Investment Securities; Rules, Policies, and Procedures for Corporate Activities; Bank Activities and Operations

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 1, 5, and 7

[Docket No. 99-14]

RIN 1557-AB61

Investment Securities; Rules, Policies, and Procedures for

Corporate Activities; Bank Activities and Operations

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

ACTION: Final rule.

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

updating and clarifying its rules regarding investment securities,

corporate activities, and bank activities and operations. Most of the

changes involve the OCC's interpretations regarding national bank

activities and operations. This final rule clarifies existing rules,

adds new provisions based on recent statutory changes, judicial

rulings, OCC decisions, and other developments, and makes technical

changes. This final rule reflects the OCC's continuing commitment to

assess the effectiveness of our rules and to make changes where

necessary.

EFFECTIVE DATE: December 6, 1999.

FOR FURTHER INFORMATION CONTACT: Jacqueline Lussier, Senior Attorney,

or Mark Tenhundfeld, Assistant Director, Legislative and Regulatory

Activities Division, (202) 874-5090, Office of the Comptroller of the

Currency, 250 E Street, SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION: The OCC published a notice of proposed

rulemaking in the Federal Register on June 14, 1999 (64 FR 31749)

inviting comments on proposed changes to several of the OCC's

regulations. The OCC received a total of 16 comments, including seven

from banks and banking industry representatives, three from states,

four from community groups, and one from two individuals. Eight of the

commenters favored all or some of the proposed changes, while eight

opposed one or more of the proposal's provisions.

The final rule implements most of the initiatives contained in the

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

the comments received and to further clarify the rules. The following

discussion summarizes the proposed rule, the comments received, and

describes the action the OCC has taken in the final rule.

Part 7--Bank Activities and Operations

This final rule changes the name of part 7 from ``Interpretive

rulings'' to ``Bank activities and operations'' to better describe the

content of part 7.

Messenger Service (Sec. 7.1012)

The OCC proposed to amend Sec. 7.1012 to conform to caselaw that

streamlined the criteria for determining when a national bank is

operating a branch. 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.1

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.

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\1\ In the proposal, the OCC cited two cases supporting the

revision to Sec. 7.1012: 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). See 64 FR

at 31749 n.1. These cases held that a tax preparation firm that

delivered tax refund anticipation loan (RAL) proceeds to mutual

customers of the firm and a national bank was not a branch within

the meaning of the branching laws. The standards articulated by both

courts in reaching this conclusion formed the basis for the

amendment to Sec. 7.1012 that the OCC proposed, and the OCC

continues to rely on those cases for that purpose. The principal

issue in the cases, however, was the permissibility of certain fees

charged by the national bank in connection with the RAL. The fee

issue, which both courts resolved in the bank's favor based upon 12

U.S.C. 85, is not relevant to the OCC's amendment to Sec. 7.1012.

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The OCC proposed to combine the criteria in

Secs. 7.1012(c)(2)(ii)(A) and (c)(2)(ii)(B) into one new paragraph and

apply the resulting criteria differently depending on whether or not

the messenger service is affiliated with the bank. The OCC also

proposed a stylistic amendment to Sec. 7.1012(c)(2)(i).

The OCC received three comment letters addressing these proposed

changes. Letters from two commenters supported adopting the changes.

The third letter, representing the views of three commenters, opposed

the changes on the ground that they would encourage national banks to

make small loans with short maturities and high rates of interest. The

commenters' discussion on this point relies on two premises; first,

that the messenger service rule set forth in Sec. 7.1012 authorizes

national banks to make loans at non-branch facilities; and, second,

that banks will therefore rely on the messenger service rule to make

certain types of loans, including so-called payday loans, that would

not be permissible if the branching laws applied. Both premises are

incorrect.

First, the messenger service rule does not, and could not lawfully,

authorize a national bank to conduct the core banking activities of

taking deposits, paying checks, or lending money in a non-branch

facility. By statute, a branch is defined, subject to certain specified

exceptions, as an office or place of business where deposits are

received, checks paid, or money lent. 12 U.S.C. 36(j). Section 7.1012

permits a national bank to use a messenger service--a courier, for

example--to pick-up and deliver items related to transactions between a

bank and its customer, but neither the existing rule, nor the amendment

proposed by the OCC, expands the authority of a national bank to

conduct core banking activities only at branches. Thus, a bank may find

it convenient to use a messenger service to deliver loan proceeds to

its customer, but its use of the service in that way

[[Page 60093]]

does not mean that the loan is made at the offices of the messenger

service or that the messenger service is a branch.

Second, the messenger service rule does not control the loan terms,

such as maturity or interest rate, that a national bank may offer. The

rate of interest a national bank may charge, for example, is governed

by 12 U.S.C. 85. The applicability of such laws is unaffected by the

OCC's proposed amendment to Sec. 7.1012, which has the distinctly

different purpose of conforming to recent judicial precedents the tests

used to distinguish affiliated non-branch messenger services from

unaffiliated non-branch messenger services in order to ensure that the

branching laws are not evaded.

For these reasons, the amendment to Sec. 7.1012 cannot be viewed as

affecting payday lending. Accordingly, the OCC believes the concerns of

the commenters opposing the amendment are misplaced. The amendment is

adopted as proposed.

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 suggested five technical amendments to update this

section.

Two commenters addressed these proposed changes. Both supported

adopting the changes. One commenter suggested several additional

technical amendments to clarify certain references contained in

footnote 1 to Sec. 7.1016 and to make the text of the regulation more

precise. For instance, the commenter noted that it is appropriate to

refer to the Convention on Independent Guarantees and Stand-by Letters

of Credit as a United Nations convention, rather than as a United

Nations Commission on International Trade Law convention.

The OCC agrees with the commenter's suggestions for clarifying the

rule and adopts them in the final rule. The OCC adopts Sec. 7.1016 as

proposed, but with the modifications suggested by the commenter.

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

The OCC proposed adding a cross-reference in Sec. 7.1017 to

Sec. 28.4(c), which states that a national bank may guarantee the

liabilities of its foreign operations. This change was proposed in

order to remove whatever doubt that may have been created by the

relocation 2 of the foreign operations guarantee provision

from part 7 to part 28.

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\2\ 61 FR 4849 (Feb. 9, 1996) (amending part 7); 61 FR 19524

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

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The OCC received one comment on this proposed change, from a

commenter favoring adoption of the change. The OCC adopts Sec. 7.1017

as proposed.

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

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

provided in OCC interpretive letters 3 approving buyback or

repurchase agreements between shareholders and prospective directors.

This guidance, proposed to be added in new paragraphs (b)(4)(ii),

(iii), and (iv) of Sec. 7.2005, states 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

was proposed to make it easier for banks, especially community banks,

to attract qualified persons to serve on bank boards of directors.

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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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Three commenters addressed this proposed change. All supported its

adoption. One commenter requested the OCC to go further and examine

whether it is necessary to maintain the qualifying share requirement.

However, this requirement is imposed by statute (12 U.S.C. 72). The OCC

has recently recommended to Congress that the Comptroller be given the

authority to waive the qualifying share requirement, in whole or in

part, in the case of national banks that elect Subchapter S status in

order to facilitate this form of corporate organization for national

banks.4 In light of the comment received, the OCC will

evaluate whether it should recommend to Congress additional changes to

section 72.

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\4\ See Testimony of John D. Hawke, Jr., Comptroller of the

Currency, Before the Subcommittee on Financial Institutions and

Consumer Credit of the Committee on Banking and Financial Services,

U.S. House of Representatives, May 12, 1999. You can inspect and

photocopy the Comptroller's testimony at the OCC's Public Disclosure

Room, First Floor, 250 E Street, SW., Washington, DC 20219. You can

make an appointment to inspect the testimony by calling (202) 874-

5043. The testimony is also available on the OCC's web site at

http://www.occ.treas.gov/ftp/release/99-44a.pdf.

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The OCC adopts Sec. 7.2005(b)(4) as proposed.

Oath of Directors (Sec. 7.2008)

The OCC proposed adding new paragraph (c) to Sec. 7.2008 and

revising the last sentence of Sec. 7.2008(b) to inform national banks

that they are to file 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.

One commenter addressed these proposed changes. This commenter

supported their adoption. The OCC adopts Sec. 7.2008(b) and (c) as

proposed.

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

The OCC proposed amending Sec. 7.2020 to provide examples of

legitimate corporate purposes justifying the acquisition by a national

bank of its outstanding shares and holding them as treasury stock.

These examples include: (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 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.

As noted in the preamble to the proposed rule, 5 while

the OCC expects that this guidance will benefit all national banks,

certain of the examples listed as legitimate purposes (namely,

purchasing shares upon a director's resignation or death if there is no

ready market for the shares and to aid in qualifying the bank for

treatment under the tax laws as a Subchapter S

[[Page 60094]]

corporation) are expected to provide a particular benefit to community

banks.

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\5\ 64 FR 31749, 31751 (June 14, 1999).

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The OCC received three comments on this proposed change, all of

which supported its adoption. One commenter suggested that the text of

the regulation be modified slightly to clarify that approval of the OCC

under 12 U.S.C. 59 is required before a bank may acquire and hold its

shares. The OCC agrees that this clarification is helpful and adopts it

in the final rule by modifying the first sentence of proposed

Sec. 7.2020(a).

The examples listed as legitimate corporate purposes are non-

exclusive, and the OCC included paragraph (c) in proposed Sec. 7.2020

stating that purposes other than those enumerated in paragraph (b) of

proposed Sec. 7.2020 may satisfy the legitimate corporate purpose test.

The OCC will continue its practice of evaluating other purposes for the

acquisition and retention of a bank's shares on a case-by-case basis.

In addition, the OCC notes that the word ``include'' in paragraph (b)

of proposed Sec. 7.2020 is not exhaustive and therefore believes that

paragraph (c) is redundant. In the final rule, the OCC removes

paragraph (c) from Sec. 7.2020 as proposed and renumbers paragraph (d)

of proposed Sec. 7.2020 as Sec. 7.2020(c). The OCC also makes a

technical change substituting the word ``and'' for ``or'' in paragraph

(b) of proposed Sec. 7.2020.

The OCC adopts Sec. 7.2020 as proposed, but with the modifications

discussed.

Reverse Stock Splits (New Sec. 7.2023)

The OCC proposed adding new Sec. 7.2023 codifying the OCC's

interpretation that a national bank may engage in a reverse stock

split, as long as the bank provides adequate protection for dissenting

shareholders' rights and the transaction serves a legitimate corporate

purpose.6 A ``reverse stock split'' is 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 fractional interests. This codification

clarifies the flexibility national banks have to restructure their

ownership interests, and benefits particularly community banks that

desire, for instance, to restructure in order to qualify as a

Subchapter S corporation.

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\6\ Interpretive Letter No. 786 (June 9, 1997), reprinted in

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

conclusion is consistent with the recent 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 where the OCC

found that there was a valid corporate purpose for the transaction

and that minority shareholders were entitled to dissenters' rights.

An earlier decision reversed an OCC approval of a reverse stock

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

1990). However, that case is distinguishable on the grounds that the

court reached its decision after concluding that the transaction had

no legitimate business purpose and failed to provide for dissenters'

rights. The court expressly declined to answer whether 12 U.S.C. 83

(the statute at issue in the case) prohibits all reverse stock split

transactions, noting that its opinion was limited to the facts of

the case. Id. at 1308 n.4, 1309. See also Lewis v. Clark, 911 F.2d

1558 (11th Cir. 1990) (concluding that minority shareholders in a

merger could not be required to accept cash rather than stock in the

new bank).

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Three commenters addressed the proposed change. All supported

adoption in its entirety.

In the final rule, the OCC is making a technical change

substituting the word ``and'' for ``or'' in Sec. 7.2023(b) as proposed.

The OCC adopts Sec. 7.2023 as proposed, but with the modification

discussed.

The examples listed in Sec. 7.2023(b) as legitimate corporate

purposes are non-exclusive, and the OCC will continue its practice of

evaluating other purposes for reverse stock splits on a case-by-case

basis.

Visitorial Powers (Sec. 7.4000)

The OCC proposed to revise 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. As proposed,

Sec. 7.4000 codified the definition of visitorial powers and

illustrated what visitorial powers include by providing a non-exclusive

list of these powers. These powers include: (a) examination of a bank;

(b) inspection of a bank's books and records 7; (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

reorganized 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.

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\7\ The rule recognizes that bank-created records may be

obtained through normal judicial processes. However, ``non-public

OCC information,'' as defined in 12 CFR Sec. 4.32(b), held by a bank

may be obtained only by following the procedures set forth in 12 CFR

part 4, subpart C. This final rule revises the last sentence of

Sec. 7.4000(a) by adding a parenthetical statement that non-public

OCC information in the possession of a bank, such as the bank's

examination report and supervisory correspondence, may be obtained

by complying with the procedures set forth in 12 CFR part 4, subpart

C.

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Eight commenters addressed this proposed change. The commenters

were evenly split between those favoring adoption of the change and

those opposed. Of those favoring adoption of the proposed change, two

supported its adoption without any changes to the proposal, while two

others suggested edits to the proposed text to elaborate on the extent

of the visitorial powers listed in proposed Sec. 7.4000(a)(2) and the

general exceptions to those powers listed in proposed Sec. 7.4000(b).

Those opposing the proposed change maintained that 12 U.S.C. 484 does

not preclude a role for the states, particularly in the area of

consumer protection.8

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\8\ Three commenters supported this position by suggesting that

the proposed interpretation is inconsistent with the holding of the

federal district court in Bank One, Utah v. Guttau, No. 4-98-CV-

10247 (D. Iowa July 24, 1998), that a state ATM law is not preempted

by the National Bank Act. However, the Court of Appeals for the

Eighth Circuit subsequently reversed the district court's decision

and upheld the position of the bank and the OCC in that case. Bank

One, Utah v. Guttau, No. 98-3166, slip op. 8-9, 10 (8th Cir. Sept.

2, 1999) (pet. for rehearing en banc pending) (Eighth Circuit's

opinion hereinafter cited as Guttau).

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The OCC agrees that Congress did not intend to preclude any role

for the states by enacting 12 U.S.C. 484. As noted in the preamble to

the proposal,9 there are instances where federal statutory

authority provides for a state agency to inspect a national bank's

books and records (as is the case, for instance, with state escheat

laws). 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, and the pending Gramm-

Leach-Bliley Act would clarify that authority.10

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\9\ 64 FR 31749, 31751 n.9 (June 14, 1999).

\10\ See H.R. 10, 106th Cong., 1st Sess. Sec. 303 (functional

regulation of insurance); S. 900, 106th Cong., 1st Sess. Sec. 201

(same).

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However, Congress clearly intended for the role of states to be

defined by those instances authorized by federal law. See 12 U.S.C.

484(a). Except where so authorized, the exclusive visitorial authority

with respect to national banks has been vested in the OCC. Id. See also

12 U.S.C. 1813(q)(1); 1818(b) et seq.; Guthrie v. Harkness, 199 U.S.

148, 159 (1905); and National State Bank, Elizabeth, N.J. v. Long, 630

F.2d 981, 988-89 (3d Cir. 1980).

Congress recently reaffirmed the exclusive visitorial authority of

the OCC in the context of interstate branching. See the Riegle-Neal

Interstate Banking and Branching Efficiency Act of 1994 (Interstate

Act),11 which amended 12 U.S.C. 36, among other statutes, to

permit interstate branching. In the Interstate Act, Congress provided

that

[[Page 60095]]

certain types of state laws apply to interstate branches of national

banks. 12 U.S.C. 36(f)(1)(A). However, at the same time, Congress also

expressly granted to the OCC the exclusive enforcement authority over

interstate branches' compliance with those state laws. 12 U.S.C.

36(f)(1)(B).

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\11\ Pub. L. 103-328, 108 Stat. 2338, enacted Sept. 29, 1994.

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As discussed in the preamble to the proposed rule,12

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); 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). This expansive definition is consistent with the intent of

creating a national banking system that is subject to cohesive, uniform

supervision by the primary regulator of national banks.

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\12\ 64 FR 31749, 31751 (June 14, 1999).

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One commenter contended that, because the federal Electronic Funds

Transfer Act (15 U.S.C. 1693-1693r) (EFTA) expressly states that it

does not preempt state electronic funds transfer (EFT) laws that

provide consumers greater protections than those provided by the

federal EFTA, the OCC may not preempt consumer protections afforded by

a state's EFT laws.13 The OCC agrees that the federal EFTA

does not preempt state EFT laws that afford greater consumer

protections than does the federal EFTA. However, as the OCC concluded

in a previous interpretation, a state EFT law that impairs or impedes a

national bank's ability to engage in an activity that is authorized

under another federal law could be preempted by that federal

law.14 The Eighth Circuit recently upheld this position in

Guttau. In addressing the State of Iowa's contention that the federal

EFTA permits the states to regulate the electronic transfer of funds,

the court stated:

\13\ This position also was advanced by two commenters in

response to the proposed amendments to Sec. 7.4003.

\14\ See Interpretive Letter No. 789 (June 27, 1997), reprinted

in [1997 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-216.

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Despite the State's claims, this anti-preemption provision [in

the federal EFTA] is specifically limited to the provisions of the

federal EFTA, and nothing therein grants the states any additional

authority to regulate national banks. State regulation of national

banks is proper where ``doing so does not prevent or significantly

interfere with the national bank's exercise of its powers.'' Barnett

Bank [v. Nelson], 116 S. Ct. [1103, 1996] at 1109. Congress has made

clear in the [National Bank Act] its intent that ATMs are not to be

subject to state regulation, and thus the provisions of the Iowa

EFTA that would prevent or significantly interfere with [the

national bank's] placement and operation of its ATMs must be held to

be preempted.

Slip op. at 9.

Three commenters suggested that, because the question of whether

states may enforce compliance with their consumer protection laws by

national banks is the subject of pending litigation,15 it is

inappropriate for the OCC to promulgate a rule at this time related to

the OCC's visitorial powers.16 However, an agency is not

precluded from issuing a rule that affects a provision that is the

subject of ongoing litigation. See Smiley v. Citibank, 517 U.S. 735,

135 L. Ed. 2d 25, 116 S. Ct. 1730 (1996).

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\15\ See First Union Nat'l Bank v. Burke, 48 Fed. Supp. 2d 132

(D. Conn. 1999) (in which a federal district court upheld, in its

Ruling on Motion for Preliminary Injunction, 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 three

national banks) (further proceedings stayed pending state court

interpretation of state law); and First Nat'l Bank of McCook v.

Fulkerson, No. 98-D-1024 (D. Colo. filed April 28, 1998) (action for

declaratory judgment and injunction against state banking

authority's administrative enforcement action against combination

loan production office, deposit production office, and ATM on ground

that the combination constitutes a branch). The commenters also

cited the federal district court decision in the Guttau case.

However, as previously noted, the Court of Appeals for the Eighth

Circuit recently reversed the district court's holding, and found

that federal law preempts state law restrictions on national bank

ATMs. Guttau, slip op. at 8-9.

\16\ This point also was made in comments concerning proposed

Secs. 7.4003, 7.4004, and 7.4005.

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Based on the statutory authority and the caselaw discussed earlier,

the OCC concludes that proposed Sec. 7.4000 contains an accurate

statement of the OCC's exclusive visitorial authority.

One commenter who favored adoption of the rule suggested that the

OCC clarify that its exclusive visitorial powers extend to operating

subsidiaries of national banks. As stated in 12 CFR 5.34(d)(3), each

operating subsidiary is subject to examination and supervision by the

OCC. This does not mean, however, that the OCC's jurisdiction

necessarily is exclusive over a given subsidiary, and many subsidiaries

have ``functional'' regulators, such NASD Regulation, Inc., the

Securities and Exchange Commission, or a state insurance department.

Another commenter who favored adoption of the rule requested that

the OCC add to the text of the final rule the statement that the list

of visitorial powers in proposed Sec. 7.4000(a)(2) is non-exclusive.

This commenter pointed out that the preamble to the proposed rule

stated that this list was illustrative of what visitorial powers

include and was non-exclusive. The commenter urged the OCC to add this

clarification to the regulation to avoid any ambiguity that might

result from the statements in the proposal. The OCC notes that the word

``include'' is not exhaustive and therefore believes the recommended

clarification is not necessary.

The same commenter also suggested another technical change relating

to the rule's exceptions. The regulatory text in proposed

Sec. 7.4000(a) provided that state officials may not exercise

visitorial powers with respect to national banks ``except in limited

circumstances authorized by federal law.'' Similar language was used in

proposed Sec. 7.4000(b). The commenter suggested that the language in

paragraph (a) of Sec. 7.4000 refer the reader to paragraph (b), so that

the language in paragraph (a) would read ``except as provided in

paragraph (b) of this section.'' The commenter stated that this change

would clarify the regulation by demonstrating that the two paragraphs

are interrelated. The OCC agrees that this suggestion would add clarity

to the regulation and adopts this recommendation in the final rule.

Finally, the OCC is making a technical change substituting the word

``and'' for ``or'' in paragraphs (a) and (b) of proposed Sec. 7.4000.

The OCC adopts Sec. 7.4000 as proposed, but with the modification

suggested by the commenter, the change to the last sentence of

paragraph (a) of proposed Sec. 7.4000 concerning the procedure for

obtaining non-public OCC information in accordance with 12 CFR part 4,

subpart C, and the technical changes discussed.

Establishment and Operation of Remote Service Units (New Sec. 7.4003)

The OCC proposed to add a new Sec. 7.4003 codifying the OCC's

interpretations that, because automated teller machines (ATMs) and

other remote service units (RSUs) 17 are expressly excluded

from the definition of ``branch'' in 12 U.S.C. 36(j), an ATM or RSU

established by a national bank is not subject to any state-imposed

[[Page 60096]]

geographic or operational restrictions or licensing laws.18

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\17\ 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 checks, 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.

\18\ See, e.g., 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; Interpretive Letter No. 789 (June 27, 1997), reprinted in [1997

Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-216;

Interpretive Letter No. 772 (Mar. 6, 1997), reprinted in [1996-97

Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-136. The OCC's

interpretation recently was upheld by the Court of Appeals for the

Eighth Circuit. Bank One, Utah v. Guttau, No 98-3166 (8th Cir. Sept.

2, 1999), rev'g No. 4-98-CV-10247 (D. Iowa July 24, 1998) (which had

held that Iowa's ATM law is not preempted by the National Bank Act).

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The OCC received seven comments on this proposed new rule.

Commenters who favored adoption of the rule suggested that it was

appropriate in light of the amendment to section 36(j). One commenter

stated that the interpretation would add clarity and guidance to

national banks in their deployment of ATMs and RSUs. None of the

commenters who favored adoption of the rule suggested changes to the

proposed language.

Three commenters opposed adoption of the rule. One maintained that,

because 12 U.S.C. 93a 19 states that the authority it

confers does not apply to 12 U.S.C. 36, the OCC is precluded from

adopting the rule as proposed. However, the language to which the

commenter referred is not a bar to the OCC's authority. Rather, it

simply makes clear that, whatever authority the OCC has pursuant to

other statutes to adopt regulations affecting national bank branching,

12 U.S.C. 93a does not expand that authority.20 Moreover,

even if 12 U.S.C. 93a were to preclude the OCC from issuing rules under

section 36, the fact that section 36(j) expressly excludes ATMs and

RSUs from the scope of section 36 leads to the conclusion that any

rulemaking clarifying the status of ATMs and RSUs as not constituting

branches is a rulemaking concerning a matter explicitly outside 12

U.S.C. 36.

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\19\ 12 U.S.C. 93a states: ``Except to the extent that

authority to issue such rules and regulations has been expressly and

exclusively granted to another regulatory agency, the Comptroller of

the Currency is authorized to prescribe rules and regulations to

carry out the responsibilities of the office, except that the

authority conferred by this section does not apply to section 36 of

[Title 12] or to securities activities of National Banks under the

Act commonly known as the ``Glass-Steagall Act'.''

\20\ The legislative history of the statute that added 12

U.S.C. 93a to the federal banking law supports this reading. See,

e.g., House Conf. Rep. No. 96-842, 96th Cong., 2d Sess. 83 (1980),

reprinted in 1980 U.S.C.C.A.N. 236, 313 (``[T]he rulemaking

provision carries no authority to permit otherwise impermissible

activities of national banks with specific reference to the

provisions of the McFadden Act [12 U.S.C. 36].'').

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Two commenters who opposed adoption of the rule concluded that the

proposal was defective because it did not list each state law that is

proposed to be preempted, as they maintain is required by section 114

of the Interstate Act (codified at 12 U.S.C. 43) (section

114).21 Section 114 was designed to supply a public comment

process in situations where preemption decisions would otherwise be

announced without notice of the issue and an opportunity for public

comment. Thus, section 114 does not apply to rulemakings, including

this rulemaking, conducted pursuant to the notice-and-comment

procedures prescribed by the Administrative Procedure Act (APA). 5

U.S.C. 553. Rules adopted pursuant to 5 U.S.C. 553 provide interested

parties with the notice and opportunity to comment that section 114 is

intended to ensure, making it unnecessary to subject them to

duplicative publication requirements under section 114.

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\21\ Section 114 requires the OCC, before issuing an opinion

letter or interpretive rule that concludes that federal law preempts

any state law regarding community reinvestment, consumer protection,

fair lending, or the establishment of intrastate branches, to

publish notice in the Federal Register of the preemption issue that

the OCC is considering (including a description of each state law at

issue), and give interested parties at least 30 days in which to

comment. Section 114 by its terms does not require a listing of each

state law that may be preempted.

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In light of the express exclusion of ATMs and RSUs from the

definition of ``branch'' in 12 U.S.C. 36(j) and the comments received

in response to proposed Sec. 7.4003, the OCC adopts Sec. 7.4003 as

proposed.

Deposit Production Offices (New Sec. 7.4004)

The OCC proposed to codify its interpretation,22 in new

Sec. 7.4004, that a national bank deposit production office (DPO) 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.

Paragraph (a) of proposed Sec. 7.4004 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) of proposed Sec. 7.4004 states that a national bank may

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

for its deposit production activities.

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\22\ 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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Three commenters addressed this proposed new section. Of the two

commenters supporting adoption, one questioned the appropriateness of

permitting, as paragraph (b) of proposed Sec. 7.4004 does, a national

bank to use persons not employed by the bank in its DPOs. The OCC notes

that the provision in question merely permits a national bank the

flexibility to use agents in its DPOs; a bank remains free to use its

employees if it so chooses. This flexibility is the same as has been

available for national banks using loan production offices (LPOs),

which has not resulted in supervisory concerns.

The commenter opposed to proposed new Sec. 7.4004 stated that it,

along with proposed new Sec. 7.4005, circumvents the intent of Congress

as articulated in the Interstate Act to require national banks to

adhere to state laws governing the establishment and operation of

interstate branches. The OCC agrees that national banks' interstate

branches are to comply with those state laws.23 However,

since a DPO does not perform any of the activities listed in 12 U.S.C.

36(j) that would cause it to be a ``branch,'' the provisions of those

state laws do not apply.

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\23\ In the Interstate Act, Congress expressly authorized the

OCC to enforce the provisions of state law to which a branch of a

national bank is subject. 12 U.S.C. 36(f)(1)(B).

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The OCC adopts Sec. 7.4004 as proposed.

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

The OCC proposed to add a new Sec. 7.4005 to codify its

interpretation that a facility that combines the non-branch functions

of an LPO, DPO, and RSU is not a branch by virtue of that

combination.24

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\24\ The proposal cites 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 cites 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 (brief filed Jan. 4, 1999).

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Eight commenters addressed this proposed new section. Those

favoring its adoption agreed with the OCC that the combination of

facilities that individually are not branches would not create a

branch. Those opposed maintained that the combined functions would

create what is effectively a

[[Page 60097]]

branch, thereby enabling banks to circumvent branching laws. Two of

these commenters also suggested that, by permitting banks to set up a

combined LPO, DPO, and RSU in one facility without first applying to

the OCC for approval pursuant to 12 CFR 5.30, the OCC would undermine

the Community Reinvestment Act (12 U.S.C. 2901-2907) (CRA) by

legitimizing narrower assessment areas.25

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\25\ As a general matter, financial institutions subject to the

CRA are required to delineate one or more assessment areas within

which an institution's primary regulator evaluates that

institution's record of helping to meet the credit needs of its

community. For the requirements applicable to national banks'

delineation of assessment areas, see 12 CFR 25.41.

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After carefully considering all the comments, the OCC remains of

the view that the combination of facilities that separately are not

branches does not transform the whole into something greater than its

parts. ATMs and RSUs are expressly excluded from the definition of

``branch'' in 12 U.S.C. 36(j). Similarly, LPOs and DPOs do not engage

in activities that would cause them to be branches under section 36(j).

Combining these entities does not change this fact. As long as a

national bank operates the facilities within the limits identified in

the interpretations concerning LPOs (12 CFR 7.1004), RSUs (id. at

Sec. 7.4003), and DPOs (id. at Sec. 7.4004), the combined activities

still will not meet the definition of ``branch'' in section

36(j).26

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\26\ See, e.g., OCC Conditional Approval No. 313, Decision of

the OCC on the Application by Canadian Imperial Bank of Commerce to

Charter CIBC National Bank, Maitland, Fla., dated July 9, 1999. This

conditional approval was published in the OCC's ``Interpretations

and Actions'' for July, 1999.

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The OCC recognizes that national banks that are predominantly non-

branch based present unique supervisory and regulatory issues in

several areas, including the CRA. The OCC and other banking agencies

have addressed certain of these issues already. For instance, the

agencies require a bank with a deposit-taking ATM to delineate an

assessment area around the ATM to ensure that the bank is meeting the

needs of the community from which it is receiving deposits. See 12 CFR

25.41(b) and (c).27 Remaining issues affecting non-branch

based institutions will require further analysis by the OCC and other

banking agencies, but exceed the scope of this rulemaking.

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\27\ See also 64 FR 23618, 23647-48 (May 3, 1999) (in which the

OCC and other banking agencies published a question and answer in

which the agencies discuss how CRA ratings will be assigned in a

situation in which a bank uses non-branch delivery systems to obtain

deposits and deliver loans).

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The OCC adopts Sec. 7.4005 as proposed.

Part 1--Investment Securities

The OCC proposed amending 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 proposed 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, because that language has

created issues about the treatment of Type V securities and about the

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

securitization. As noted in the preamble to the proposed rule, the OCC,

consistent with previous judicial rulings and OCC

decisions,28 proposed to clarify that it 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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\28\ See Securities Indus. Ass'n 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).

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

Two commenters addressed this proposed change. Both favored

adoption without suggesting any changes.

The OCC adopts proposed Sec. 1.3(e)(1) as proposed.

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

The OCC proposed to conform references to the interagency Uniform

Financial Institutions Rating System--commonly referred to as the

CAMELS rating--to reflect the addition of a sixth component,

``sensitivity to market risk.'' 29 The OCC also proposed

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 and to amend an incorrect reference that

currently appears in Sec. 5.35(g)(3).

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\29\ See 61 FR 67021 (Dec. 19, 1996).

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One commenter addressed these proposed changes. This commenter

favored adoption of these changes to part 5.

The OCC adopts the proposed amendments without change.

Effective Date

Pursuant to the Administrative Procedure Act, 5 U.S.C. 553, this

final rule has a 30-day delayed effective date. The Community

Development and Regulatory Improvement Act of 1994 (CDRI Act)

separately requires that the OCC's regulations take effect on the first

day of the first calendar quarter following publication if the

regulations impose additional reporting, disclosures, or other new

requirements on national banks. See 12 U.S.C. 4802(b). The final rule

imposes no new requirements on national banks. Therefore, the CDRI Act

delayed effective date provision does not apply.

Regulatory Flexibility Act

It is hereby certified that this final rule will not have a

significant economic impact on a substantial number of small entities.

Accordingly, a regulatory flexibility analysis is not required. This

final rule is clarifying in nature and will reduce somewhat the

regulatory burden on national banks.

Executive Order 12866

The OCC has determined that this final rule is not a significant

regulatory action under Executive Order 12866.

Unfunded Mandates Act of 1995

Section 202 of the Unfunded Mandates Act of 1995 (Unfunded Mandates

Act) requires that an agency prepare a budgetary impact statement

before promulgating a rule that includes a federal mandate that may

result in the annual expenditure of $100 million or more in any one

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

the private sector. If a budgetary impact statement is required,

section 205 of the Unfunded Mandates Act requires an agency to identify

and consider a reasonable number of alternatives before promulgating a

rule.

The OCC has determined that the final rule does not include a

federal mandate that will result in expenditures by state, local, and

tribal governments, or by the private sector, of $100 million or more

in any one year. Accordingly,

[[Page 60098]]

the OCC has not prepared a budgetary impact statement or specifically

addressed the regulatory alternatives considered.

One commenter asserted that Sec. 7.4003 will result in an

expenditure by the private sector of $100 million or more because, in

this commenter's estimation, that provision will cause consumers to pay

higher fees for using RSUs. The OCC notes that the relevant test under

the statute is whether a regulation includes a federal mandate that may

result in the threshold expenditure. The provision cited by the

commenter as support for the conclusion that the rule will cause the

private sector to spend $100 million or more is not a mandate. Instead,

it simply codifies the conclusion that an RSU is not a branch, and is

not subject to state geographic or operational restrictions or

licensing laws. Accordingly, no further analysis of that provision

under the Unfunded Mandates Act is required.

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 amended as set forth below:

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

(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

``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--BANK ACTIVITIES AND OPERATIONS

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

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

12. The title of part 7 is revised to read as set forth above.

13. 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

[[Page 60099]]

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.

* * * * *

14. 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.30 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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\30\ Examples of such laws or rules of practice include: 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; http://www.iccwbo.org); the

International Standby Practices (ISP98) (ICC Publication No. 590)

(available from the Institute of International Banking Law &

Practice, 301/869-9840; http://www.iiblp.org); the United Nations

Convention on Independent Guarantees and Stand-by 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; http://

www.iccwbo.org); 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;

* * * * *

15. 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:

* * * * *

16. 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 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.

* * * * *

17. 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.

18. 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. Pursuant to 12 U.S.C. 59,

including the requirements for prior approval by the bank's

shareholders and the OCC imposed by that statute, 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; and

(5) Reduce costs associated with shareholder communications and

meetings.

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

acquire or hold treasury stock on speculation about changes in its

value.

19. 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.

[[Page 60100]]

(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; and

(2) Reduce costs associated with shareholder communications and

meetings.

20. 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 provided in paragraph (b) of this section. 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. However, production of a bank's records (other than non-

public OCC information under 12 CFR part 4, subpart C) may 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; and

(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); and

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

* * * * *

21. 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 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.

22. 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 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.

23. 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: October 25, 1999.

John D. Hawke, Jr.,

Comptroller of the Currency.

[FR Doc. 99-28819 Filed 11-3-99; 8:45 am]

BILLING CODE 4810-33-P