v. Clark, finding that a national bank

could cash out minority shareholders under the National Bank Act, as

long as there is a valid business purpose and the minority

shareholders are entitled to dissenters' rights.

In Bloomington Nat'l Bank v. Telfer, 916 F.2d 1305 (7th Cir.

1990), the court reversed the OCC's approval of a reverse stock

split. The court held that the reverse stock split plan violated 12

U.S.C. 83 and 214a-215a, after concluding that the transaction had

no legitimate business purpose and failed to provide for dissenters'

right. The court expressly declined to answer whether section 83

prohibits all reverse stock split transactions, noting that its

opinion was limited to the facts of the case. Id. at 1308 n.4, 1309.

To clarify how the OCC applies the governing law in light of these

decisions, the proposal reflects the OCC's position that the better

reasoned view in the federal courts is that reverse stock splits

will be approved if there is a legitimate corporate purpose and if

shareholders are provided adequate dissenters' rights.

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Visitorial Powers (Sec. 7.4000)

The proposal revises Sec. 7.4000, ``Books and records of national

banks,'' to clarify the extent of the OCC's visitorial powers under 12

U.S.C. 484 and other federal statutes. Section 484 provides, in

relevant part, that no national bank is subject to any visitorial

powers except as authorized by federal law. 12 U.S.C.

484(a).7 Congress vested the OCC with exclusive visitorial

powers to ensure the cohesive, uniform supervision of national banks.

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\7\ The term ``visitorial,'' as used in section 484, derives

from English common law, which used the term ``visitation'' to refer

to the act of a superintending officer who visits a corporation to

examine its manner of conducting business and enforce observance of

the laws and regulations. Guthrie v. Harkness, 199 U.S. 148, 158

(1905) (quoting First National Bank of Youngstown v. Hughes, 6 F.

737 (6th Cir. 1881)). The Guthrie court noted that visitors ``have

power to keep [corporations] within the legitimate sphere of their

operations, and to correct all abuses of authority, and to nullify

all irregular proceedings.'' Id. For purposes of section 484, the

term has been construed broadly, as discussed in the text following

this footnote.

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Courts have defined ``visitation'' expansively to include the

inspection, regulation, or control of the operations of a bank to

enforce the bank's observance of the law. See First National Bank of

Youngstown v. Hughes, 6 F. 737, 740 (6th Cir. 1881), appeal dismissed,

106 U.S. 523 (1883). See also Peoples Bank v. Williams, 449 F. Supp.

254 (W.D. Va. 1978) (visitorial powers involve the exercise of the

right of inspection, superintendence, direction, or regulation over a

bank's affairs).8

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\8\ Recently, a federal district court upheld the OCC's right to

exercise exclusive regulatory authority to enforce applicable state

law against national banks when it enjoined a state banking

authority's administrative enforcement proceeding against two

national banks. Ruling on Motion for Preliminary Injunction, First

Union Nat'l Bank v. Burke, No. 3:98cv2171 (D. Ct. Apr. 7, 1999)

(appeal pending).

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Proposed Sec. 7.4000 codifies the definition of visitorial powers

and illustrates what visitorial powers include by providing a non-

exclusive list of these powers. They include: (a) examination of a

bank; (b) inspection of a bank's books and records; (c) regulation and

supervision of activities authorized or permitted under federal banking

law; and (d) enforcing compliance with any applicable federal or state

laws concerning those activities. The proposal also retitles

Sec. 7.4000 as ``Visitorial powers'' to reflect the rule's intended

focus.

The proposal also reorganizes Sec. 7.4000 by grouping together, in

proposed paragraph (b), the exceptions noted in several different

places in the current rule that are explicitly provided by federal law

to the OCC's exclusive visitorial powers. These exceptions do not

preclude the OCC from exercising its concurrent authority to inspect a

national bank's books and records in the instances listed. This

reorganization of the exceptions in the current rule is done solely for

ease of reference. None of the exceptions listed is new, and the list

is not exclusive.9

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\9\ The exceptions listed in the rule are those where federal

statutory law explicitly provides for another agency to inspect a

national bank's books and records. In addition, the OCC does not

object to state insurance regulators inspecting the records of

national banks related to their insurance activities that are

regulated under applicable state law.

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[[Page 31752]]

Establishment and Operation of Remote Service Units (Proposed New

Sec. 7.4003)

The authority of national banks to establish ``branches'' in a

state is linked to the extent that state law authorizes state banks to

establish branches. See 12 U.S.C. 36(c)-(g). Branches are the only

national bank facilities that are subject to state geographic

restrictions or related approval requirements under 12 U.S.C. 36. The

national bank branching statute, at 12 U.S.C. 36(j), defines a

``branch'' to include any branch bank, branch office, branch agency,

additional office, or any branch place of business located in any state

at which deposits are received, checks paid, or money lent. Section

36(j) explicitly excludes, however, an automated teller machine (ATM)

or remote service unit (RSU) \10\ from the definition of ``branch.''

\11\ In light of the exclusion of ATMs and RSUs from 12 U.S.C. 36(j),

the OCC has concluded in recent interpretive letters \12\ that ATMs and

RSUs established and operated by national banks are not subject to any

state-imposed geographic or operational restrictions or licensing laws.

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\10\ An RSU is an automated facility, operated by a customer of

a bank, that engages in one or more of the core banking functions of

receiving deposits, paying withdrawals, or lending money. An RSU

includes ATMs, automated loan machines, and automated devices for

receiving deposits, and may be equipped with a telephone or

televideo device that allows contact with bank personnel.

\11\ This exclusion was added to section 36(j) by the Economic

Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA), Pub.

L. 104-208, sec. 2205, enacted Sept. 30, 1996 (110 Stat. 3009).

\12\ See, e.g., Interpretive Letter No. 789 (June 27, 1997),

reprinted in [1997 Transfer Binder] Fed. Banking L. Rep. (CCH) para.

81-216 (IL 789); Interpretive Letter No. 772 (Mar. 6, 1997),

reprinted in [1996-97 Transfer Binder] Fed. Banking L. Rep. (CCH)

para. 81-136 (IL 772).

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Proposed new Sec. 7.4003 codifies the principle, reflected in those

interpretive letters and other OCC interpretations \13\ that automated

loan machines (ALMs) and automated devices for receiving deposits are

appropriately considered to be RSUs and, accordingly, are not subject

to any state-imposed geographic or operational restrictions or

licensing laws. As previously noted, RSUs are automated facilities,

operated by customers of a bank, that receive deposits, pay

withdrawals, or lend money. Similarly, ALMs and automated deposit-

receiving devices are automated facilities, operated by bank customers,

that permit a customer, in the case of an ALM, to apply for a loan and

receive the loan proceeds or have them deposited into the customer's

existing account or, in the case of the deposit-receiving device, make

deposits. ALMs and automated deposit-receiving devices qualify under

this standard as RSUs and, therefore, are regulated in the same way as

other RSUs.

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\13\ Interpretive Letter No. 838 (April 15, 1998), reprinted in

[Current Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-293;

Interpretive Letter No. 821 (Feb. 17, 1998), reprinted in [Current

Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-271; IL 789; IL

772. Despite the plain language of section 36(j), one federal

district court case, Bank One, Utah v. Guttau, Civil No. 4-98-CV-

10247 (D. Iowa July 24, 1998), has held that Iowa ATM law is not

preempted by the National Bank Act. This holding is on appeal to the

Eighth Circuit.

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Deposit Production Offices (Proposed New Sec. 7.4004)

A national bank facility that does not receive deposits, pay

checks, or lend money is not a branch for purposes of 12 U.S.C. 36(j).

The OCC has determined that a national bank deposit production office

(DPO), which merely assists bank customers in making deposits, is not a

branch because it does not engage in any of the core banking functions

that would cause it to be a branch under 12 U.S.C. 36.\14\

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\14\ Interpretive Letter No. 691 (Sept. 25, 1995), reprinted in

[1995-96 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-006

(deposit production offices are not branches as long as deposits are

not accepted at the DPO but rather are mailed by the customer to the

bank after filling out preliminary forms at the DPO); Interpretive

Letter No. 638 (Jan. 6, 1994), reprinted in [1993-94 Transfer

Binder] Fed. Banking L. Rep. (CCH) para. 83,525 (a non-branch

facility may perform deposit origination functions such as providing

information on deposit products or handling application forms, as

long as the activity stops short of actually receiving deposits).

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Proposed new Sec. 7.4004 codifies this interpretation. Paragraph

(a) states that a DPO must not receive deposits in order for it to be

excluded from 12 U.S.C. 36(j)'s definition of ``branch,'' and that all

deposit and withdrawal transactions by customers using a DPO must be

performed by the customer, either in person at the main office or a

branch office of the bank, or by mail, electronic transfer, or a

similar method of transfer. Paragraph (b) states that a national bank

may use the services of, and compensate, persons not employed by the

bank for its deposit production activities. This flexibility to operate

a DPO with people other than bank employees is consistent with the

approach taken with respect to national bank loan production offices

(LPOs). See 12 CFR 7.1004.

Combination of LPO, DPO, and RSU (Proposed New Sec. 7.4005)

When a facility combines the non-branch functions of an LPO, DPO,

and RSU, the OCC has concluded that the facility is not a branch by

virtue of that combination.\15\ Since an LPO, DPO, or RSU is not,

individually, a branch under 12 U.S.C. 36(j), it follows that any

combination of these facilities at one location also would not be a

branch. The proposal adds this interpretation in new Sec. 7.4005.

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\15\ Interpretive Letter No. 843 (Sept. 29, 1998), reprinted in

[Current Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-298

(IL 843). The proposal also reflects the position the OCC has taken

as amicus curiae in litigation pending in the Federal District Court

of Colorado in a case with substantially similar facts as those in

IL 843. See OCC's Brief Amicus Curiae filed in First Nat'l Bank of

McCook v. Fulkerson, Civil Action No. 98- D-1024 (filed Jan. 4,

1999).

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Part 1--Investment Securities

The OCC proposes to amend 12 CFR 1.3(e)(1) to clarify a provision

that has led to some confusion. Current Sec. 1.3(e)(1) sets forth the

regulatory treatment of Type IV securities that are fully secured by

Type I securities. The OCC proposes to eliminate the statement in

Sec. 1.3(e)(1) that a national bank may deal in Type IV securities that

are fully secured by Type I securities. This language has led to

confusion about the treatment of Type V securities and about the

relationship of the current provision with Sec. 1.3(g) regarding

securitization. Consistent with previous judicial rulings and OCC

decisions,\16\ the OCC will continue to apply its long-standing

regulatory treatment of asset-backed instruments that are fully secured

by Type I securities and treat those instruments as Type I securities.

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\16\ See Security Pacific v. Clarke, 885 F.2d 1034 (2d Cir.

1989), cert. denied, 493 U.S. 1070 (1990) (national bank authority

to securitize assets); Interpretive Letter No. 514 (May 5, 1990),

reprinted in [1990-91 Transfer Binder] Fed. Banking L. Rep. (CCH)

para. 83,218 (bonds collateralized by Gov't Nat'l Mortgage Ass'n

(GNMA), Fed. Nat'l Mortgage Ass'n (FNMA) and Fed. Home Loan Mortgage

Ass'n (FHLMC) pass-through certificates); Interpretive Letter No.

362 (May 22, 1986), reprinted in [1985-87 Transfer Binder] Fed.

Banking L. Rep. (CCH) para. 85,532 (issuing, underwriting and

dealing in evidences of indebtedness collateralized by GNMA, FNMA or

FHLMC certificates); Interpretive Letter No. 378 (April 24, 1987),

reprinted in [1988-89 Transfer Binder] Fed. Banking L. Rep. (CCH)

para. 85,602 (issuance and sale of collateralized mortgage

obligations--bonds representing interests in pools of mortgages or

mortgage-related obligations); Interpretive Letter No. 257 (April

12, 1983), reprinted in [1983-84 Transfer Binder] Fed. Banking L.

Rep. (CCH) para. 85,421 (underwriting and dealing in mortgage-backed

pass-through certificates evidencing undivided interests in Fed.

Housing Admin. insured mortgage pools purchased by the bank from

GNMA); Investment Securities Letter No. 29 (Aug. 3, 1988), reprinted

in [1988-89 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,899

(investment limits for asset-backed securities consisting of General

Motors Acceptance Corp. receivables).

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Part 5--Rules, Policies, and Procedures for Corporate Activities

In 1996, the interagency Uniform Financial Institutions Rating

System--

[[Page 31753]]

then commonly referred to as the CAMEL rating system \17\--was updated

to add a sixth component, addressing sensitivity to market risk. \18\

To reflect the addition of that sixth component, the acronym CAMEL was

changed to CAMELS. In a recent rulemaking \19\ that amended 12 CFR part

3 (the OCC's rule on minimum capital ratios), the OCC made the

conforming amendment by changing ``CAMEL'' to ``CAMELS'' in

Sec. 3.6(c). However, the other OCC regulation in which the term CAMEL

is used, part 5, was not updated concurrently.

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\17\ The rating system was referred to as the CAMEL rating

system because it assessed five components of a bank's performance:

capital adequacy, asset quality, management administration,

earnings, and liquidity.

\18\ 61 FR 67021 (Dec. 19, 1996).

\19\ 64 FR 10194 (Mar. 2, 1999).

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This proposal changes the references to CAMEL in several sections

of part 5 to CAMELS, reflecting, as discussed in the preceding

paragraph, the recent addition of ``sensitivity to market risk'' to the

Uniform Financial Institutions Rating System. The proposal also

contains technical amendments to several sections in part 5 to conform

them to provisions in the Comptroller's Corporate Manual that have been

revised since part 5 last was amended. Finally, the proposal makes a

technical amendment to Sec. 5.35(g)(3) to correct an error in a

reference to another paragraph of Sec. 5.35.

Request for Comments

The OCC invites comment on any of the proposed changes.

The OCC also seeks comments on the impact of each proposal on

community banks. The OCC recognizes that community banks operate with

more limited resources than larger institutions and may present a

different risk profile. Thus, the OCC specifically requests comments on

the impact of each proposal on community banks' current resources and

available personnel with the requisite expertise, and whether the goals

of the proposed regulation could be achieved, for community banks,

through an alternative approach.

Executive Order 12866 and the President's memorandum of June 1,

1998, require each agency to write all rules in plain language. We

invite your comments on how to make this proposed rule easier to

understand. For example:

Have we organized the material to suit your needs?

Are the requirements in the rule clearly stated?

Does the rule contain technical language or jargon that

isn't clear?

Would a different format (grouping and order of sections,

use of headings, paragraphing) make the rule easier to understand?

Would more (but shorter) sections be better?

What else could we do to make the rule easier to

understand?

Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act, 5

U.S.C. 605(b), the OCC hereby certifies that this proposal will not

have a significant economic impact on a substantial number of small

entities. As is discussed more fully in the preamble to this proposal,

the proposal clarifies and updates 12 CFR parts 1, 5, and 7. The

proposal imposes no new requirements on national banks. Accordingly, a

regulatory flexibility analysis for the proposal is not required.

Executive Order 12866

The OCC has determined that this proposal is not a significant

regulatory action under Executive Order 12866.

Unfunded Mandates Reform Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C.

1532 (Unfunded Mandates Act), requires that the agency prepare a

budgetary impact statement before promulgating any rule likely to

result in a federal mandate that may result in the expenditure by

state, local, and tribal governments, in the aggregate, or by the

private sector, of $100 million or more in any one year. If a budgetary

impact statement is required, section 205 of the Unfunded Mandates Act

also requires the agency to identify and consider a reasonable number

of regulatory alternatives before promulgating the rule.

The OCC has determined that this proposal will not result in

expenditures by state, local, and tribal governments, or by the private

sector, of $100 million or more in any one year. Accordingly, the OCC

has not prepared a budgetary impact statement or specifically addressed

any regulatory alternatives. The proposal is clarifying in nature and

imposes no new requirements on national banks.

List of Subjects

12 CFR Part 1

Banks, banking, National banks, Reporting and recordkeeping

requirements, Securities.

12 CFR Part 5

Administrative practice and procedure, National banks, Reporting

and recordkeeping requirements, Securities.

12 CFR Part 7

Credit, Insurance, Investments, National banks, Reporting and

recordkeeping requirements, Securities, Surety bonds.

Authority and Issuance

For the reasons set out in the preamble, chapter I of title 12 of

the Code of Federal Regulations is proposed to be amended as follows:

PART 1--INVESTMENT SECURITIES

1. The authority citation for part 1 continues to read as follows:

Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a.

2. In Sec. 1.3, paragraph (e)(1) is revised to read as follows:

Sec. 1.3 Limitations on dealing in, underwriting, and purchase and

sale of securities.

* * * * *

(e) Type IV securities--(1) General. A national bank may purchase

and sell Type IV securities for its own account. Except as described in

paragraph (e)(2) of this section, the amount of the Type IV securities

that a bank may purchase and sell is not limited to a specified

percentage of the bank's capital and surplus.

* * * * *

PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES

3. The authority citation for part 5 continues to read as follows:

Authority: 12 U.S.C. 1 et seq., 93a.

4. In Sec. 5.3, paragraph (c) is revised and paragraph (g)(2) is

amended by revising the term ``(CAMEL)'' to read ``(CAMELS)'', to read

as follows:

Sec. 5.3 Definitions.

* * * * *

(c) Appropriate district office means:

(1) Bank Organization and Structure for all national bank

subsidiaries of certain holding companies assigned to the Washington,

D.C., licensing unit;

(2) The appropriate OCC district office for all national bank

subsidiaries of certain holding companies assigned to a district office

licensing unit;

(3) The OCC's district office where the national bank's supervisory

office is located for all other banks; or

[[Page 31754]]

(4) The OCC's International Banking and Finance Department for

federal branches and agencies of foreign banks.

* * * * *

Sec. 5.11 [Amended]

5. In Sec. 5.11, paragraph (i)(1) is amended by revising the phrase

``a representative of the OCC'' to read ``presiding officer''.

6. In Sec. 5.33, paragraph (d)(2)(i) is revised to read as follows:

Sec. 5.33 Business combinations.

* * * * *

(d) * * *

(2) * * *

(i) A business combination between eligible banks, or between an

eligible bank and an eligible depository institution, that are

controlled by the same holding company or that will be controlled by

the same holding company prior to the combination; or

* * * * *

Sec. 5.35 [Amended]

7. In Sec. 5.35, paragraph (g)(3) is amended by revising the term

``paragraph (h)'' to read ``paragraph (i)''.

Sec. 5.37 [Amended]

8. In Sec. 5.37, paragraphs (d)(1)(i) and (d)(3) are amended by

revising the term ``district'' to read ``supervisory'', and paragraph

(d)(3) is amended further by revising the term ``(CAMEL)'' to read

``(CAMELS)''.

Sec. 5.51 [Amended]

9. In Sec. 5.51, paragraph (c)(6)(i) is amended by revising the

term ``(CAMEL)'' to read ``(CAMELS)''.

Sec. 5.64 [Amended]

10. In Sec. 5.64, paragraph (b) is amended by revising the term

``district'' to read ``supervisory''.

PART 7--INTERPRETIVE RULINGS

11. The authority citation for part 7 continues to read as follows:

Authority: 12 U.S.C. 1 et seq. and 93a.

12. In Sec. 7.1012, paragraphs (c)(2)(i) and (c)(2)(ii) are revised

and paragraphs (c)(2)(iii), (c)(2)(iv), (c)(2)(v), and (c)(2)(vi) are

added to read as follows:

Sec. 7.1012 Messenger service.

* * * * *

(c) * * *

(2) * * *

(i) A party other than the national bank owns or rents the

messenger service and its facilities and employs the persons who

provide the service;

(ii)(A) The messenger service retains the discretion to determine

in its own business judgment which customers and geographic areas it

will serve; or

(B) If the messenger service and the bank are under common

ownership or control, the messenger service actually provides its

services to the general public, including other depository

institutions, and retains the discretion to determine in its own

business judgment which customers and geographic areas it will serve;

(iii) The messenger service maintains ultimate responsibility for

scheduling, movement, and routing;

(iv) The messenger service does not operate under the name of the

bank, and the bank and the messenger service do not advertise, or

otherwise represent, that the bank itself is providing the service,

although the bank may advertise that its customers may use one or more

third party messenger services to transact business with the bank;

(v) The messenger service assumes responsibility for the items

during transit and for maintaining adequate insurance covering thefts,

employee fidelity, and other in-transit losses; and

(vi) The messenger service acts as the agent for the customer when

the items are in transit. The bank deems items intended for deposit to

be deposited when credited to the customer's account at the bank's main

office, one of its branches, or another permissible facility, such as a

back office facility that is not a branch. The bank deems items

representing withdrawals to be paid when the items are given to the

messenger service.

* * * * *

13. In Sec. 7.1016, paragraphs (a) including the footnote,

(b)(1)(iii)(C), (b)(1)(iv), and (b)(2)(ii) are revised to read as

follows:

Sec. 7.1016 Independent undertakings to pay against documents.

(a) General authority. A national bank may issue and commit to

issue letters of credit and other independent undertakings within the

scope of the applicable laws or rules of practice recognized by

law.1 Under such letters of credit and other independent

undertakings, the bank's obligation to honor depends upon the

presentation of specified documents and not upon nondocumentary

conditions or resolution of questions of fact or law at issue between

the applicant and the beneficiary. A national bank may also confirm or

otherwise undertake to honor or purchase specified documents upon their

presentation under another person's independent undertaking within the

scope of such laws or rules.

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\1\ Samples of such laws or rules of practice include, but are

not limited to: the applicable version of Article 5 of the Uniform

Commercial Code (UCC) (1962, as amended 1990) or revised Article 5

of the UCC (as amended 1995) (available from West Publishing Co., 1/

800/328-4880); the Uniform Customs and Practice for Documentary

Credits (International Chamber of Commerce (ICC) Publication No.

500) (available from ICC Publishing, Inc., 212/206-1150); the

International Standby Practices (ISP-98) (available from the

Institute of International Banking Law & Practice, 301/869-9840);

the United Nations Convention on Independent Guarantees and Standby

Letters of Credit (adopted by the U.N. General Assembly in 1995 and

signed by the U.S. in 1997) (available from the U.N. Commission on

International Trade Law, 212/963-5353); and the Uniform Rules for

Bank-to-Bank Reimbursements Under Documentary Credits (ICC

Publication No. 525) (available from ICC Publishing, Inc., 212/206-

1150); as any of the foregoing may be amended from time to time.

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(b) * * *

(1) * * *

(iii) * * *

(C) Entitle the bank to cash collateral from the applicant on

demand (with a right to accelerate the applicant's obligations, as

appropriate); and

(iv) The bank either should be fully collateralized or have a post-

honor right of reimbursement from the applicant or from another issuer

of an independent undertaking. Alternatively, if the bank's undertaking

is to purchase documents of title, securities, or other valuable

documents, the bank should obtain a first priority right to realize on

the documents if the bank is not otherwise to be reimbursed.

(2) * * *

(ii) In the event that the undertaking provides for automatic

renewal, the terms for renewal should be consistent with the bank's

ability to make any necessary credit assessments prior to renewal;

* * * * *

14. In Sec. 7.1017, the introductory text is revised to read as

follows:

Sec. 7.1017 National bank as guarantor or surety on indemnity bond.

A national bank may lend its credit, bind itself as a surety to

indemnify another, or otherwise become a guarantor (including, pursuant

to 12 CFR 28.4, guaranteeing the deposits and other liabilities of its

Edge corporations and Agreement corporations and of its corporate

instrumentalities in foreign countries), if:

* * * * *

15. In Sec. 7.2005, paragraph (b)(4) is revised to read as follows:

Sec. 7.2005 Ownership of stock necessary to qualify as director.

* * * * *

(b) * * *

(4) Other arrangements--(i) Shares held through retirement plans

and similar arrangements. A director may

[[Page 31755]]

hold his or her qualifying interest through a profit-sharing plan,

individual retirement account, retirement plan, or similar arrangement,

if the director retains beneficial ownership and legal control over the

shares.

(ii) Shares held subject to buyback agreements. A director may

acquire and hold his or her qualifying interest pursuant to a stock

repurchase or buyback agreement with a transferring shareholder under

which the director purchases the qualifying shares subject to an

agreement that the transferring shareholder will repurchase the shares

when, for any reason, the director ceases to serve in that capacity.

The agreement may give the transferring shareholder a right of first

refusal to repurchase the qualifying shares if the director seeks to

transfer ownership of the shares to a third person.

(iii) Assignment of right to dividends or distributions. A director

may assign the right to receive all dividends or distributions on his

or her qualifying shares to another, including a transferring

shareholder, if the director retains beneficial ownership and legal

control over the shares.

(iv) Execution of proxy. A director may execute a revocable or

irrevocable proxy authorizing another, including a transferring

shareholder, to vote his or her qualifying shares, provided the

director retains beneficial ownership and legal control over the

shares.

* * * * *

16. In Sec. 7.2008, the last sentence of paragraph (b) is revised

and a new paragraph (c) is added to read as follows:

Sec. 7.2008 Oath of directors.

* * * * *

(b) Execution of the oath. * * * Appropriate sample oaths are

located in the ``Comptroller's Corporate Manual.''

(c) Filing and recordkeeping. A national bank must file the

original executed oaths of directors with the OCC and retain a copy in

the bank's records in accordance with the Comptroller's Corporate

Manual filing and recordkeeping instructions for executed oaths of

directors.

17. Section 7.2020 is revised to read as follows:

Sec. 7.2020 Acquisition and holding of shares as treasury stock.

(a) Acquisition of outstanding shares. Under 12 U.S.C. 59, a

national bank may acquire its outstanding shares and hold them as

treasury stock, if the acquisition and retention of the shares is, and

continues to be, for a legitimate corporate purpose.

(b) Legitimate corporate purpose. Examples of legitimate corporate

purposes include the acquisition and holding of treasury stock to:

(1) Have shares available for use in connection with employee stock

option, bonus, purchase, or similar plans;

(2) Sell to a director for the purpose of acquiring qualifying

shares;

(3) Purchase a director's qualifying shares upon the cessation of

the director's service in that capacity if there is no ready market for

the shares;

(4) Reduce the number of shareholders in order to qualify as a

Subchapter S corporation; or

(5) Reduce costs associated with shareholder communications and

meetings.

(c) Other purposes. Purposes other than those enumerated in

paragraph (b) of this section may satisfy the legitimate corporate

purpose test.

(d) Prohibition. It is not a legitimate corporate purpose to

acquire or hold treasury stock on speculation about changes in its

value.

18. A new Sec. 7.2023 is added to subpart B to read as follows:

Sec. 7.2023 Reverse stock splits.

(a) Authority to engage in reverse stock splits. A national bank

may engage in a reverse stock split if the transaction serves a

legitimate corporate purpose and provides adequate dissenting

shareholders' rights.

(b) Legitimate corporate purpose. Examples of legitimate corporate

purposes include a reverse stock split to:

(1) Reduce the number of shareholders in order to qualify as a

Subchapter S corporation; or

(2) Reduce costs associated with shareholder communications and

meetings.

19. In Sec. 7.4000, the section heading and paragraphs (a) and (b)

are revised to read as follows:

Sec. 7.4000 Visitorial powers.

(a) General rule. (1) Only the OCC or an authorized representative

of the OCC may exercise visitorial powers with respect to national

banks, except as otherwise expressly provided by federal law. State

officials may not exercise visitorial powers with respect to national

banks, such as conducting examinations, inspecting or requiring the

production of books or records of national banks, or prosecuting

enforcement actions, except in limited circumstances authorized by

federal law. Production of records may, however, be required under

normal judicial procedures.

(2) For purposes of this section, visitorial powers include:

(i) Examination of a bank;

(ii) Inspection of a bank's books and records;

(iii) Regulation and supervision of activities authorized or

permitted pursuant to federal banking law; or

(iv) Enforcing compliance with any applicable federal or state laws

concerning those activities.

(b) Exceptions to the general rule. Federal law expressly provides

special authority for state or other federal officials to:

(1) Inspect the list of shareholders, provided the official is

authorized to assess taxes under state authority (12 U.S.C. 62; this

section also authorizes inspection of the shareholder list by

shareholders and creditors of a national bank);

(2) Review, at reasonable times and upon reasonable notice to a

bank, the bank's records solely to ensure compliance with applicable

state unclaimed property or escheat laws upon reasonable cause to

believe that the bank has failed to comply with those laws (12 U.S.C.

484(b));

(3) Verify payroll records for unemployment compensation purposes

(26 U.S.C. 3305(c));

(4) Ascertain the correctness of federal tax returns (26 U.S.C.

7602); or

(5) Enforce the Fair Labor Standards Act (29 U.S.C. 211).

* * * * *

20. A new Sec. 7.4003 is added to read as follows:

Sec. 7.4003 Establishment and operation of a remote service unit by a

national bank.

A remote service unit (RSU) is an automated facility, operated by a

customer of a bank, that conducts banking functions, such as receiving

deposits, paying withdrawals, or lending money. A national bank may

establish and operate an RSU pursuant to 12 U.S.C. 24 (Seventh). An RSU

includes an automated teller machine, automated loan machine, and

automated device for receiving deposits. An RSU may be equipped with a

telephone or televideo device that allows contact with bank personnel.

An RSU is not considered a ``branch'' within the meaning of 12 U.S.C.

36(j), and is not subject to state geographic or operational

restrictions or licensing laws.

21. A new Sec. 7.4004 is added to read as follows:

Sec. 7.4004 Establishment and operation of a deposit production office

by a national bank.

(a) General rule. A national bank or its operating subsidiary may

engage in deposit production activities at a site

[[Page 31756]]

other than the main office or a branch of the bank. A deposit

production office (DPO) may solicit deposits, provide information about

deposit products, and assist persons in completing application forms

and related documents to open a deposit account. A DPO is not a branch

within the meaning of 12 U.S.C. 36(j) and 12 CFR 5.30(d)(1) so long as

it does not receive deposits, pay withdrawals, or make loans. All

deposit and withdrawal transactions of a bank customer using a DPO must

be performed by the customer, either in person at the main office or a

branch office of the bank, or by mail, electronic transfer, or a

similar method of transfer.

(b) Services of other persons. A national bank may use the services

of, and compensate, persons not employed by the bank in its deposit

production activities.

22. A new Sec. 7.4005 is added to read as follows:

Sec. 7.4005 Combination of loan production office, deposit production

office, and remote service unit.

A location at which a national bank operates a loan production

office (LPO), a deposit production office (DPO), and a remote service

unit (RSU) is not a ``branch'' within the meaning of 12 U.S.C. 36(j) by

virtue of that combination. Since an LPO, DPO, or RSU is not,

individually, a branch under 12 U.S.C. 36(j), any combination of these

facilities at one location does not create a branch.

Dated: May 11, 1999.

John D. Hawke, Jr.,

Comptroller of the Currency.

[FR Doc. 99-14256 Filed 6-11-99; 8:45 am]

BILLING CODE 4810-33-P