Letter states that the activities, including data and payments processing, of the Clearing House at that time were part of or incidental to the business of banking, and thus, that it was permissible for national banks to own interests in the Clearing House.

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OCC Interpretive Letters › Letter states that the activities, including data and payments processing, of the Clearing House at that time were part of or incidental to the business of banking, and thus, that it was permissible for national banks to own interests in the Clearing House.

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Text

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #993

May 16, 1997 June 2004

12 CFR 24

Dear [ ]:

You have submitted a letter on behalf of the [ ] (the

"Clearing House") in connection with the proposed reorganization of the Clearing House into a

holding company with subsidiaries. Your letter seeks confirmation that national banks may

lawfully acquire and hold minority interests both in the new holding company and in certain

of its subsidiaries. The new holding company will itself conduct the current trade association

activities of the Clearing House. Subsidiaries of the holding company will conduct the

current payment system activities of the Clearing House, including: (1) the Clearing House

Interbank Payments System ("CHIPS"), (2) the [ ]Clearing House

("[ ]CH"), (3) the Clearing House Electronic Check Clearing System ("CHECCS ") and

(4) paper check exchange and settlement. For the reasons discussed below, I conclude that the

activities of the Clearing House are part of or incidental to the business of banking and that the

acquisition and ownership of interests in both the holding company and its subsidiaries are

permissible for national banks.

Background

The Clearing House

The Clearing House is a not-for-profit, unincorporated association of [ ]

commercial banks

lude that the

activities of the Clearing House are part of or incidental to the business of banking and that the

acquisition and ownership of interests in both the holding company and its subsidiaries are

permissible for national banks.

Background

The Clearing House

The Clearing House is a not-for-profit, unincorporated association of [ ]

commercial banks. Its members are [ Bank 1 ], [ Bank 2 ],

[ Bank 3 ], [ Bank 4 ], [ Bank 5 ],

[ Bank 6 ], [ Bank 7 ], [ Bank 8 ],

[ Bank 9 ] and [ Bank 10 ]. The Clearing House

operates a variety of payments related services, including CHIPS, [ ]CH and CHECCS,

offered only to its member banks and to other financial institutions.

The Proposed Structure and Activities

The proposed structure consists of a holding company (the "Holding Company") and several

subsidiaries. The Holding Company will be the successor to the Clearing House and will also be

a not-for-profit organization. The Holding Company and its subsidiaries (collectively, the

"Clearing House LLC's") will each be organized as a Delaware limited liability company

("LLC").

The Holding Company will have at least two subsidiaries that will conduct the payments

related activities currently conducted through the Clearing House. One such subsidiary

("[XXX]") will operate CHIPS

a not-for-profit organization. The Holding Company and its subsidiaries (collectively, the

"Clearing House LLC's") will each be organized as a Delaware limited liability company

("LLC").

The Holding Company will have at least two subsidiaries that will conduct the payments

related activities currently conducted through the Clearing House. One such subsidiary

("[XXX]") will operate CHIPS. One or more other subsidiaries (collectively, the "SVPCo's")

will operate the small value payment systems currently operated by the Clearing House

([ ]CH, CHECCS, and paper check clearing).1 The Holding Company also will have a

subsidiary ("ServiceCo") that will own and operate the computer facilities and related licenses

used by the Holding Company's subsidiaries in the conduct of their activities.

It is currently anticipated that each of ServiceCo, [XXX] and the SVPCo's will be organized as

for-profit organizations, although the practicality of establishing one or more as a not-for-profit

organization is still being considered. In either case, it is expected that revenues from fees will

be priced on a basis that will approximate expenses.

The specific activities of these various entities are described below:

Payments Related Activities

As noted, [XXX] and other SVPCos will collectively conduct the current payments related

activities of the Clearing House and provide a variety of payments related services to members

and other financial institutions.

CHIPS: [XXX] will operate CHIPS. CHIPS is a large-dollar electronic funds transfer

system in the United States that is the primary wholesale electronic payment system supporting

the international transfer of U.S. dollars between domestic and foreign banks. CHIPS links

over 100 large banking institutions and currently transfers and settles approximately $1.3

trillion in payments on an average day. CHIPS provides clearing house functions for these

payments among members

system in the United States that is the primary wholesale electronic payment system supporting

the international transfer of U.S. dollars between domestic and foreign banks. CHIPS links

over 100 large banking institutions and currently transfers and settles approximately $1.3

trillion in payments on an average day. CHIPS provides clearing house functions for these

payments among members. Through CHIPS, participating institutions (generally, national and

1 There may be a period while the restructuring is being completed, however, during which the Holding

Company will conduct certain of the activities currently conducted by the Clearing House (other than CHIPS). The

Clearing House anticipates that the Holding Company initially will establish one SVPCo subsidiary that will operate

all of the current small value payment systems of the Clearing House. Over time, however, the Holding Company

may divide these activities among additional SVPCo subsidiaries and may establish new SVPCo subsidiaries to

operate additional small value payment systems.

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state banks, private banks licensed under [ State ] banking law, branches and agencies of

foreign banks, and qualified Edge Act subsidiaries) can send inter se electronic messages on

payment instructions and additional transaction data related to payment instructions. CHIPS

also provides processing of those payments and arranges for settlement between its members

on a multilateral net basis at the end of each business day.2

The other SVPCo will operate the small value retail payment systems currently conducted by

the Clearing House: [ ]CH, CHECCS and paper check clearing services.

[ ]CH: Automated clearing houses ("ACH"), like the [ ]CH, are electronic funds

transfer systems designed predominantly to handle repetitive small dollar payments

basis at the end of each business day.2

The other SVPCo will operate the small value retail payment systems currently conducted by

the Clearing House: [ ]CH, CHECCS and paper check clearing services.

[ ]CH: Automated clearing houses ("ACH"), like the [ ]CH, are electronic funds

transfer systems designed predominantly to handle repetitive small dollar payments.

Essentially, an ACH operates as an electronic alternative to the traditional paper-based check

collection system. Usually, the ACH receives from member originating institutions batch

payment instructions for the crediting and debiting of deposit accounts. These instructions are

called entries. The ACH processes the entries by editing, balancing and sorting the payment

data in the entries and then transmits the entries directly or indirectly (though other ACHs) to

the appropriate receiving institution for further action. The ACH also arranges settlement

between the originating and receiving institutions through credits and debits of accounts

maintained by those institutions with Federal Reserve Banks.

[ ]CH, which operates essentially as described above, is a part of a national network of

automated clearing houses linked by the Federal Reserve System and has also formed a

network with the two other private ACH operators to process ACH items directly. The

[ ]CH currently has more than 800 participants.

CHECCS: CHECCS is a payments processing system that enhances the efficiency of paper

check processing by using electronic check presentment. In CHECCS, a banking organization

presenting a check encodes the information on the check's magnetic ink character recognition

line and transmits it to an electronic switch operated by CHECCS. These data are sorted and

stored in the CHECCS system until retrieved by the paying bank

processing system that enhances the efficiency of paper

check processing by using electronic check presentment. In CHECCS, a banking organization

presenting a check encodes the information on the check's magnetic ink character recognition

line and transmits it to an electronic switch operated by CHECCS. These data are sorted and

stored in the CHECCS system until retrieved by the paying bank. The use of CHECCS

permits a bank to identify potential return items before the delivery of physical checks and

therefore reduces the bank's exposure to such items. Other components of CHECCS include

data processing and transmittal systems that permit (1) immediate identification of certain

return items by comparing stored information with master files of closed account and stop

2 The proposed reorganization will not affect the operational methodology of CHIPS or the current

measures that have been implemented to control and reduce operational, fraud, credit and systemic risk. In order to

reduce credit and systemic risk, CHIPS currently employs admission standards, same-day settlement, bilateral credit

limits, net debit caps, loss sharing rules (additional settlement obligations) and collateral requirements. CHIPS will

continue to meet all of the standards set forth in the Policy Statement on Privately Operated Large-Dollar

Multilateral Netting Systems issued by the Board of Governors of the Federal Reserve System, 59 Fed. Reg. 67,534

(Dec. 29, 1994).

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settlement, bilateral credit

limits, net debit caps, loss sharing rules (additional settlement obligations) and collateral requirements. CHIPS will

continue to meet all of the standards set forth in the Policy Statement on Privately Operated Large-Dollar

Multilateral Netting Systems issued by the Board of Governors of the Federal Reserve System, 59 Fed. Reg. 67,534

(Dec. 29, 1994).

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payment information, and (2) permits paying banks electronically to transmit return item

notices.

Paper-based Systems: The SVPCo will also provide conventional paper check clearing

services through which members of the Holding Company will exchange checks, coupons and

other certificates of value among themselves on the premises of the SVPCo. The SVPCo will

record the transactions and calculate net settlement amounts and arrange to have the resulting

amounts settled through the Federal Reserve Bank of [ State ].

Facilitating Activities and Supporting Services

Holding Company: When the reorganization is completed, it is anticipated that the Holding

Company itself will not conduct any payment systems activities. Instead, the activities of the

Holding Company will consist of holding interests in its subsidiaries and providing "trade

association services." Trade association services will consist primarily of submitting comments

in respect of regulatory and legislative proposals, filing briefs as amicus curiae in judicial

actions and submitting requests for regulatory interpretations, in each case where the proposal,

action or matter affects the banking industry. The Holding Company is also expected to own

the real property currently owned on behalf of the Clearing House (although such property

may also be held through ServiceCo).

ServiceCo: ServiceCo will engage solely in the provision of services to the Holding

Company's subsidiaries. Such services will consist primarily of data processing and data

transmission services, databases and facilities

ing Company is also expected to own

the real property currently owned on behalf of the Clearing House (although such property

may also be held through ServiceCo).

ServiceCo: ServiceCo will engage solely in the provision of services to the Holding

Company's subsidiaries. Such services will consist primarily of data processing and data

transmission services, databases and facilities. Specifically, ServiceCo will own and operate

the computer facilities and related licenses used by the Holding Company's subsidiaries in their

activities. ServiceCo will provide data processing services and access to its facilities to each of

the Holding Company's subsidiaries.

Ownership

Each of the ten current members of the Clearing House will become a member of, and acquire

an equal limited liability company interest in, the Holding Company. The affairs and activities

of each Clearing House LLC are governed by a limited liability company agreement ("LLC

Agreement").

[ XXX ] will be owned in part by the Holding Company and in part by the participants in

CHIPS. [ XXX ] will have two classes of members, Class A members and Class B members.

Each banking organization that is a participant in CHIPS (or becomes a participant after the

date of the reorganization) will become a Class A member, and Class A membership will be

limited to CHIPS participants. The Holding Company will be the only Class B member.

Ninety-nine percent of the common limited liability company interests in [ XXX ] will be held

by the Class A members and will be allocated per capita among them. The Holding Company

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s a participant after the

date of the reorganization) will become a Class A member, and Class A membership will be

limited to CHIPS participants. The Holding Company will be the only Class B member.

Ninety-nine percent of the common limited liability company interests in [ XXX ] will be held

by the Class A members and will be allocated per capita among them. The Holding Company

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(as the Class B member) will have only a 1 % common limited liability company interest, but it

will elect a majority of the [ XXX ] Board.

ServiceCo and (initially) the SVPCo's will be wholly owned by the Holding Company. The

ownership structure of the SVPCo's, however, is expected to change over time. It is

anticipated that one or more of the SVPCo's will in the future become partly owned by the

participants in the payment systems operated by it. In that case, the ownership structure of the

SVPCo would be modeled after that of [ XXX ].

Governance

Each of the Clearing House LLCs will be managed by a Board of Directors (except

ServiceCo). With respect to the Holding Company, each member of the Holding Company

will be entitled to appoint one Director, and each Director will have one vote on all matters

coming before the Board. Each member of the Holding Company will have one vote on all

matters presented to the members, as such.

[ XXX ] will be managed by a ten-member Board of Directors. The Holding Company (as the

Class B member) will be entitled to elect six of the Directors, and the Class A members will

be entitled to elect the remaining four Directors. Every Director must be an executive officer

of a Class A member of [ XXX ] and no two Directors may be officers of the same Class A

member (or of affiliated Class A members). Each Director will be entitled to one vote on all

matters coming before the Board

) will be entitled to elect six of the Directors, and the Class A members will

be entitled to elect the remaining four Directors. Every Director must be an executive officer

of a Class A member of [ XXX ] and no two Directors may be officers of the same Class A

member (or of affiliated Class A members). Each Director will be entitled to one vote on all

matters coming before the Board.

The Class A members and the Class B member of [ XXX ] will vote as separate classes on all

matters presented to the members, and all actions by the members will require the affirmative

vote of both the Class A members and the Class B member. Although each Class A Member

will have an equal common limited liability company interest in [ XXX ], each Class A

member's vote will be weighted based on the member's usage of CHIPS over a specified

period.

As the sole member, the Holding Company will initially be entitled to appoint all Directors of

any SVPCo. If any SVPCo becomes partially owned by participants, the participants will

become entitled to elect a minority of its Directors in a voting arrangement expected to be

similar to that of [ XXX ]. ServiceCo will be managed directly by the Holding Company, as

sole member, and will not have a Board of Directors.

Other Material Terms of the LLC Agreements

The LLC Agreement of each Clearing House LLC provides that the LLC shall not directly or

indirectly carry on any activity that would prohibit a national bank or a member bank of the

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similar to that of [ XXX ]. ServiceCo will be managed directly by the Holding Company, as

sole member, and will not have a Board of Directors.

Other Material Terms of the LLC Agreements

The LLC Agreement of each Clearing House LLC provides that the LLC shall not directly or

indirectly carry on any activity that would prohibit a national bank or a member bank of the

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Federal Reserve System from being a member of the LLC.3 In addition, the LLC Agreements

provide that a member may withdraw for any reason and without the consent of any other

member (subject, in the case of [ XXX ] and any SVPCo, to thirty days written notice).

Membership in the Clearing House LLC's will be limited to banking organizations. In the

case of the Holding Company, the LLC Agreement limits membership to commercial banks

and trust companies. In the case of [ XXX ], the LLC Agreement limits membership to the

Holding Company and to banking organizations that are participants in CHIPS (or in another

electronic funds transfer system that may from time to time be operated by [ XXX ]).

Membership in a SVPCo will be limited to the Holding Company and institutions that are

participants in the payment system(s) operated by the SVPCo. Under their respective LLC

Agreements, membership in the Clearing House LLC's (except ServiceCo) will be subject to

restrictions on transferability. With certain exceptions, a member may not transfer any part of

its interest without the consent of the Board of Directors.

None of the LLC Agreements of the Clearing House LLC's will require any member to make

any capital contribution other than upon admission. From time to time, however, a Clearing

House LLC may request additional contributions from members (including for expenses). In

the case of the Holding Company, the failure of a member to make a requested contribution

may be grounds for expulsion.

e of the LLC Agreements of the Clearing House LLC's will require any member to make

any capital contribution other than upon admission. From time to time, however, a Clearing

House LLC may request additional contributions from members (including for expenses). In

the case of the Holding Company, the failure of a member to make a requested contribution

may be grounds for expulsion.

Discussion

Your letter raises the issue of the authority of a national bank to make a non-controlling

investment in a limited liability company. In a variety of circumstances, the OCC has

permitted national banks to own, either directly, or indirectly through an operating subsidiary,

a minority interest in an enterprise. The OCC has said that national banks are legally

permitted to make a minority investment in an LLC provided four criteria or standards are

met. See Interpretive Letter No. 732, reprinted in, [1995-1996 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 81-049 (May 10, 1996); Interpretive Letter No. 692, reprinted in

[Current Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 81,007 (Nov. 1, 1995), and OCC

Interpretive Letter No. 694, reprinted in [Current Transfer Binder] Fed. Banking L. Rep.

(CCH) ¶ 81,009 (Dec. 13, 1995).4 These standards, which have been distilled from our

previous decisions on permissible minority investments for national banks and their

subsidiaries, are:

3 We interpret this language to mean that the LLCs will engage only in activities that are part of or are

incidental to the business of banking. If this interpretation is incorrect, the language in the LLC Agreements should

be changed to conform to this interpretation.

4 See also 12 C.F.R. § 5.36(b). National banks are permitted to make various types of equity investments

pursuant to 12 C.F.R. § 24(Seventh) and other statutes.

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s will engage only in activities that are part of or are

incidental to the business of banking. If this interpretation is incorrect, the language in the LLC Agreements should

be changed to conform to this interpretation.

4 See also 12 C.F.R. § 5.36(b). National banks are permitted to make various types of equity investments

pursuant to 12 C.F.R. § 24(Seventh) and other statutes.

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(1) The activities of the enterprise in which the investment is made must be limited to

activities that are part of or incidental to the business of banking.

(2) The bank must be able to prevent the enterprise from engaging in activities that do

not meet the foregoing standard, or be able to withdraw its investment.

(3) The bank's loss exposure must be limited, as a legal and accounting matter, and the

bank must not have open-ended liability for the obligations of the enterprise.

(4) The investment must be convenient or useful to the bank in carrying out its business

and not a mere passive investment unrelated to that bank's banking business.

I conclude, as discussed below, that the proposed investments by national banks in the

Clearing House LLCs satisfy these four criteria.

The activities of the enterprise in which the investment is made must be

limited to activities that are part of or incidental to the business of

banking

The National Bank Act, in relevant part, provides that national banks shall have the power:

[t]o exercise … all such incidental powers as shall be necessary to carry on the

business of banking; by discounting and negotiating promissory notes, drafts,

bills of exchange, and other evidences of debt; by receiving deposits; by buying

and selling exchange, coin, and bullion; by loaning money on personal security;

and by obtaining, issuing, and circulating notes ...

12 U.S.C. § 24(Seventh).

The Supreme Court has held that the powers clause of 12 U.S. C

rry on the

business of banking; by discounting and negotiating promissory notes, drafts,

bills of exchange, and other evidences of debt; by receiving deposits; by buying

and selling exchange, coin, and bullion; by loaning money on personal security;

and by obtaining, issuing, and circulating notes ...

12 U.S.C. § 24(Seventh).

The Supreme Court has held that the powers clause of 12 U.S. C. § 24(Seventh) is a broad

grant of power to engage in the business of banking, including but not limited to the

enumerated powers and the business of banking as a whole. See NationsBank of North

Carolina N.A. v. Variable Life Annuity Co., 115 S. Ct. 810 (1995) ("VALIC"). Judicial

cases reflect three general principles used to determine whether an activity is within the scope

of the "business of banking": (1) is the activity functionally equivalent to or a logical

outgrowth of a recognized banking activity; (2) would the activity respond to customer needs

or otherwise benefit the bank or its customers; and (3) does the activity involve risks similar in

nature to those already assumed by banks. See, e.g., Merchants' Bank v. State Bank, 77 U.S.

604, 648 (1871) (certification of checks has grown out of the business needs of the country and

involves no greater risk than a bank giving a certificate of deposit); M&M Leasing Corp. v.

Seattle First Nat'l Bank, 563 F.2d 1377, 1382-83 (9th Cir. 1977), cert .denied, 436 U.S. 987

olve risks similar in

nature to those already assumed by banks. See, e.g., Merchants' Bank v. State Bank, 77 U.S.

604, 648 (1871) (certification of checks has grown out of the business needs of the country and

involves no greater risk than a bank giving a certificate of deposit); M&M Leasing Corp. v.

Seattle First Nat'l Bank, 563 F.2d 1377, 1382-83 (9th Cir. 1977), cert .denied, 436 U.S. 987

(1978) (personal property lease financing is "functionally interchangeable" with the express

power to loan money on personal property); American Ins. Assoc. v. Clarke, 865 F.2d 278,

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282 (D.C. Cir. 1988) (standby credits to insure municipal bonds is "functionally equivalent" to

the issuance of a standby letter of credit). Further, as established by the Supreme Court in

VALIC, national banks are authorized to engage in an activity if it is incidental to the

performance of the five enumerated powers in section 24(Seventh) or if it is incidental to the

performance of an activity that is part of the business of banking.

Payments related activities

Modern electronic clearing house activities, such as those of the proposed LLCs, involve three

distinct services: electronic payments message transmission, electronic payments processing,

and payments settlement among members. All three services relate to different aspects of the

payments systems that, as OCC recently noted, are central to banking.5 Each of these three

services is clearly within the business of banking and is, thus, permissible for national banks

ices: electronic payments message transmission, electronic payments processing,

and payments settlement among members. All three services relate to different aspects of the

payments systems that, as OCC recently noted, are central to banking.5 Each of these three

services is clearly within the business of banking and is, thus, permissible for national banks.

Transmission of electronic messages related to payments: It is well established that a

national bank may use electronic means to perform services expressly or incidentally

authorized to national banks.6 The OCC Interpretive Ruling setting forth this authority was

recently revised, in recognition of the rapid advancement of technology, to authorize a national

bank to "perform, provide, or deliver through electronic means and facilities any activity,

function, product, or service that it is otherwise authorized to perform, provide, or deliver."

61 Fed. Reg. 4849 (1996) codified at 12 C.F.R. § 7.1019.

Accordingly, the OCC has found that, as part of the business of banking, national banks may

provide for the electronic transmission of banking, financial, or related economic data and

thereby establish communication or data networks that support banking and financial

transactions.7 Thus, for example, in OCC Interpretive Letter No. 732, supra, the OCC

5 "Banks are the most important institutional participants in the nation's payment system. They deal with

cash, issue, process, clear and settle checks and similar monetary instruments, administer credit card and debit card

programs for consumers and merchants, and transfer funds electronically in a variety of situations and

circumstances." OCC Conditional Approval Letter No. 220, 1996 OCC Ltr. LEXIS 140 (Dec

s in the nation's payment system. They deal with

cash, issue, process, clear and settle checks and similar monetary instruments, administer credit card and debit card

programs for consumers and merchants, and transfer funds electronically in a variety of situations and

circumstances." OCC Conditional Approval Letter No. 220, 1996 OCC Ltr. LEXIS 140 (Dec. 2, 1996) (the

"Mondex Letter").

6 See OCC Interpretive Letter No. 677, reprinted in [1994-1995 Transfer Binder] Fed. Banking L. Rep.

(CCH) ¶ 83,625 (June 28, 1995); OCC Interpretive Letter No. 284, reprinted in [1983-1984 Transfer Binder] Fed.

Banking L. Rep. (CCH) ¶ 85,448 (Mar. 26, 1984); and OCC Interpretive Letter No. 449, reprinted in [1988-1989

Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,673 (Aug. 23, 1988).

7 See OCC Interpretive Letter No. 653, reprinted in [1994-1995 Transfer Binder] Fed. Banking L. Rep.

(CCH) ¶ 83,601 (December 22, 1994)(national bank may establish a network to act as an informational and

payments interface between insurance underwriters and their agents); OCC Interpretive Letter No. 516, reprinted in

(1990-91 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,220 (July 12, 1990) (national bank may provide

electronic communications channels for persons participating in securities transactions); OCC Interpretive Letter

No. 513, reprinted in [1990-91 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,215 (June 18, 1990) (national

bank may provide an electronic network for the transmission of visual, voice and data communications for other

financial institutions); OCC Interpretive Letter No. 346, reprinted in [1985-1987] Transfer Binder] Fed. Banking

Law. Rep. (CCH) ¶ 85,516 (July 31, 1985)(national bank may establish an electronic gateway for financial

settlement services).

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83,215 (June 18, 1990) (national

bank may provide an electronic network for the transmission of visual, voice and data communications for other

financial institutions); OCC Interpretive Letter No. 346, reprinted in [1985-1987] Transfer Binder] Fed. Banking

Law. Rep. (CCH) ¶ 85,516 (July 31, 1985)(national bank may establish an electronic gateway for financial

settlement services).

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permitted a national bank to assume a minority ownership in a company engaged in the design,

development, and marketing of a network for electronic funds transfer and electronic

commercial data interchange.8 Indeed, the OCC recently noted that electronically transmitted

payments through clearing houses like CHIPS account for a very large portion of the total

dollar value of all financial transactions. Mondex Letter, supra, at n. 10.

Electronic payments processing: The information and transaction processing that [ XXX ]

and the other Clearing House LLCs will provide for participating institutions is permissible.

The processing will involve banking, financial, or related economic data and, thus, is part of

the business of banking. An earlier version of 12 C.F.R. § 7.1019 stated that "as part of its

banking business and incidental thereto, a national bank may collect, transcribe, process,

analyze, and store for itself and others, banking, financial, or related economic data."

Interpretive Ruling 7.3500, 39 Fed. Reg. 14195 (Apr. 22, 1974). Although in its 1984

revision of the ruling, the OCC deleted this statement because it believed that "specific

examples [of permissible electronic activities] are inappropriate given the imprecision of terms

and rapid pace of change in the data processing industry," 49 Fed. Reg. 11157 (Mar. 26,

1984), the "analytical framework" embodied in the ruling remained the same. Id

2, 1974). Although in its 1984

revision of the ruling, the OCC deleted this statement because it believed that "specific

examples [of permissible electronic activities] are inappropriate given the imprecision of terms

and rapid pace of change in the data processing industry," 49 Fed. Reg. 11157 (Mar. 26,

1984), the "analytical framework" embodied in the ruling remained the same. Id. There was

no intent to narrow or restrict the substantive effect of the rule.9

Clearing and settlement of payments among members: The OCC has long held that

national banks may invest in and hold stock in clearing house associations in which they

participate. Unpublished letter from James J. Saxon dated October 12, 1966; Unpublished

letter from William B. Camp, dated November 18, 1966; Unpublished letter from Peter

Liebesman dated January 26, 1981. Cf., Unpublished letter from James J. Saxon dated

8 The Clearing House LLCs will transmit not only payment instructions, but also information related to

payments instructions. This will be permissible. As part of the business of banking, national banks can transmit

data or information and electronic documents connected with funds transfer, such as electronic data interchange

("EDI") services. See Interpretive Letter No. 732, supra (a national bank may offer EDI services that allow

businesses to electronically send and receive payments, invoices and orders worldwide). See_also Interpretive Letter

No. 419, reprinted in [1988-1989 Transfer Binder] Fed. Banking Law. Rep. (CCH) ¶ 85,643 (February 18, 1988)

(national bank providing specialized electronic payment systems for health care providers and insurance carriers can

also transmit as part of that payment service treatment information from the health care providers to the insurance

carriers that was used by the insurance carrier to determine how the amount to be payed should be allocated among

potential payors)

H) ¶ 85,643 (February 18, 1988)

(national bank providing specialized electronic payment systems for health care providers and insurance carriers can

also transmit as part of that payment service treatment information from the health care providers to the insurance

carriers that was used by the insurance carrier to determine how the amount to be payed should be allocated among

potential payors).

9 OCC Interpretive Letter No. 677, supra. See also OCC Interpretive Letter No. 737, reprinted in, [Current

Transfer Binder] Fed. Banking Law. Rep. (CCH) ¶ 81-101 (Aug. 19, 1996) (to be published) (national bank may

provide transaction and information processing services to support an electronic stored value system); OCC

Interpretive Letter No. 653, supra, (national bank may act as an informational and payments interface between

insurance underwriters and general insurance agents); OCC Letter No. 346, supra, (national banks may maintain

records on commodities transactions).

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January 28, 1964; Unpublished letter from Robert B. Serino dated July 26, 1989; and OCC

Interpretive Letter No. 692, supra. Case authority also holds that this is a permissible activity

for national banks. Philler v. Patterson, 168 Pa. 468, 32 A. 26 (1895); Crane v. The Fourth

National Rank, 173 Pa. 556, 34 A. 296 (1896). Cf., Andrew v. Farmers & Merchants

Savings Bank, 245 N.W. 226, 229 (Iowa 1932). The use of electronic technology to conduct

clearing and settlement activities does not change this conclusion. OCC Interpretive Letter

No. 737, supra (the collection, processing, and settlement of payments in a stored value

system is part of the business of banking).10

Facilitating Activities and Supporting Services

The Holding Company and ServiceCo will not conduct any payment systems activities, but

instead will provide general services to facilitate and support the business operations of the

other Clearing House LLCs

upra (the collection, processing, and settlement of payments in a stored value

system is part of the business of banking).10

Facilitating Activities and Supporting Services

The Holding Company and ServiceCo will not conduct any payment systems activities, but

instead will provide general services to facilitate and support the business operations of the

other Clearing House LLCs. These supporting activities are not part of the business of

banking per se, but they are permissible incidental activities because they facilitate, support

and, hence, are "necessary to" the operation of the other LLCs as businesses.

Some permissible incidental activities of national banks are not necessarily incident to specific

banking services or products, but rather to the operation of the bank as a business: they

facilitate general operation of the bank as a business enterprise. These facilitating activities

include hiring employees, issuing stock to raise capital, owning or renting equipment,

borrowing money for operations, purchasing the assets and assuming the liabilities of other

financial institutions. While no express grants of authority to conduct these activities exist,

various federal statutes have implicitly recognized and regulated these business activities of

national banks. For example, the statutes refer to limits on persons who can serve as bank

employees.11 In each case, the statutes have assumed the existence of the corporate power to

conduct the activity. These powers are incidental to the general grant of power to conduct a

"business" under 12 U.S.C. 24(Seventh) and do not need express enumeration.12

10 See also Mondex Letter (national banks may invest in an LLC providing clearing and settlement for an

open stored value system); OCC Interpretive Letter No. 731, reprinted in [Current Transfer Binder] Fed. Banking

Law. Rep

eral grant of power to conduct a

"business" under 12 U.S.C. 24(Seventh) and do not need express enumeration.12

10 See also Mondex Letter (national banks may invest in an LLC providing clearing and settlement for an

open stored value system); OCC Interpretive Letter No. 731, reprinted in [Current Transfer Binder] Fed. Banking

Law. Rep. (CCH) ¶ 81,048 (July 1, 1996) (national banks may enter into a contract with a public authority to operate

on behalf of the authority an electronic toll collection system); OCC Interpretive Letter No. 732, supra (national

banks may provide electronic data interchange services that, among other things, provide for payments by EFT); and

OCC Interpretive Letter No. 419, supra (national bank may provide a service that facilitates settlement and payment

of health claims using EFT technology).

11 See, e.g.,12 U.S. C. 78 (persons ineligible to be bank employees).

12 Memorandum dated November 18, 1996, to Eugene A. Ludwig, Comptroller of the Currency, from Julie

L. Williams, Chief Counsel, "Legal Authority for Revised Operating Subsidiary Regulation," reprinted at [Current

Transfer Binder] Fed. Banking Law. Rep. (CCH) ¶ 90-464 ("Williams Memo").

- -

The power to operate through optimal corporate structures, such as subsidiary corporations or

joint ventures is an example of such permissible operational incidental activities. Such stock

ownership is not among the powers expressly granted to national banks in 12 U.S.C.

24(Seventh) nor does it fall within the "business of banking" in the sense that it is a banking

activity. Nevertheless, statutes refer to the existence of bank subsidiaries, indicating that

subsidiaries were contemplated as permissible and that the incidental power to hold and operate

them is implied.13

In this case, the Holding Company will hold interests in its subsidiaries

in 12 U.S.C.

24(Seventh) nor does it fall within the "business of banking" in the sense that it is a banking

activity. Nevertheless, statutes refer to the existence of bank subsidiaries, indicating that

subsidiaries were contemplated as permissible and that the incidental power to hold and operate

them is implied.13

In this case, the Holding Company will hold interests in its subsidiaries. This would be a

permissible activity for a national bank; it is an exercise of the business facilitating incidental

power to reconfigure the structure of what the banks own, i.e., the Clearing House, into a

more desirable structure through which to conduct payments related activities on behalf of the

investing banks.

Another "trade association service" provided by the Holding Company will be external

communications and relations. The external communications conducted by the Holding

Company will be relevant to banking industry issues and, specifically, payment system issues.

Also, as part of this function, the Holding Company will become involved in litigation relating

to issues of concern to the Holding Company's owners. These are permissible incidental

facilitating activities.14

2. The Banks must be able to prevent the LLC from engaging in activities

that do not meet the foregoing standard, or be able to withdraw their

investment

This is an obvious corollary to the first standard. It is not sufficient that the LLC's activities

are permissible at the time the bank initially purchases LLC membership shares; they must also

remain permissible for as long as the bank retains an ownership interest in the LLC.

The LLC Agreements will effectively provide that the LLC will only engage in activities that

are part of or incidental to the business of banking. In addition, investing banks may withdraw

13 12 U.S.C

urchases LLC membership shares; they must also

remain permissible for as long as the bank retains an ownership interest in the LLC.

The LLC Agreements will effectively provide that the LLC will only engage in activities that

are part of or incidental to the business of banking. In addition, investing banks may withdraw

13 12 U.S.C. 24(Seventh) (limitations on presupposed authority of national bank to own a subsidiary

engaged in the safe deposit business); 12 U.S.C. 371d (limitations on the amount of investment permitted in a bank

premises corporation subsidiary); and 12 U.S.C. 371c ("affiliates" includes subsidiaries owned by national banks).