[Federal Register: December 20, 2002 (Volume 67, Number 245)]
[Rules and Regulations]
[Page 77909-77918]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20de02-2]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 506, 559, 562, and 563
[No. 2002-64]
RIN 1550-AB55
Savings Associations--Transactions with Affiliates
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Interim final rule with request for comment.
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SUMMARY: The Office of Thrift Supervision (OTS) is revising its
regulations on transactions with affiliates. This interim final rule
conforms OTS regulations to the Board of Governors of the Federal
Reserve System (FRB) final rule implementing sections 23A and 23B of
the Federal Reserve Act (FRA). The FRB rule (Regulation W) combines
statutory restrictions on transactions with affiliates with new and
existing interpretations and exemptions.
DATES: This interim final rule is effective April 1, 2003. Comments
must be received on or before February 18, 2003.
ADDRESSES: Mail: Send comments to Regulation Comments, Chief Counsel's
Office, Office of Thrift Supervision, 1700 G Street, NW., Washington,
DC 20552, Attention: No. 2002-64. Commenters should be aware that there
have been unpredictable and lengthy delays in postal deliveries to the
Washington, DC area in recent weeks and may prefer to make their
comments via facsimile, e-mail, or hand delivery.
Delivery: Hand deliver comments to the Guard's Desk, East Lobby
Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days,
Attention: Regulation Comments, Chief Counsel's Office, No. 2002-64.
Facsimiles: Send facsimile transmissions to FAX Number (202) 906-
6518, Attention: No. 2002-64.
E-Mail: Send e-mails to regs.comments@ots.treas.gov, Attention: No.
2002-64, and include your name and telephone number.
Availability of comments: OTS will post comments and the related
index on the OTS Internet Site at www.ots.treas.gov. In addition, you
may inspect comments at the Public Reading Room, 1700 G Street, NW., by
appointment. To make an appointment for access, call (202) 906-5922,
send an e-mail to public.info@ots.treas.gov, or send a facsimile
transmission to (202) 906-7755. (Please identify the materials you
would like to inspect to assist us in serving you.) We schedule
appointments on business days between 10 a.m. and 4 p.m. In most cases,
appointments will be available the business day after the date we
receive a request.
FOR FURTHER INFORMATION CONTACT: Karen A. Osterloh, Special Counsel,
(202) 906-6639, Regulations and Legislation Division, Chief Counsel's
Office, or Donna Deale, Manager, (202) 906-7488, Supervision Policy,
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
Section 11(a)(1) of the Home Owners' Loan Act (HOLA) (12 U.S.C.
1468(a)(1)) applies sections 23A and 23B of the FRA (12 U.S.C. 371c and
371c-1) to every savings association ``in the same manner and to the
same extent'' as if the savings association were a member bank of the
Federal Reserve System.
Section 23A of the FRA imposes three major limitations on a member
bank's (and its subsidiaries') transactions with affiliates. First,
section 23A limits the amount of ``covered transactions'' with any
single affiliate to no more than 10 percent of the member bank's
capital stock and surplus. Covered transactions with all affiliates are
limited to no more than 20 percent of the member bank's capital stock
and surplus. A covered transaction includes a loan or extension of
credit to an affiliate, a purchase of or investment in securities
issued by an affiliate, a purchase of assets from an affiliate, the
acceptance of securities issued by an affiliate as collateral security
for a loan or extension of credit to any person or company, and the
issuance of a guarantee, acceptance, or letter of credit on behalf of
an affiliate.
Second, section 23A requires that all covered transactions between
a member bank and its affiliates be on terms and conditions that are
consistent with safe and sound banking practices and prohibits a member
bank from purchasing low-quality assets from an affiliate. Finally,
section 23A requires that a member bank's extensions of credit to
affiliates and guarantees on behalf of affiliates be appropriately
secured by a statutorily defined amount of collateral.
Section 23B of the FRA protects member banks by requiring that
transactions between the bank and its affiliates occur on market
terms--on terms and under circumstances that are substantially the
same, or at least as favorable to the bank, as those prevailing at the
time for comparable transactions with unaffiliated companies. Section
23B applies to covered transactions under section 23A, as well as other
transactions, such as the sale of securities or other assets to an
affiliate and the payment of money or the furnishing of services to an
affiliate. Section 23B also prohibits certain purchases and
acquisitions of securities by a member bank or its subsidiary subject
to certain conditions, and prohibits certain advertisements or
agreements that state or suggest that the member bank is responsible
for the obligations of its affiliates.
In addition to the section 23A and 23B restrictions, section
11(a)(1) of the HOLA imposes two prohibitions on savings associations.
First, a savings association may not make a loan or other extension of
credit to any affiliate unless that affiliate is engaged only in
activities that a bank holding company may conduct. In addition, no
savings association may purchase or invest in securities issued by an
affiliate, other than with respect to shares of a subsidiary. Section
11(a)(4) of the HOLA authorizes OTS to impose such additional
restrictions on any transaction between a savings association and any
affiliate as it
[[Page 77910]]
determines to be necessary to protect the safety and soundness of the
association.
In 1991, OTS issued comprehensive rules implementing section 11(a)
of the HOLA.\1\ These rules, which are currently codified at 12 CFR
563.41 and 563.42 (2002), define and clarify the application of
sections 23A and 23B to savings associations and their subsidiaries,
implement the two prohibitions imposed under section 11(a) of the HOLA,
and impose additional restrictions and safeguards, as authorized by
section 11(a)(4) of the HOLA. OTS has made only minor amendments to
these rules since 1991.
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\1\ 56 FR 34005 (July 25, 1991).
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The FRB has statutory authority to issue regulations to administer
and carry out the purposes of sections 23A and 23B of the FRA.\2\ Until
recently, the FRB had promulgated no comprehensive regulations on this
subject. Instead, the FRB relied on a series of regulatory
interpretations and informal staff guidance.\3\ The FRB recently issued
Regulation W, a comprehensive final rule implementing sections 23A and
23B of the FRA.\4\ Regulation W incorporates many existing FRB
interpretations, supersedes certain outdated interpretations, exempts
specific types of transactions, and implements revisions to sections
23A and 23B contained in the Gramm-Leach-Bliley Act (GLBA).\5\
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\2\ 12 U.S.C. 371c(f), 371c-1(e).
\3\ The FRB codified some of these interpretations at 12 CFR
250.240 through 250.250 (2002).
\4\ 67 FR 76560 (Dec. 12, 2002), to be codified as 12 CFR part
223. In this rule, OTS cites to 12 CFR part 223 as it will be
codified in the 2003 Code of Federal Regulations, rather than by
citation to publication of the final rule in the Federal Register
\5\ Pub. L. No. 106-102, 113 Stat. 1338 (1999).
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The FRB's final rule does not by its terms apply to savings
associations. However, because sections 23A and 23B apply to every
savings association in the same manner and to the same extent as if the
savings association were a member bank, OTS is revising its regulations
on transactions with affiliates to reflect Regulation W. Today's
interim final rule has three goals:
[sbull] To incorporate all applicable provisions and exceptions
prescribed by the FRB in Regulation W;
[sbull] To provide guidance concerning the relationship between the
additional prohibitions under section 11(a)(1) of the HOLA and
Regulation W; and
[sbull] To set out the additional restrictions OTS imposes under
section 11(a)(4) of the HOLA.
II. General Approach
OTS is replacing its existing rules on transactions with affiliates
at 12 CFR 563.41 and 563.42 (2002) with a new interim final rule, which
will be codified at 12 CFR 563.41. The interim final rule cross
references the substantive provisions contained in Regulation W;
interprets Regulation W to the extent necessary to apply these
restrictions to savings associations; incorporates the prohibitions in
section 11(a)(1) of the HOLA; and imposes various additional
restrictions on savings associations under section 11(a)(4) of the
HOLA.
OTS considered, but is not adopting, an alternative presentation.
Specifically, OTS reviewed whether its rule should restate, with
appropriate revisions, all of Regulation W. While this alternative
presentation would consolidate in one place all regulations under
section 11(a) of the HOLA, OTS believes that this approach would be
duplicative. Moreover, this approach would require OTS to revise its
regulations every time that the FRB amends Regulation W. The approach
in this interim final rule, on the other hand, will ensure that most
amendments to Regulation W are automatically incorporated in OTS rules
without further notice and comment rulemaking. OTS specifically seeks
public comment on which approach is more suitable.
III. Interim Final Rule--12 CFR 563.41
A. Scope
The interim final rule at Sec. 563.41(a) sets out the scope of the
new rule. Specifically, it states that Sec. 563.41 implements section
11(a) of the HOLA, which applies sections 23A and 23B of the FRA to
every savings association in the same manner and to the same extent as
if the association were a member bank; prohibits certain types of
transactions with affiliates; and authorizes OTS to impose additional
restrictions on savings association transactions with affiliates.
The interim final rule implements only section 11(a) of the HOLA.
It does not contain every statutory or regulatory restriction on
transactions between savings associations and their affiliates. For
example, the rule does not address additional restrictions on
transactions with affiliates that OTS may require as prompt corrective
action under section 38(f)(2)(B) of the Federal Deposit Insurance Act
(FDIA). 12 U.S.C. 1831o(f)(2)(B).
B. Sections 23A and 23B of the FRA/Regulation W
The interim final rule at Sec. 563.41(b) states that a savings
association must comply with sections 23A and 23B of the FRA and
Regulation W. To clarify Regulation W for savings associations, OTS has
prepared a chart briefly explaining how specific sections of Regulation
W apply and explaining why other sections do not apply to savings
associations. These provisions are described below.
1. Applying Regulation W to Savings Associations
Regulation W by its terms applies only to member banks and defines
this term as ``any national bank, State bank, banking association, or
trust company that is a member of the Federal Reserve System. For
purposes of this definition, an operating subsidiary of a member bank
is treated as part of the member bank.'' 12 CFR 223.3(w). To ensure
that Regulation W applies to savings associations and their
subsidiaries in the same manner and to the same extent as member banks,
the interim final rule at Sec. 563.41(b)(11) states that the term
``member bank'' as used in Regulation W includes a savings association.
Like the existing rule, the interim final rule defines ``savings
association'' to include federal and state-chartered savings
associations and most thrift subsidiaries.\6\ Savings association also
includes any savings bank or cooperative bank that is a savings
association under section 10(l) of the HOLA.\7\ This provision reflects
the agency's long-standing interpretation that a savings bank or
cooperative bank that elects to be treated as a savings association for
the purposes of section 10(l) of the HOLA has also made an election to
be treated as a savings association for the purposes of section 11 of
the HOLA.\8\ Accordingly, the interim final rule continues to include
within the definition of savings association those state banks and
cooperative banks that are subsidiaries of section 10(l) holding
companies.
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\6\ See 12 CFR 563,41(b)(5)(2002), which incorporates the
definition of savings association at 12 CFR 583.21(2002). Thrift
subsidiaries are discussed below.
\7\ Section 10(l) of the HOLA states: ``Notwithstanding any
other provision of law, a savings bank (as defined in [12 U.S.C.
1813(g)]) and a cooperative bank that is an insured bank (as defined
in [12 U.S.C. 1813(H)]) upon application shall be deemed to be a
savings association for the purposes of [section 10 of the HOLA], if
the Director [of OTS] determines that such bank is a qualified
thrift lender * * *.'' 12 U.S.C. 1467A(l).
\8\ See section 10(d) of the HOLA. 12 U.S.C. 1467a(d).
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[[Page 77911]]
OTS has also revised the reference to ``operating subsidiaries.''
Under Regulation W, the definition of affiliate generally excludes any
company that is a subsidiary of the member bank unless the subsidiary
is: (1) A depository institution; (2) a financial subsidiary;\9\ (3) a
company that is directly controlled by one or more affiliates (other
than depository institution affiliates) or by a shareholder that
controls the member bank or a group of shareholders that together
control the member bank; (4) an employee stock option plan, trust, or
other similar organization that exists for the benefit of the
shareholders, partners, members, or employees of the member bank; or
(5) any other company that the FRB or appropriate banking agency
determines to be an affiliate. 12 CFR 223.2(b)(1)(i)-(v). The FRB
refers to all non-affiliate subsidiaries as ``operating subsidiaries.''
12 CFR 223.3(aa). OTS believes that this term is unnecessary and
confusing given the use of the term ``operating subsidiary'' in other
OTS regulations. See 12 CFR part 559. Accordingly, the chart at Sec.
563.41(b) of the interim final rule does not use the term ``operating
subsidiary.'' Instead, where it is appropriate to refer to a subsidiary
that is not an affiliate, the chart uses the phrase ``non-affiliate
subsidiary.''
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\9\ Financial subsidiaries are discussed in this preamble at
section III.B.2.b.
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2. Affiliates
Under Regulation W, the term ``affiliate'' is defined to include
parent companies (any company that controls the member bank); companies
under common control with the member bank; companies under other types
of common control; companies with interlocking directors or trustees;
companies that are sponsored and advised on a contractual basis by the
member bank, its subsidiary, or an affiliate; investment companies for
which a member bank or any affiliate is an investment advisor;
depository institution subsidiaries of a member bank; financial
subsidiaries; companies held under merchant banking or insurance
company investment authority; partnerships for which the member bank or
an affiliate serves as general partner; subsidiaries of affiliates; and
other companies that the FRB deems to be an affiliate of the member
bank. 12 CFR 223.2(a). This definition specifically excludes certain
companies, including most subsidiaries of member banks. 12 CFR
223.2(b). The interim final rule adopts the FRB definition of affiliate
except as described below.
a. Control
One of the fundamental concepts underlying the definition of
affiliate is the concept of control. Regulation W states that control
by a company or shareholder over another company means that:
[sbull] The company or shareholder, directly or indirectly, or
acting through one or more other persons, owns, controls, or has the
power to vote 25 percent or more of any class of voting securities or
other similar voting interest of the other company.
[sbull] The company or shareholder controls in any manner the
election of a majority of the directors, trustees, or general partners
(or individuals exercising similar functions) of the other company.
[sbull] The Board determines, after notice and opportunity for
hearing, that the company or shareholder, directly or indirectly,
exercises a controlling influence over the management or policies of
the other company. 12 CFR 223.3(g)(1).
Regulation W also includes specific provisions addressing ownership
or control of shares as a fiduciary, shares by a subsidiary,
convertible securities, and nonvoting equity securities. See 12 CFR
223.3(g)(2)-(5).
When OTS promulgated its transactions with affiliates regulation in
1991, it exercised its authority under section 11(a)(4) of the HOLA to
expand the definition of control. Specifically, existing Sec.
563.41(b)(3) states that a company or shareholder has control over
another company if the company or shareholder, directly or indirectly,
or acting through one or more other persons owns, controls, or has the
power to vote 25 percent or more of any class of voting securities of
the other company or if the company or shareholder would be deemed to
control another company under 12 CFR 574.4(a) or presumed to control
the company under 12 CFR 574.4(b). As a related matter, OTS also
applied its own concept of control to define a subsidiary of a savings
association. Specifically, existing Sec. 563.41(b)(4) defines
subsidiary of a savings association as a company that is controlled by
a savings association within the meaning of part 574.
This interim final rule at Sec. 563.41(b)(6) continues to use the
existing OTS definition of control.\10\ OTS-regulated savings
associations are accustomed to applying part 574 control concepts to
transactions with affiliates and in numerous other contexts. See
definitions of control used in 12 CFR part 559 (subordinate
organizations) and 12 CFR part 563b (the mutual-to-stock conversions
rule). While this definition is more expansive than the FRB's
definition of control, its use is consistent with section 11(a)(4) of
the HOLA, which permits OTS to impose additional restrictions on
savings associations' transactions with affiliates. OTS specifically
requests comment on whether these control rules continue to be
appropriate or whether it should conform these rules more closely to
Regulation W.
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\10\ OTS made one minor revision to its existing definition of
control. Under OTS's current transactions with affiliates rules, no
company is deemed to own or control a company by virtue of its
ownership or control of shares in a fiduciary capacity, except under
certain circumstances. OTS has updated this provision to more
closely reflect the related FRB provision at 12 CFR 223.3(g)(2).
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b. Financial Subsidiaries
Regulation W defines affiliate to include a financial subsidiary of
a member bank. 12 CFR 223.2(a)(8). A financial subsidiary is defined as
any subsidiary of a member bank that ``engages, directly or indirectly,
in any activity that national banks are not permitted to engage in
directly or that is conducted on terms and conditions that differ from
those that govern the conduct of such activity by national banks.'' The
definition excludes a subsidiary that ``a national bank is specifically
authorized to own or control by the express terms of a Federal statute
* * *.'' \11\
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\11\ 12 CFR 223.3(p).
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Approximately 100 thrifts have investments in subsidiaries called
service corporations that engage in activities in which a national bank
may not engage directly. Regulation W did not address whether these
thrift subsidiaries would be considered to be financial subsidiaries.
For the reasons stated below, OTS concludes that savings association
subsidiaries are not financial subsidiaries under the definition in
Regulation W.
OTS believes that service corporations would fall within the
exception to the definition of financial subsidiary. As noted above,
Regulation W states that a financial subsidiary does not include a
subsidiary that a national bank is specifically authorized by the
express terms of a Federal statute to own or control. This exception is
based on the definition of a financial subsidiary of a national bank at
12 U.S.C. 24a, which also expressly provides that bank service
companies are not financial
[[Page 77912]]
subsidiaries under the exception.\12\ To apply this exception to
savings associations ``in the same manner and to the same extent'' as
member banks, OTS believes that it is appropriate to exclude any
subsidiary that a savings association is specifically authorized by
Federal statute to own or control. Since federal savings associations
are specifically authorized to invest in and control service
corporations under section 5(c)(4)(B) of the HOLA, service corporations
would be excluded.
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\12\ U.S.C. 24a(g)(3)(B) states that subsidiaries that a
national bank may control under the Bank Service Company Act are
excluded as finance subsidiaries.
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OTS also believes that the statutory scheme underlying GLBA
strongly indicates that Congress did not contemplate that a savings
association would own or control a financial subsidiary as that term is
defined in section 23A of the FRA. Section 121 of GLBA added the new
provisions addressing financial subsidiaries. In addition to the
changes to section 23A(e) of the FRA, section 121 added extensive
provisions governing financial subsidiaries of national banks \13\ and
parallel provisions addressing financial subsidiaries of insured state
banks.\14\ However, no GLBA provision explicitly referred to a
financial subsidiary of a savings association and no legislative
history hinted that the GLBA's new financial subsidiary provisions
would have any impact on thrift subsidiaries. Moreover, while section
121 included numerous statutory revisions reconciling the new financial
subsidiary provisions with existing sections of the FDIA, the FRA, the
Bank Holding Company Act, and the Revised Statutes, GLBA included no
similar conforming revisions to the HOLA or the Savings and Loan
Holding Company Act. GLBA's failure to reconcile conflicting provisions
in these two acts strongly suggests that Congress did not intend to
include thrift subsidiaries as financial subsidiaries.\15\
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\13\ Section 121(a) of GLBA added 12 U.S.C. 24a, which
specifically authorizes national banks to conduct activities through
financial subsidiaries; regulates the activities that may be
conducted by those financial subsidiaries; and imposes various
restrictions on national banks that control financial subsidiaries.
\14\ Section 121(d) of GLBA added section 46 to the FDIA to
permit an insured state bank to control an interest in a subsidiary
that engages in activities that would be permissible for a national
bank to conduct through a financial subsidiary. Section 46 includes
safety and soundness firewalls that generally require insured state
banks to comply with the same conditions and restrictions that apply
to a national bank under 12 U.S.C. 24a, including restrictions on
transactions with financial subsidiaries.
\15\ For example, GLBA made no conforming revisions to section
11 (a)(l)(B) of the HOLA, which prohibits thrifts from purchasing or
investing in securities issued by an affiliate, other than with
respect to shares of a subsidiary. Section 23A(e)(2) of the FRA
specifically states that a financial subsidiary ``shall be deemed to
be an affiliate of the bank'' and ``shall not be deemed to be a
subsidiary of the bank.'' If a service corporation were a financial
subsidiary and, thus, an affiliate and not a subsidiary, section 11
and section 23A(e)(2)--when read together--would prohibit a savings
association from investing in the service corporation's securities.
This would nullify a federal savings association's express authority
to invest in service corporations under section 5(c)(4)(B) of the
HOLA. Similar issues could be raised regarding section 11(a)(1)(A)
of the HOLA, which prohibits thrifts from making any loan or
extension of credit to an affiliate engaged in activities that are
not permitted to bank holding companies.
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The text of section 23A(e) of FRA provides further evidence that
Congress did not intend to include thrift subsidiaries as financial
subsidiaries. Section 23A(e)(1) defined financial subsidiary as any
company that is ``a subsidiary of a bank that would be a financial
subsidiary of a national bank under [12 U.S.C. 24a].'' Congress could
have used the phrase ``a subsidiary of an insured depository
institution that would be a financial subsidiary of a national
bank.''\16\ The use of the phrase ``subsidiary of a bank that would be
a financial subsidiary of a national bank,'' however, suggests that
Congress intended a limited application of this definition only to
subsidiaries of national and state banks.
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\16\ Compare 12 U.S.C. 24a(g)93) (the term ``financial
subsidiary means any company that is controlled by one or more
insured depository institutions * * *'').
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OTS notes that a contrary interpretation would also fail to
recognize that Congress specifically and comprehensively addressed the
regulation of savings associations and their subsidiaries in the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA).\17\ In FIRREA, Congress was aware that certain subsidiaries
could engage in activities that were impermissible for a parent savings
association under section 5(c)(4)(B) of HOLA, and that these activities
were broader than the activities allowed for national banks and their
subsidiaries. As a part of that legislation, Congress enacted various
provisions specifically designed to address transactions by savings
associations with their subsidiaries. Many of these restrictions serve
similar purposes as the restrictions on transactions with financial
subsidiaries addressed by section 23A(e) of the FRA.\18\
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\17\ Pub. L. No. 101-73, 103 Stat. 183 (1989).
\18\ For example, section 23A of the FRA restricts covered
transactions with financial subsidiaries, including limits on loans,
extensions of credit, and purchases of, or investments in,
securities issued by affiliates. See 12 U.S.C. 371c(b)(7)(A) and
(B), FIRREA also established prudential limits on these
transactions. Section 5(t)(5) of the HOLA requires Federal and state
chartered savings associations to deduct from capital all
investments and extensions of credit to any subsidiary engaged in
activities taht are not permissible for national banks. Other
depository institutions are not subject to as extensive restrictions
on their investments in subsidiaries that engage in activities that
re impermissible to a national bank. By contrast, national banks
must deduct equity and retained earnings in financial subsidiaries,
but not debt investments. 12 U.S.C. 24a(c).
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Finally, OTS believes that its interpretation is consistent with
the purposes of sections 23A and 23B of the FRA. These two provisions
were designed to limit the risks to an institution (and the Federal
deposit insurance funds) from transactions between the institution and
its affiliates, and to limit the ability of an institution to transfer
to its affiliates the subsidy arising from the institution's access to
the Federal safety net.\19\ OTS has addressed these risks through its
comprehensive regulation of the relationship between savings
associations and their subsidiaries. Under this regulatory scheme, OTS
has not experienced significant problems that would warrant the
application of sections 23A and 23B to these subordinate organizations.
In light of this successful record, there is no demonstrable need to
apply affiliate restrictions to thrift subsidiaries by classifying them
as financial subsidiaries.
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\19\ 66 FR 24186 (May 11, 2000).
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Accordingly, the interim final rule at Sec. 563.41(b) states that
the Regulation W references to financial subsidiaries do not apply to
savings associations and their subsidiaries. These references include
12 CFR 223.2(a)(8) and (b)(1)(ii) (affiliate includes a financial
subsidiary); 12 CFR 223.3(p) (definition of financial subsidiary); and
12 CFR 223.32 (rules that apply to a financial subsidiary of a member
bank).
c. Companies That Are Both Subsidiaries and Affiliates
Under Regulation W, subsidiaries of a member bank are generally not
affiliates unless the subsidiary is: (1) A depository institution; (2)
a financial subsidiary; (3) directly controlled by one or more
affiliates (other than depository institution affiliates) of the member
bank, by a shareholder that controls the member bank, or by a group of
shareholders that together control the member bank; (4) an employee
stock option plan (ESOP), trust, or similar organization that exists
for the benefit of shareholders, partners, members, or employees of the
member bank or its affiliates, or (5) determined by the FRB
[[Page 77913]]
or appropriate federal banking agency to be an affiliate.\20\
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\20\ 12 CFR 223.2(b)(1)-(v).
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Except for references to financial subsidiaries, the OTS interim
final rule follows Regulation W. This will modify OTS's current
treatment of thrift subsidiaries. In one respect, the interim final
rule will add to the definition of affiliate a subsidiary that is an
ESOP, trust, or similar organization that exists for the benefit of
shareholders, partners, members, or employees of the member bank or its
affiliates.
In another respect, the interim rule will delete from the OTS
definition of affiliate ``any company that would be an affiliate under
[12 CFR 563.41(b)(1) (2002)] but for the fact that it is a subsidiary
of a savings association.''\21\ By contrast, the corollary provision of
Regulation W only includes as affiliates those companies that are
directly controlled by one or more affiliates or by shareholders that
control the institutions. The application of these two provisions leads
to slightly different results. For example, a subsidiary that is
sponsored and advised on a contractual basis by an affiliate of the
savings association is both a subsidiary and an affiliate. Under the
current OTS rule, the entity would appear to be an affiliate. Under
Regulation W, the entity would be a subsidiary, but not an affiliate.
While OTS may impose greater restrictions on transactions by savings
associations, OTS believes that its current rule is overly broad,
particularly in light of the authority discussed below which permits
OTS (or the FRB) to deem any company (including a subsidiary) to be an
affiliate on a case-by-case basis.
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\21\ See 12 CFR 563.41(b)(2)(i)(2002).
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d. Companies Deemed To Be Affiliates
Section 223.2(a)(12) states that ``affiliate'' includes any company
that the FRB or the appropriate federal banking agency determines by
regulation or order to have a relationship with the member bank or any
subsidiary or affiliate of the bank such that covered transactions by
the bank with that company may be affected by the relationship to the
detriment of the bank or its subsidiary.\22\ OTS's existing rule at
Sec. 563.41(b)(1)(v)(A) is nearly identical to Regulation W. However,
existing Sec. 563.41(b)(1)(v)(B) adds that OTS may also deem a company
to be an affiliate if it determines that the company presents a risk to
the safety or soundness of the savings association. The OTS rule lists
a number of factors for OTS consideration including the nature of the
activities conducted by the company, the amount of transactions with
the savings association or its subsidiaries, the financial condition of
the company or its parent savings association, and other supervisory
factors.
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\22\ The FRB may make other determinations under Regulation W
that may affect institutions regulated by OTS. For example, a
savings association may request the FRB to grant an exemption from
the requirements of section 23A or 23B of the FRA (12 CFR 223.43 and
223.55). The FRB generally seeks OTS concurrence before it takes an
action that impacts an OTS-regulated institution. Thus, the interim
final rule does not require an institution to notify OTS before it
makes a request for exemption. To expedite these requests, however,
OTS-regulated institutions should contact OTS when they file an
exemption request.
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The interim final rule addresses OTS authority to make case-by-case
determinations at Sec. 563.41(b)(3). OTS has reworded the safety and
soundness standard to more accurately reflect section 11(a)(4) of the
HOLA and has deleted the list of supervisory factors as unnecessary.
OTS, however, will continue to consider these and other factors when it
makes its determination under the safety and soundness standard.\23\
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\23\ Currently, OTS may also, on a case-by-case basis, elect to
treat a company that is both an affiliate and a subsidiary as a
subsidiary. See 12 CFR 563.41(b)(2)(ii)(2002) (last phrase). OTS has
never exercised this authority and not included this provision in
the interim final rule.
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3. Other Provisions of Regulation W
a. Capital Stock and Surplus
Regulation W's definition of the phrase ``capital stock and
surplus'' uses capital terms such as Tier 1 and Tier 2 capital. By
contrast, the existing OTS definition of the phrase ``capital stock and
surplus'' cross-references the definition of unimpaired capital and
unimpaired surplus under OTS's loans-to-one-borrower rule, which uses
thrift-specific capital terms such as core and supplementary capital.
To ensure that thrifts will be able to apply this definition, the
interim rule continues to use the current OTS definition. For similar
reasons, all citations to the Call Report will refer to the Thrift
Financial Report.
b. U.S. Branches or Agencies of Foreign Banks
OTS does not regulate U.S. branches or agencies of foreign banks.
Accordingly, Sec. 563.41(b) of the interim final rule states that 12
CFR 223.61, which addresses these entities, does not apply.\24\
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\24\ OTS has made one additional revision that affects the
application of its current rule. Under section23A(c) of the FRA,
each loan, extension of credit to, or guarantee, acceptance, or
letter of credit issued on behalf of, an affiliate must be secured
by collateral having a market value equal to a set percentage of the
transaction. A transaction that is secured by notes, drafts, bills
of exchange, or bankers' acceptances that are eligible for
rediscount or purchase by a Federal Reserve Bank must be
collateralized at 100 percent. 12 U.S.C. 371c(c)(10)(A)(iii). This
provision requires only that the cited instruments must be eligible
for purchase or reinvestment and imposes no requirement that the
institution must be a member bank. The current OTS rule adds to the
statutory provision by stating that collateral that is eligible for
rediscount or purchase by a Federal Home Loan Bank may also be
collateralized at 100 percent. 12 CFR 563.41(c)(1)(i)(C). The
additional language in the current OTS rule is not necessary to
ensure that savings associations have parity with member banks.
Accordingly, the interim rule does not include this current language
provisions.
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C. Additional Prohibitions and Restrictions under Section 11 of the
HOLA
Section 11(a) of the HOLA imposes two prohibitions on savings
associations in addition to those found in sections 23A and 23B of the
FRA, and authorizes OTS to impose additional restrictions on a savings
association's transactions with affiliates. Paragraph (c) of the
interim final rule addresses these additional provisions.
1. Regulation W Definitions
The interim final rule applies Regulation W definitions to the
additional section 11 prohibitions and restrictions, except as
described in the chart at Sec. 563.41(b) of the interim rule.
2. Loans and Extensions of Credit
Section 11(a)(1)(A) of the HOLA states that ``no loan or other
extension of credit may be made to any affiliate unless that affiliate
is engaged only in activities described at section 10(c)(2)(F)(i) of
[the HOLA].'' Section 10(c)(2)(F)(i) of the HOLA refers to activities
``which the [FRB], by regulation, has determined to be permissible for
bank holding companies under [12 U.S.C. 1843(c)], unless the Director,
by regulation, prohibits or limits any such activities for savings and
loan holding companies.''\25\ Thus, under section 11(a)(1)(A), a
savings association may not make a loan or other extension of credit to
an affiliate engaged in non-bank holding company activities. OTS
restates this restriction at Sec. 563.41(c)(1) of the interim final
rule.\26\
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\25\ These activities include activities approved for bank
holding companies by regulation at 12 CFR 225.28, or by case-by-case
order of the FRB in accordance with 12 CFR 225.23 and 225.24.
\26\ The chart in the interim rule at Sec. 563.41(b)(7) also
refers to this prohibition.
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For the purposes of this prohibition, the current rule states that
a loan or other extension of credit includes a purchase of assets from
an affiliate that is subject to the affiliate's agreement to
repurchase. As a result, the existing rule
[[Page 77914]]
generally prohibits these agreements with affiliates that are engaged
in non-bank holding company activities. The current rule, however,
exempts certain agreements that involve United States Treasury
securities and that meet specified requirements.
Section 11 of the HOLA does not define ``loan or other extension of
credit,'' and does not compel a legal conclusion that purchases of
assets that are subject to an affiliate's agreement to repurchase are,
or are not, prohibited by statute. When it originally promulgated this
provision, OTS noted that section 11(a)(1)(A) focused on prohibiting
transactions with non-banking affiliates that transfer credit and other
risks to the savings association. Because a purchase of assets that is
subject to an agreement to repurchase generally bears many of the
economic characteristics of a loan or extension of credit to such an
affiliate,\27\ OTS concluded that it was appropriate to treat most of
these transactions as loans or extensions of credit under section
11(a)(1)(A). OTS requests comment on whether it should retain these
provisions on purchases of assets that are subject to agreements to
repurchase.
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\27\ The savings association transfers funds to the affiliate,
expecting to be repaid when the company repurchases the assets. The
purchased assets essentially amount to collateral, since the savings
association is required to return the assets at the time of
repurchase. The principal risk to the savings association, its
depositors and the depot insurance fund is credit risk--the
possibility that the affiliate will default on its obligation to
make the repurchase. These types of agreements are generally
considered the functional equivalent of a loan or extension of
credit. See amendments to Federal Financial Institutions Examination
Council Policy Statement on Repurchase Agreements of Depository
Institutions with Securities Dealers and Others, 63 FR 6935
(February 11, 1998).
---------------------------------------------------------------------------
In addition to the rules on purchases of assets that are subject to
an agreement to repurchase, OTS has issued a number of interpretations
regarding the loan prohibition. These interpretations are contained in
various documents including preambles to proposed and final rules,
opinion letters, and other guidance. For example, OTS has considered
whether a savings association is barred from extending credit to an
affiliate that directly engages only in activities permissible for a
bank holding company, but owns subsidiaries engaged in activities not
permissible for bank holding companies, such as real estate
development. OTS determined that, in the case of affiliates that are
not savings associations, such activities are imputed to each parent
affiliate in a vertical ownership chain up to, but not including, a
controlling holding company in the corporate structure. Activities are
not, however, attributed downward to subsidiaries of an affiliate.\28\
Where non-bank holding company activities are attributed to an
affiliate from its subsidiary, a savings association is barred from
extending credit to that affiliate. While this guidance reflects OTS's
existing position, OTS has not incorporated its interpretations on the
attribution of activities in the interim final rule. OTS specifically
requests comment on whether it should include this guidance in the
final rule.
---------------------------------------------------------------------------
\28\ 56 FR 34405, at 34009.
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OTS has also considered whether a third party attribution rule
applies to the loan prohibition. Sections 23A(a)(2) and 23B(a)(3) of
the FRA require a member bank (and thus savings associations) to treat
any transaction with any person as a transaction with an affiliate to
the extent that the proceeds are used for the benefit of, or
transferred to, an affiliate. Regulation W includes this third party
attribution rule at 12 CFR 223.16 and 223.52(b). By contrast, section
11(a)(1)(A) of the HOLA does not include a third party attribution
rule, and OTS has declined to infer such a rule for the purposes of
section 11. As a result, OTS's existing rules implementing section
11(a)(1)(A) do not prohibit a loan or extension of credit to a non-
affiliate where the proceeds are used for the benefit of, or
transferred to, an affiliate that engages in non-bank holding company
activities.\29\ The interim final rule includes a similar provision.
Several OTS legal opinions, however, indicate that the agency may,
nonetheless, attribute such a loan to an affiliate if the loan is not
bona fide or is not of independent substance, or there is evidence that
the loan was a prearranged step in a series of transactions designed to
channel funds to an affiliate to which the institution could not lend
directly.\30\ OTS requests comment on whether it should include this
additional guidance in the final rule.
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\29\ See 12 CFR 563.41(a)(2)(2002).
\30\ Op. OTS Chief Counsel (Dec. 22, 1991) and Op. OTS Chief
Counsel (March 13, 1992).
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3. Purchases or Investments in Securities Issued by an Affiliate
Section 11(a)(1)(B) provides that ``no savings association may
enter into any transaction described in section 23A(b)(7)(B) of [the
FRA] with any affiliate other than with respect to shares of a
subsidiary.'' Section 23A(b)(7)(B) of the FRA describes ``a purchase of
or investment in securities issued by [an] affiliate.''
Section 563.41(c)(2) of the interim final rule restates this
restriction.\31\ To ensure that a savings association may make
investments in a bank or savings association that is a subordinate
organization, the interim final rule also continues to state that the
term subsidiary includes a bank and a savings association for the
purposes of this provision. OTS has issued a number of legal opinions
interpreting this prohibition and is considering including these
interpretations in the rule. OTS specifically requests comment on
whether it should include these or other interpretations of section
11(a)(1)(B) of the HOLA in the final rule.\32\
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\31\ The chart in the interim rule at Sec. 563.41(b)(8) also
refers to this prohibition.
\32\ See Op. Acting Chief Counsel (Sept. 9, 1993) (Purchases of
mortgage-backed securities that are guaranteed by Fannie Mae,
Freddie Mac, or Ginnie Mae from an affiliate are not subject to the
section 11(a)(1)(B) prohibition) and Op. Acting Chief Counsel (June
30, 1993) (Purchases of securities, including mutual funds, issued
by an affiliate, are not prohibited if the purchase is made on a
riskless principal or agency basis).
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4. Recordkeeping
Currently Sec. Sec. 563.41(e) and 563.42(e) require a savings
association to make and retain records that reflect in reasonable
detail all transactions between a savings association (and its
subsidiaries) and affiliates, and transactions with an unaffiliated
party that are attributed to an affiliate under the third party
attribution rule. The current rule also includes minimum recordkeeping
requirements at Sec. 563.41(e)(1)(i) through (vii). OTS imposed these
recordkeeping requirements under its authority at section 11(a)(4) of
the HOLA, which permits OTS to impose additional restrictions to
protect the safety and soundness of savings associations. The interim
final rule retains these requirements at Sec. 563.41(c)(3).
5. Notice
Under the existing rules, OTS may require certain savings
associations to notify it at least 30 days before the savings
association or its subsidiary conducts a transaction with an affiliate.
These associations include a savings association that commenced de novo
operations within the past two years, an association that was the
subject (or whose holding company was the subject) of an approved
application or notice under the control regulations at 12 CFR part 574
within the past two years, an association with a composite CAMELS
rating of ``4'' or ``5,'' an association that does not meet all
regulatory capital requirements, an association that has entered into a
[[Page 77915]]
consent to merge or a supervisory agreement or has been the subject of
a cease and desist order within the past two years, an association that
is the subject of a formal enforcement proceeding, a problem
association, and an association that is in a troubled condition.
OTS restates these requirements with minor revisions at paragraph
(c)(4) of the interim final rule. OTS has clarified that ``troubled
condition'' is defined at 12 CFR 563.555. OTS has also deleted specific
references to problem institutions, institutions that have a composite
rating of 4 or 5 under CAMELS, and institutions that are subject to a
cease and desist order. These institutions will either fall within the
definition of troubled condition, or one of the other listed
categories.
IV. Solicitation of Comments Regarding the Use of Plain Language
Section 722 of the GLBA \33\ requires federal banking agencies to
use ``plain language'' in all proposed and final rules published after
January 1, 2000. OTS invites comments on how to make this rule easier
to understand. For example:
---------------------------------------------------------------------------
\33\ 12 U.S.C. 4809.
---------------------------------------------------------------------------
(1) Have we organized the material to suit your needs? If not, how
could the material be better organized?
(2) Do we clearly state the requirements in the rule? If not, how
could the rule be more clearly stated?
(3) Does the rule contain technical language or jargon that is not
clear? If so, what language requires clarification?
(4) Would a different format (grouping and order of sections, use
of headings, paragraphing) make the rule easier to understand? If so,
what changes to the format would make the rule easier to understand?
V. Issuance of an Interim final rule
Section 553 of the Administrative Procedure Act (APA) permits an
agency to issue a rule without prior notice and public comment if the
agency, for good cause, finds that notice and comment is impractical,
unnecessary, or contrary to the public interest, and explains its
finding when it publishes the final rule. 5 U.S.C. 553(b)(B).
Among the purposes of this interim final rule are updating existing
OTS rules to reflect FRB's newly issued Regulation W, interpreting
Regulation W to the extent necessary to apply it to savings
associations, providing guidance concerning the relationship between
the prohibitions imposed by section 11(a)(1) of the HOLA and Regulation
W, and clearly setting out additional restrictions imposed by OTS under
section 11(a)(4) of the HOLA. OTS's existing regulations at 12 CFR
563.41 and 563.42 contain provisions that conflict with final
Regulation W and do not reflect updated interpretations contained in
Regulation W. As a result, the continued retention of these rules
following the effective date of Regulation W is likely to cause undue
confusion concerning applicable restrictions on transactions with
affiliates. OTS has already received numerous inquiries on these
matters. Having an interim final rule in place will help to minimize
this confusion and ensure a smoother transition for savings
associations as OTS implements Regulation W. OTS therefore believes
that prior notice and public comment on this interim final rule is
impractical, unnecessary, and contrary to the public interest.
VI. Effective Date and Transition Rule
The FRB made Regulation W effective April 1, 2003. Accordingly,
transactions entered into on or after April 1, 2003, will be
immediately subject to Regulation W. Transactions entered into after
the date of publication of Regulation W in the Federal Register, but
before April 1, 2003, will become subject to Regulation W on April 1,
2003.
The FRB included a limited transition rule for transactions
consummated on or before the publication date of Regulation W. Under
this transition rule, if such a transaction would become subject to
section 23A or 23B (or the treatment of the transaction would change)
solely as a result of Regulation W, the transaction will not become
subject to Regulation W until July 1, 2003. A transaction is subject to
section 23A or 23B solely as a result of Regulation W, if the
transaction is subject to section 23A or 23B under Regulation W, but
was not subject to section 23A or 23B under the terms of the statute or
any written interpretation of the statute by the FRB or its staff dated
before publication of Regulation W. Similarly, a transaction's
treatment under section 23A or section 23B changes solely as a result
of Regulation W if the treatment of the transaction under Regulation W
differs from the treatment of the transaction under the terms of
sections 23A and 23B or any written interpretation of the statute by
the FRB or its staff dated before publication of Regulation W.
There are two exceptions to the FRB transition rule. First, a
transaction that otherwise qualifies for the transition period will
immediately become subject to Regulation W if it is renewed, extended,
or materially altered on or after April 1, 2003. Second, a purchase of
assets that was consummated on or before the publication of Regulation
W and that qualifies for the transaction rule, is not subject to the
new requirements in Regulation W.
To relieve regulatory burden, the FRB also permits member banks to
apply specified provisions before Regulation W's effective date. Member
banks may apply the following rules beginning on the date of
publication of Regulation W: (1) Section 223.16(c)(4) (general purpose
credit card exemption); (2) Sec. 223.24(a), (b), and (c) (valuation
principles applicable to extensions of credit secured by affiliate
securities); (3) Sec. 223.31(d) (exemption for step transactions
involving the acquisition of an affiliate that becomes a non-affiliate
subsidiary after the acquisition); (4) Sec. 223.41(d) (exemption for
internal corporate reorganization transactions); and (5) Sec.
223.42(c), (f), (g), (i), (j), and (k) (exemptions for transactions
secured by cash or U.S. government securities, purchases of certain
marketable securities, purchases of municipal securities, asset
purchases by a newly formed institution, transactions approved under
the Bank Merger Act, and purchases of extensions of credit from an
affiliate).
In today's interim final rule, OTS has established the same
effective date, will apply identical transition rules, and will permit
savings associations to apply the specified sections of Regulation W
before the effective date of the rule. OTS, however, requests comment
on whether the appropriate dates for these periods should be based on
the date of publication of this interim rule, rather than the date of
publication of Regulation W.
VII. Executive Order 12866
The Director of OTS has determined that this rule does not
constitute a ``significant regulatory action'' for the purposes of
Executive Order 12866.
VIII. Regulatory Flexibility Act Analysis
An initial regulatory flexibility analysis under the Regulatory
Flexibility Act (RFA) is required when an agency must publish a
general notice of proposed rulemaking. 5 U.S.C. 603. As noted above,
OTS has determined that it is not necessary to publish a notice of
proposed rulemaking for this interim final rule. Accordingly, the RFA
does not require an initial regulatory flexibility analysis.
Nonetheless, OTS has considered the likely impacts of this rule on
small businesses and believes that the rule
[[Page 77916]]
will not have a significant impact on a substantial number of small
entities. OTS has had comprehensive regulations implementing section 11
of the HOLA since 1991. Today's interim final rule updates these
provisions to incorporate Regulation W, interprets Regulation W to the
extent necessary to apply the FRB rule to savings associations,
clarifies the relationship between section 11(a)(1) of the HOLA and
Regulation W, and sets out the additional restrictions imposed under
section 11(a)(4) of the HOLA. In light of existing Sec. 563.41, OTS
does not believe that the interim final rule will significantly
increase the applicable burdens for small or large savings
associations. Accordingly, a regulatory flexibility analysis is not
required.
IX. Unfunded Mandates Act of 1995
The Unfunded Mandates Reform Act of 1995, Public Law 104-4
(Unfunded Mandates Act) applies only when an agency is required to
issue a general notice of proposed rulemaking or a final rule for which
a general notice of proposed rulemaking was published. 2 U.S.C. 1532.
As noted above, OTS has determined that a notice of proposed rulemaking
is not required. Accordingly, OTS has concluded that the Unfunded
Mandates Act does not require an analysis of this interim final rule.
Moreover, OTS has determined that the interim final rule will not
result in expenditures by state, local, or tribal governments or by the
private sector of $100 million or more. OTS has had comprehensive
regulations implementing section 11 of the HOLA since 1991. Today's
interim final rule merely updates these provisions to incorporate
Regulation W, interprets Regulation W to the extent necessary to apply
the FRB rule to savings associations, interprets Regulation W to the
extent necessary to apply the FRB rule to savings associations,
clarifies the relationship between section 11(a)(1) of the HOLA and
Regulation W, and sets out the additional restrictions imposed under
section 11(a)(4) of the HOLA. In light of existing Sec. Sec. 563.41,
OTS does not believe that the interim final rule will significantly
increase the applicable burdens for savings associations and will not
result in increased expenditures by these institutions. Accordingly,
OTS has not prepared a budgetary impact statement or specifically
addressed the regulatory alternatives considered.
X. Paperwork Reduction Act of 1995
The information collection requirements in the existing OTS rules
at 12 CFR 563.41(e) and 563.42(e) were previously approved under OMB
control number 1550-0078. The interim final rule incorporates these
requirements at Sec. 563.41(c)(3) and (4), and does not make any
substantive changes that affect the overall burden of compliance.
List of Subjects
12 CFR Part 506
Reporting and recordkeeping requirements.
12 CFR Part 559
Reporting and recordkeeping requirements, Savings associations,
Subsidiaries.
12 CFR Part 562
Accounting, Reporting and recordkeeping requirements, Savings
associations.
12 CFR Part 563
Accounting, Advertising, Crime, Currency, Investments, Reporting
and recordkeeping requirements, Savings associations, Securities,
Surety bonds.
Accordingly, the Office of Thrift Supervision amends chapter V,
title 12, Code of Federal Regulations to read as follows:
PART 506--INFORMATION COLLECTION REQUIREMENTS UNDER THE PAPERWORK
REDUCTION ACT
1. The authority citation for part 506 continues to read as
follows:
Authority: 44 U.S.C. 3501 et seq.
2. Amend Sec. 506.1(b) by adding an entry for Sec. 563.41(c)(3)
and(4), and by removing the entries for Sec. 563.41(e) and Sec.
563.42(e) to read as follows:
Sec. 506.1 OMB control numbers assigned pursuant to the Paperwork
Reduction Act.
* * * * *
(b) Display.
------------------------------------------------------------------------
Current OMB
12 CFR part or section where identified and described. control No.
------------------------------------------------------------------------
* * * * *
563.41(c)(3) and (4).................................. 1550-0078
* * * * *
------------------------------------------------------------------------
PART 559--SUBORDINATE ORGANIZATIONS
3. The authority citation for part 559 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828.
4. Amend Sec. 559.3 by revising paragraph (l) to read as follows:
Sec. 559.3 What are the characteristics of, and what requirements
apply to, subordinate organizations of Federal savings associations?
* * * * *
----------------------------------------------------------------------------------------------------------------
Operating subsidiary Service corporation
----------------------------------------------------------------------------------------------------------------
* * * * * * *
(l) How do the transactions with (1) Section (2) Section 563.41 of (2) Section (2) Section 563.41 of
affiliates (TWA) regulations (Sec. this chapter explains how TWA this chapter explains how TWA
563.41 of this chapter apply? applies. Generally, an operating applies. Generally, a service
subsidiary is not an affiliate, corporation is not an affiliate,
unless it is a depository unless it is a depository
institution; is directly institution; is directly
controlled by another affiliate of controlled by another affiliate
the savings association or by of the savings association or by
shareholders that control the shareholders that control the
savings association; or is an savings association; or is an
employee stock option plan, trust, employee stock option plan,
or similar organization that trust, or similar organziaiton
exists for the benefit of that exists for the benefit of
shareholders, partners, members, shareholders, partners, members,
or employees of the savings or employees of the savings
association or an affiliate. An association or an affiliate. If a
operating subsidiary's savings association directly or
transactions with affiliates are indirectly controls a service
aggregated with those of the corporation, the service
thrift corporation's transactions with
affiliates are aggregated with
those of the thrift.
* * * * * * *
----------------------------------------------------------------------------------------------------------------
[[Page 77917]]
PART 562--REGULATORY REPORTING STANDARDS
5. The authority citation for part 562 continues to read as
follows:
Authority: 12 U.S.C. 1463.
Sec. 562.4 [Amended]
6. Amend Sec. 562.4(a) and (e) by removing ``12 CFR 563.41(b)(1)''
and adding in lieu thereof ``12 CFR 563.41.''
PART 563--SAVINGS ASSOCIATIONS--OPERATIONS
7. The authority citation for part 563 continues to read as
follows:
Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,
1817, 1820, 1828, 1831o, 3806; 42 U.S.C. 4106.
8. Revise Sec. 563.41 to read as follows:
Sec. 563.41 Transactions with affiliates.
(a) Scope. (1) This section implements section 11(a) of the Home
Owners' Loan Act (12 U.S.C. 1468(a)). Section 11(a) applies sections
23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 371c-1) to
every savings association in the same manner and to the same extent as
if the association were a member bank; prohibits certain types of
transactions with affiliates; and authorizes OTS to impose additional
restrictions on a savings association's transactions with affiliates.
(2) For the purposes of this section, ``savings association''
defined at section 3 of the Federal Deposit Insurance Act (12 U.S.C.
1813), and also includes any savings bank or any cooperative bank that
is a savings association under 12 U.S.C. 1467a(l). A non-affiliate
subsidiary of a savings association as described in paragraph (b)(12)
of this section is treated as part of the savings association.
(b) Sections 23A and 23B of the FRA/Regulation W. A savings
association must comply with sections 23A and 23B of the Federal
Reserve Act and the Federal Reserve Board (FRB) implementing regulation
at 12 CFR part 223 (Regulation W), except as described in the following
chart:
----------------------------------------------------------------------------------------------------------------
Provision of Regulation W Application
----------------------------------------------------------------------------------------------------------------
(1) 12 CFR 223.1--Authority, purpose, and scope........ Does not apply. Section 563.41(a) addresses these
matters.
(2) 12 CFR 223.2(a)(8)--``Affiliate'' includes a Does not apply. Savings association subsidiaries do not
financial subsidiary. meet the statutory definition of financial subsidiary.
(3) 12 CFR 223.2(a)(12)--Board or appropriate Federal Shall be read to include the following statement:
banking agency determination that ``affiliate'' ``Affiliate also includes any company that OTS
includes other types of companies. determines, by order or regulation, to present a risk
to the safety and soundness of the savings
association.''
(4) 12 CFR 223.2(b)(1)(ii)--``Affiliate'' includes a Does not apply. Savings association subsidiaries do not
subsidiary that is a financial subsidiary. meet the statutory definition of financial subsidiary.
(5) 12 CFR 223.3(d)--Definition of ``capital stock and Does not apply. Capital stock and surplus means
surplus''. ``unimpaired capital and unimpaired surplus,'' as
defined in 12 CFR 560.93(b)(11).
(6) 12 CFR 223.3(g)--Definition of ``control''......... Does not apply. (i) ``Control'' by a company or
shareholder over another company means that the
company or shareholder:
(A) Directly or indirectly, or acting through one or
more other persons owns, controls or has the power to
vote 25 percent or more of any class of voting
securities of the other company;
(B) Is deemed to control the company under 12 CFR
574.4(a); or
(C) Is presumed to control the company under 12 CFR
574.4(b) and control has not been rebutted.
(ii) Notwithstanding any other provision of this rule,
no company owns or controls another company by virtue
of its ownership or control of shares in a fiduciary
capacity, except as provided in 12 CFR 223.2(a)(3) or
if the company owning or controlling the shares is a
business trust.
(7) 12 CFR 223.3(h)(1)--Section 23A covered Shall be read to incorporate Sec. 563.41(c)(1), which
transactions include an extension of credit to the prohibits loans extensions of credit to an affiliate,
affiliate. unless the affiliate, is engaged in the activities
described at 12 U.S.C. 1467a(c)(2)(F)(i), as defined
in Sec. 584.2-2 of this chapter.
(8) 12 CFR 223.3(h)(2)--Section 23A covered Shall be read to incorporate Sec. 563.41(c)(2), which
transactions include a purchase of or investment in prohibits purchases and investments in securities
securities issued by an affiliate. issued by an affiliate, other than with respect to
shares of a subsidiary.
(9) 12 CFR 223.3(k)--Definition of ``depository Shall be read to include the following statement: ``For
institution''. the purposes of this definition, a non-affiliate
subsidiary of a savings association is treated as part
of the depository institution.''
(10) 12 CFR 223.3(p)--Definition of ``financial Does not apply. Savings association subsidiaries do not
subsidiary''. meet the statutory definition of financial subsidiary.
(11) 12 CFR 223.3(w)--Definition of ``member bank''.... Shall be read to include the following statement:
``Member bank also includes a savings association. For
purposes of this definition, a non-affiliate
subsidiary of a savings association is treated as part
of the savings association.''
(12) 12 CFR 223.3(aa)--Definition of ``operating Does not apply. Other OTS regulations include a
subsidiary''. conflicting definition of this same term. Instead, OTS
uses the phrase ``non-affiliate subsidiary.'' A non-
affiliate subsidiary is a subsidiary of a savings
association other than a subsidiary described at 12
CFR 223.2(b)(1) (i), (iii) through (v).
(13) 12 CFR 223.3(ii)--Definition of ``subsidiary''.... Shall be read to include the following statement:
``However, a subsidiary of a savings association means
a company that is controlled by the savings
association within the meaning of part 574 of this
chapter.''
(14) 12 CFR 223.31--Application of section 23A to an Shall be read to refer to ``operating subsidiary''
acquisition of an affiliate that becomes an operating instead of ``a non-affiliate subsidiary.''
subsidiary.
(15) 12 CFR 223.32--Rules that apply to financial Does not apply. Savings association subsidiaries do not
subsidiaries of a bank. meet the statutory definition of financial subsidiary.
[[Page 77918]]
(16) 12 CFR 223.42(f)(2)--Exemption for purchasing Shall be read to refer to ``Thrift Financial Report''
certain marketable securities. instead of ``Call Report.''
(17) 12 CFR 223.42(g)(2)--Exemption for purchasing Shall be read to refer to ``Thrift Financial Report''
municipal securities. instead of ``Call Report.''
(18) 12 CFR 223.61--Application of sections 23A and 23B Does not apply. OTS does not regulate U.S. branches and
to U.S. branches and agencies of foreign banks. agencies of foreign banks.
----------------------------------------------------------------------------------------------------------------
(c) Additional prohibitions and restrictions. A savings association
must comply with the additional prohibitions and restrictions in this
paragraph. Except as described in paragraph (b) of this section, the
definitions in 12 CFR part 223 apply to these additional prohibitions
and restrictions.
(1) Loans and extensions of credit. (i) A savings association may
not make a loan or other extension of credit to an affiliate, unless
the affiliate is solely engaged in the activities described at 12
U.S.C. 1467a(c)(2)(F)(i), as defined in Sec. 584.2-2 of this chapter.
This paragraph (c)(1) does not prohibit a loan or extension of credit
to a non-affiliate, merely because proceeds of the transaction are used
for the benefit of, or transferred to, an affiliate.
(ii) For the purposes of this paragraph (c)(1), a loan or other
extension of credit includes a purchase of assets from an affiliate
that is subject to the affiliate's agreement to repurchase the assets.
Such a purchase is not a loan or extension of credit, however, if the
purchase is a transaction or series of transactions meeting all of the
following requirements:
(A) The savings association purchases United States Treasury
securities from the affiliate, the affiliate agrees to repurchase the
securities at the end of a stated term, the remaining term of the
securities purchased by the savings association exceeds the term of the
affiliate's repurchase agreement, and the savings association has
possession or control of the securities and the right to dispose of the
securities at any time during the term of the agreement and upon
default.
(B) The affiliate purchases United States Treasury securities from
the savings association and the savings association agrees to
repurchase the securities at the end of a stated term.
(C) The aggregate amount of the affiliate's outstanding obligations
to repurchase securities from the savings association under the
repurchase obligation described at paragraph (c)(1)(ii)(A) of this
section, at all times, is less than the aggregate amount of the savings
association's outstanding obligations to repurchase securities from the
affiliate under paragraph (c)(1)(ii)(B) of this section.
(2) Purchases or investments in securities. A savings association
may not purchase or invest in securities issued by any affiliate other
than with respect to shares of a subsidiary. For the purposes of this
paragraph (c)(2), subsidiary includes a bank and a savings association.
(3) Recordkeeping. A savings association must make and retain
records that reflect, in reasonable detail, all transactions between
the savings association and its affiliates and any other person to the
extent that the proceeds of a transaction are used for the benefit of,
or transferred to, an affiliate. At a minimum, these records must:
(i) Identify the affiliate;
(ii) Specify the dollar amount of the transaction and demonstrate
that this amount is within the quantitative limits in 12 CFR 223.11 and
223.12, or that the transaction is not subject to those limits;
(iii) Indicate whether the transaction involves a low-quality
asset;
(iv) Identify the type and amount of any collateral involved in the
transaction and demonstrate that this collateral meets the requirements
in 12 CFR 223.14 or that the transaction is not subject to those
requirements;
(v) Demonstrate that the transaction complies with 12 CFR part 223,
subpart F or that the transaction is not subject to those requirements;
(vi) Demonstrate that all loans and extensions of credit to
affiliates comply with paragraph (c)(1) of this section; and
(vii) Be readily accessible for examination and supervisory
purposes.
(4) Notice requirement. (i) OTS may require a savings association
to notify the agency before the savings association may engage in a
transaction with an affiliate or a subsidiary (other than exempt
transactions under 12 CFR part 223). OTS may impose this requirement
if:
(A) The savings association is in troubled condition as defined at
Sec. 563.555 of this part;
(B) The savings association does not meet its regulatory capital
requirements;
(C) The savings association commenced de novo operations within the
past two years;
(D) OTS approved an application or notice under 12 CFR part 574
involving the savings association or its holding company within the
past two years;
(E) The savings association entered into a consent to merge or a
supervisory agreement within the past two years; or
(F) OTS or another banking agency initiated a formal enforcement
proceeding against the savings association and the proceeding is
pending.
(ii) OTS must notify the savings association in writing that it has
imposed the notice requirement and must identify the circumstance
listed in paragraph (c)(4)(i) of this section that supports the
imposition of the notice requirement.
(iii) If OTS has imposed the notice requirement under this
paragraph, a savings association must provide a written notice to OTS
at least 30 days before the savings association may enter into a
transaction with an affiliate or a subsidiary. The written notice must
include a full description of the transaction. If OTS does not object
during the 30-day period, the savings association may proceed with the
proposed transaction.
Sec. 563.42 [Removed]
9. Remove Sec. 563.42.
10. Amend Sec. 563.43 by revising paragraph (d) to read as
follows:
Sec. 563.43 Loans by savings associations to their executive
officers, directors, and principal shareholders.
* * * * *
(d) The term subsidiary includes a savings association that is
controlled within the meaning of Sec. 563.41(b)(6) of this part by a
company (including for this purpose an insured depository institution)
that is a savings and loan holding company. When used to refer to a
subsidiary of a savings association, the term subsidiary means a
``subsidiary'' as that term is defined at Sec. 563.41(b)(13) of this
part.
* * * * *
Dated: December 12, 2002.
By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 02-31782 Filed 12-19-02; 8:45 am]
BILLING CODE 6720-01-P