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6000 - Bank Holding Company Act
§ 225.142 Statement of policy concerning bank holding companies
engaging in futures, forward and options contracts on U.S. Government
and agency securities and money market instruments.
(a) Purpose of financial contract positions. In
supervising the activities of bank holding companies, the Board has
adopted and continues to follow the principle that bank holding
companies should serve as a source of strength for their subsidiary
banks. Accordingly, the Board believes that any positions that bank
holding companies or their nonbank subsidiaries take in financial
contracts should reduce risk exposure, that is, not be speculative.
(b) Establishment of prudent written policies,
appropriate limitations and internal controls and audit
programs. If the parent organization or nonbank subsidiary is
taking or intends to take positions in financial contracts, that
company's board of directors should approve prudent written policies
and establish appropriate limitations to insure that financial
contract activities are performed in a safe and sound manner with
levels of activity reasonably related to the organization's business
needs and capacity to fulfill obligations. In addition, internal
controls and internal audit programs to monitor such activity should be
established. The board of directors, a duly authorized committee
thereof or the internal auditors should review periodically (at least
monthly) all financial contract positions to insure conformity with
such policies and limits. In order to determine the
company's
{{2-28-06 p.6110.28-L-34}}exposure, all open positions
should be reviewed and market values determined at least monthly, or
more often, depending on volume and magnitude of positions.
(c) Formulating policies and recording financial
contracts. In formulating its policies and procedures, the parent
holding company may consider the interest rate exposure of its nonbank
subsidiaries, but not that of its bank subsidiaries. As a matter of
policy, the Board believes that any financial contracts executed to
reduce the interest rate exposure of a bank affiliate of a holding
company should be reflected on the books and records of the bank
affiliate (to the extent required by the bank policy statements),
rather than on the books and records of the parent company. If a bank
has an interest rate exposure that management believes requires hedging
with financial contracts, the bank should be the direct beneficiary of
any effort to reduce that exposure. The Board also believes that final
responsibility for financial contract transactions for the account of
each affiliated bank should reside with the management of that bank.
(d) Accounting. The joint bank policy statements of
March 12, 1980 include accounting guidelines for banks that engage in
financial contract activities. Since the Financial Accounting Standards
Board is presently considering accounting standards for contract
activities, no specific accounting requirements for financial contracts
entered into by parent bank holding companies and nonbank subsidiaries
are being mandated at this time. The Board expects to review further
developments in this area.
(e) Board to monitor bank holding company transactions in
financial contracts. The Board intends to monitor closely bank
holding company transactions in financial contracts to ensure that any
such activity is consistent with maintaining a safe and sound banking
system. In any cases where bank holding companies are found to be
engaging in speculative practices, the Board is prepared to institute
appropriate action under the Financial Institutions Supervisory Act of
1966, as amended.
(f) Federal Reserve bank notification. Bank holding
companies should furnish written notification to their district Federal
reserve Bank within 10 days after financial contract activities are
begun by the parent or a nonbank subsidiary. Holding companies in which
the parent or a nonbank subsidiary currently engage in financial
contract activity should furnish notice by March 31, 1983.
[Codified to 12 C.F.R. § 225.142]
[Source: 45 Fed. Reg. 61595, September 17, 1980, effective August
21, 1980; amended at 48 Fed. Reg. 7720, February 24, 1983, effective
March 1, 1983]
§ 225.143 Policy statement on nonvoting equity investments by
bank holding companies.
(a) Introduction.
(1) In recent months, a number of bank holding companies have
made substantial equity investments in a bank or bank holding company
(the "acquiree") located in states other than the home state of
the investing company through acquisition of preferred stock or
nonvoting common shares of the acquiree. Because of the evident
interest in these types of investments and because they raise
substantial questions under the Bank Holding Company Act (the
"Act"), the Board believes it is appropriate to provide guidance
regarding the consistency of such arrangements with the Act.
(2) This statement sets out the Board's concerns with these
investments, the considerations the Board will take into account in
determining whether the investments are consistent with the Act, and
the general scope of arrangements to be avoided by bank holding
companies. The Board recognizes that the complexity of legitimate
business arrangements precludes rigid rules designed to cover all
situations and that decisions regarding the existence or absence of
control in any particular case must take into account the effect of the
combination of provisions and convenants in the agreement as a whole
and the particular facts and circumstances of each case. Nevertheless,
the Board believes that the factors outlined in this statement provide
a framework for guiding bank holding companies in complying with the
requirements of the Act.
(b) Statutory and Regulatory Provisions.
(1) Under section 3(a) of the Act, a bank holding company may not
acquire direct or indirect ownership or control of more than 5 percent
of the voting shares of a bank without
{{2-28-06 p.6110.28-L-35}}the
Board's prior approval. (12 U.S.C.
1842(a)(3)). In addition, this section of the Act provides that
a bank holding company may not, without the Board's prior approval,
acquire control of a bank: that is, in the words of the statute,
"for any action to be taken that causes a bank to become a
subsidiary of a bank holding company." (12 U.S.C. 1842(a)(2)). Under
the Act, a bank is a subsidiary of a bank holding company if:
(i) The company directly or indirectly owns, controls, or holds
with power to vote 25 percent or more of the voting shares of the bank;
(ii) The company controls in any manner the election of a
majority of the board of directors of the bank; or
(iii) The Board determines, after notice and opportunity for
hearing, that the company has the power, directly or indirectly, to
exercise a controlling influence over the management or policies of the
bank. (12 U.S.C. 1841(d)).
(2) In intrastate situations, the Board may approve bank holding
company acquisitions of additional banking subsidiaries. However, where
the acquiree is located outside the home state of the investing bank
holding company, section 3(d) of the Act prevents the Board from
approving any application that will permit a bank holding company to
"acquire, directly or indirectly, any voting shares of, interest in,
or all or substantially all of the assets of any additional bank."
(12 U.S.C. 1842(d)(1)).
(c) Review of Agreements.
(1) In apparent expectation of statutory changes that might make
interstate banking permissible, bank holding companies have sought to
make substantial equity investments in other bank holding companies
across state lines, but without obtaining more than 5 percent of the
voting shares or control of the acquiree. These investments involve a
combination of the following arrangements:
(i) Options on, warrants for, or rights to convert nonvoting
shares into substantial blocks of voting securities of the acquiree
bank holding company or its subsidiary bank(s);
(ii) Merger or asset acquisition agreements with the out-of-state
bank or bank holding company that are to be consummated in the event
interstate banking is permitted;
(iii) Provisions that limit or restrict major policies,
operations or decisions of the acquiree; and
(iv) Provisions that make acquisition of the acquiree or its
subsidiary bank(s) by a third party either impossible or economically
impracticable.
The various warrants, options, and rights are not exercisable by the
investing bank holding company unless interstate banking is permitted,
but may be transferred by the investor either immediately or after the
passage of a period of time or upon the occurrence of certain events.
(2) After a careful review of a number of these agreements, the
Board believes that investments in nonvoting stock, absent other
arrangements, can be consistent with the Act. Some of the agreements
reviewed appear consistent with the Act since they are limited to
investments of relatively moderate size in nonvoting equity that may
become voting equity only if interstate banking is authorized.
(3) However, other agreements reviewed by the Board raise
substantial problems of consistency with the control provisions of the
Act because the investors, uncertain whether or when interstate banking
may be authorized, have evidently sought to assure the soundness of
their investments, prevent takeovers by others, and allow for sale of
their options, warrants, or rights to a person of the investor's choice
in the event a third party obtains control of the acquiree or the
investor otherwise becomes dissatisfied with its investment. Since the
Act precludes the investors from protecting their investments through
ownership or use of voting shares or other exercise of control, the
investors have substituted contractual agreements for rights normally
achieved through voting shares.
(4) For example, various covenants in certain of the agreements
seek to assure the continuing soundness of the investment by
substantially limiting the discretion of the acquiree's management over
major policies and decisions, including restrictions on entering into
new banking activities without the investor's approval and requirements
for extensive consultations with the investor on financial matters. By
their terms, these covenants suggest control by the investing company
over the management and policies of the acquiree.
{{2-28-06 p.6110.28-L-36}}
(5) Similarly, certain of the agreements deprive the acquiree
bank holding company, by covenant or because of an option, of the right
to sell, transfer, or encumber a majority or all of the voting shares
of its subsidiary bank(s) with the aim of maintaining the integrity of
the investment and preventing takeovers by others. These long-term
restrictions on voting shares fall within the presumption in the
Board's Regulation Y that attributes control of shares to any company
that enters into any agreement placing long-term restrictions on the
rights of a holder of voting securities.
(12 CFR 225.2(b)(4)).
(6) Finally, investors wish to reserve the right to sell their
options, warrants or rights to a person of their choice to prevent
being locked into what may become an unwanted investment. The Board has
taken the position that the ability to control the ultimate disposition
of voting shares to a person of the investor's choice and to secure the
economic benefits therefrom indicates control of the shares under the
Act.{1}
{1 See Board letter dated March 18, 1982, to C. A. Cavendes,
Sociedad Financiera.}
Moreover, the ability to transfer rights to large blocks of voting
shares, even if nonvoting in the hands of the investing company, may
result in such a substantial position of leverage over the management
of the acquiree as to involve a structure that inevitably results in
control prohibited by the Act.
(d) Provisions That Avoid Control.
(1) In the context of any particular agreement, provisions of the
type described above may be acceptable if combined with other
provisions that serve to preclude control. The Board believes that such
agreements will not be consistent with the Act unless provisions are
included that will preserve management's discretion over the policies
and decisions of the acquiree and avoid control of voting shares.
(2) As a first step towards avoiding control, convenants in any
agreement should leave management free to conduct banking and
permissable nonbanking activities. Another step to avoid control is the
right of the acquiree to "call" the equity investment and options
or warrants to assure that covenants that may become inhibiting can be
avoided by the acquiree. This right makes such investments or
agreements more like a loan in which the borrower has a right to escape
covenants and avoid the lender's influence by prepaying the loan.
(3) A measure to avoid problems of control arising through the
investor's control over the ultimate disposition of rights to
substantial amounts of voting shares of the acquiree would be a
provision granting the acquiree a right of first refusal before
warrants, options or other rights may be sold and requiring a public
and dispersed distribution of these rights if the right of first
refusal is not exercised.
(4) In this connection, the Board believes that agreements that
involve rights to less than 25 percent of the voting shares, with a
requirement for a dispersed public distribution in the event of sale,
have a much greater prospect of achieving consistency with the Act than
agreements involving a greater percentage. This guideline is drawn by
analogy from the provision in the Act that ownership of 25 percent or
more of the voting securities of a bank constitutes control of the
bank.
(5) The Board expects that one effect of this guideline would be
to hold down the size of the nonvoting equity investment by the
investing company relative to the acquiree's total equity, thus
avoiding the potential for control because the investor holds a very
large proportion of the acquiree's total equity. Observance of the 25
percent guideline will also make provisions in agreements providing for
a right of first refusal or a public and widely dispersed offering of
rights to the acquiree's shares more practical and realistic.
(6) Finally, certain arrangements should clearly be avoided
regardless of other provisions in the agreement that are designed to
avoid control. These are:
(i) Agreements that enable the investing bank holding company (or
its designee) to direct in any manner the voting of more than 5 percent
of the voting shares of the acquiree;
(ii) Agreements whereby the investing company has the right to
direct the acquiree's use of the proceeds of an equity investment by
the investing company to effect certain actions, such as the purchase
and redemption of the acquiree's voting shares; and
{{2-28-06 p.6110.28-L-37}}
(iii) The acquisition of more than 5 percent of the voting shares
of the acquiree that "simultaneously" with their acquisition by
the investing company become nonvoting shares, remain nonvoting shares
while held by the investor, and revert to voting shares when
transferred to a third party.
(e) Review by the Board. This statement does not
constitute the exclusive scope of the Board's concerns, nor are the
considerations with respect to control outlined in this statement an
exhaustive catalog of permissible or impermissible arrangements. The
Board has instructed its staff to review agreements of the kind
discussed in this statement and to bring to the Board's attention those
that raise problems of consistency with the Act. In this regard,
companies are requested to notify the Board of the terms of such
proposed merger or asset acquisition agreements or nonvoting equity
investments prior to their execution or consummation.
[Codified to 12 C.F.R. § 225.143]
[Source: 47 Fed. Reg. 30966, July 16, 1982, effective July 8,
1982]
§ 225.144 [Removed]
§ 225.145 Limitations established by the Competitive Equality
Banking Act of 1987 on the activities and growth of nonbank banks.
(a) Introduction. Effective August 10, 1987, the
Competitive Equality Banking Act of 1987 ("CEBA") redefined the
term "bank" in the Bank Holding Company Act ("BHC Act" or
"Act") to include any bank the deposits of which are insured by
the Federal Deposit Insurance Corporation as well as any other
institution that accepts demand or checkable deposit accounts and is
engaged in the business of making commercial loans.
12 U.S.C. 1841(c). CEBA also
contained a grandfather provision for certain companies affected
by this redefinition. CEBA amended section 4 of the BHC Act to
permit a company that on March 5, 1987, controlled a nonbank bank (an
institution that became a bank as a result of enactment of CEBA) and
that was not a bank holding company on August 9, 1987, to retain
its nonbank bank and not be treated as a bank holding company for
purposes of the BHC Act if the company and its subsidiary nonbank bank
observe certain limitations imposed by
CEBA.{1}
{1 12 U.S.C. 1843(f).
Such a company is treated as a bank holding company, however, for
purposes of the anti-tying provisions in section 106 of the BHC Act
Amendments of 1970 (12 U.S.C.
1971 et seq.) and the insider lending limitations of
section 22(h) of the Federal Reserve Act
(12 U.S.C. 375b). The company is
also subject to certain examination and enforcement provisions to
assure compliance with CEBA.}
Certain of these limitations are codified in section 4(f)(3) of the BHC
Act and generally restrict nonbank banks from commencing new activities
or certain crossmarketing activities with affiliates after March
5, 1987, increasing their assets at an annual rate exceeding 7 percent
during any 12 month period after August 10, 1988, or permitting
overdrafts for affiliates or incurring overdrafts on behalf of
affiliates at a Federal Reserve bank, 12 U.S.C.
1843(f)(3).{2}
{2CEBA also prohibits, with certain limited exceptions, a
company controlling a grandfathered nonbank bank from acquiring control
of an additional bank or thrift institution or acquiring, directly or
indirectly after March 5, 1987, more than 5 percent of the assets or
shares of a bank or thrift institution, 12 U.S.C. 1843(f)(2).}
The Board's views regarding the meaning and scope of these limitations
are set forth below and in provisions of the Board's Regulation Y (12
CFR 225.51 and 52).
(b) Congressional findings. (1) At the outset, the
Board notes that the scope and application of the Act's limitations on
nonbank banks must be guided by the Congressional findings set out in
section 4(f)(3) of the BHC Act. Congress was aware that these nonbank
banks had been acquired by companies that engage in a wide range of
nonbanking activities, such as retailing and general securities
activities that are forbidden to bank holding companies under section 4
of the BHC Act. In section 4(f)(3), Congress found that nonbank banks
controlled by grandfathered nonbanking companies may, because of their
relationship with affiliates, be involved in conflicts of interest,
concentration of resources,
{{2-28-06 p.6110.28-L-38}}or other
effects adverse to bank safety and soundness. Congress also found that
nonbank banks may be able to compete unfairly against banks controlled
by bank holding companies by combining banking services with financial
services not permissible for bank holding companies. Section 4(f)(3)
states that the purpose of the nonbank bank limitations is to minimize
any such potential adverse effects or inequities by restricting the
activities of nonbank banks until further Congressional action in the
area of bank powers could be undertaken. Similarly, the Senate Report
accompanying CEBA states that the restrictions CEBA places on nonbank
banks "will help prevent existing nonbank banks from changing their
basic character * * * while Congress considers proposals for
comprehensive legislation; from drastically eroding the separation of
banking and commerce; and from increasing the potential for unfair
competition, conflicts of interest, undue concentration of resources,
and other adverse effects." S. Rep. No. 100--19, 100th Cong., 1st
Sess. 12 (1987). See also H. Rep. No. 100-261, 100th Cong.,
1st Sess. 124 (1987) (the "Conference Report").
(2) Thus, Congress explicitly recognized in the statute itself
that nonbanking companies controlling grandfathered nonbank banks,
which include the many of the nation's largest commercial and financial
organizations, were being accorded a significant competitive advantage
that could not be matched by bank holding companies because of the
general prohibition against nonbanking activities in section 4 of the
BHC Act. Congress recognized that this inequality in regulatory
approach could inflect serious competitive harm on regulated bank
holding companies as the grandfathered entities sought to exploit
potential synergies between banking and commercial products and
services. See Conference Report at 125--126. The basic and
stated purpose of the restrictions on grandfathered nonbank banks is to
minimize these potential anticompetitive effects.
(3) The Board believes that the specific CEBA limitations should
be implemented in light of these Congressional findings and the
legislative intent reflected in the plain meaning of the terms used in
the statute. In those instances when the language of the statute did
not provide clear guidance, legislative materials and the Congressional
intent manifested in the overall statutory structure were considered.
The Board also notes that prior precedent requires that grandfathered
exceptions in the BHC Act, such as the nonbank bank limitations and
particularly the exceptions thereto, are to be interpreted narrowly in
order to ensure the proper implementation of Congressional
intent.{3}
{3E.g., Maryland National Corporation, 73 Federal
Reserve Bulletin 310, 313--314 (1987). Cf., Spokane & Inland
Empire Railroad Co. v. United States, 241 U.S. 344, 350 (1915).}
(c) Activity limitation.--(1) Scope of
"activity". (i) The first limitation established under
section 4(f)(3) provides that a nonbank shall not "engage in any
activitiy in which such bank was not lawfully engaged as of March 5,
1987." The term "activity" as used in this provision of CEBA
is not defined. The structure and placement of the CEBA activity
restriction within seciton 4 of the BHC Act and its legislative history
do, however, provide direction as to certain transactions that Congress
intended to treat as separate activities, thereby providing guidance as
to the meaning Congress intended to ascribe to the term generally.
First, it is clear that the term "activity" was not meant to
refer to banking as a single activity. To the contrary, the term must
be viewed as distinguishing between deposit taking and lending
activities and treating demand deposit-taking as a separate activity
from general deposit-taking and commercial lending as separate from the
general lending category.
(ii) Under the activity limitation, a nonbank bank may engage
only in activities in which it was "lawfully engaged" as of March
5, 1987. As of that date, a nonbank bank could not have been engaged in
both demand deposit-taking and commercial lending activity without
placing it and its parent holding company in violation of the BHC Act.
Thus, under the activity limitations, a nonbank bank could not after
March 5, 1987, commence the demand deposit-taking or commercial lending
activity that it did not conduct as of March 5, 1987. The debates
and Senate and Conference Reports on CEBA confirm that Congress
intended the activity limitation to prevent a grandfathered
nonbank
{{2-28-06 p.6110.28-L-39}}bank from
converting itself into a full-service bank by both offering demand
deposits and engaging in the business of making commercial
loans.{4}
{4Conference Report at 124--25; S. Rep. No. 100--19 at 12, 32;
H. Rep. No. 99--175, 99th Cong., 1st Sess. 3 (1985) ("the activities
limitation is to prevent an institution engaged in a limited range of
functions from expanding into new areas and becoming, in essence, a
full-service bank"); 133 Cong. Rec. S4054 (daily ed. March 27,
1987); (Comments of Senator Proxmire).}
Thus, these types of transactions provide a clear guide as to the type
of banking transactions that would constitute activities under CEBA and
the degree of specificity intended by Congress in interpreting that
term.
(iii) It is also clear that the activity limitation was not
intended simply to prevent a nonbank bank from both accepting demand
deposits and making commercial loans; it has a broader scope and
purpose. If Congress had meant the term to refer to just these two
activities, it would have used the restriction it used in another
section of CEBA dealing with nonbank banks owned by bank holding
companies which has this result, i.e., the nonbank bank
could not engage in any activity that would have caused it to become a
bank under the prior bank definition in the Act. See 12
U.S.C. 1843(g)(1)(A). Indeed, an earlier version of CEBA under
consideration by the Senate Banking Committee contained such a
provision for nonbank banks owned by commercial holding companies,
which was deleted in favor of the broader activity limitation actually
enacted. Committee Print No. 1, (Feb. 17, 1987). In this regard, both
the Senate Report and Conference Report refer to demand deposit-taking
and commercial lending as examples of activities that could be affected
by the activity limitation, not as the sole activities to be limited by
the provision.{5}
{5Conference Report at 124--125; S. Rep. No. 100--19 at 32.}
(iv) Finally, additional guidance as to the meaning of the term
"activity" is provided by the statutory context in which the term
appears. The activity limitation is contained in section 4 of the BHC
Act, which regulates the investments and activities of bank holding
companies and their nonbank subsidiaries. The Board believes it
reasonable to conclude that by placing the CEBA activity limitation in
section 4 of the BHC Act, Congress meant that Board and judicial
decisions regarding the meaning of the term "activity" in that
section be looked to for guidance. This is particularly appropriate
given the fact that grandfathered nonbank banks, whether owned by bank
holding companies or unregulated holding companies, were treated as
nonbank companies and not banks before enactment of CEBA.
(v) This interpretation of the term activity draws support from
comments by Senator Proxmire during the Senate's consideration of the
provision that the term was not intended to apply "on a
product-by-product, customer-by-customer basis." 133 Cong. Rec.
S4054--5 (daily ed. March 27, 1987). This is the same manner in which
the Board has interpreted the term activity in the nonbanking provision
of section 4 as referring to generic categories of activities, not to
discrete products and services.
(vi) Accordingly, consistent with the terms and purposes of the
legislation and the Congressional intent to minimize unfair competition
and the other adverse effects set out inthe CEBA findings, the Board
concludes that the term "activity" as used in section 4(f)(3)
means any line of banking or nonbanking business. This definition does
not, however, envision a product-by-product approach to the activity
limitation. The Board believes it would be helpful to describe the
application of the activity limitation in the context of the following
major categories of activities: deposit-taking, lending, trust, and
other activities engaged in the banks.
{{2-28-06 p.6110.28-L-40}}
(2) Deposit-taking activities. (i) With respect to
deposit-taking, the Board believes that the activity limitation in
section 4(f)(3) generally refers to three types of activity: demand
deposit-taking; non-demand deposit-taking with a third party payment
capability; and time and savings deposit-taking without third party
payment powers. As previously discussed, it is clear from the terms and
intent of CEBA that the activity limitation would prevent, and was
designed to prevent, nonbank banks that prior to the enactment of CEBA
had refrained from accepting demand deposits in order to avoid coverage
as a "bank" under the BHC Act, from starting to take these
deposits after enactment of CEBA and thus becoming full-service banks.
Accordingly, CEBA requires that the taking of demand deposits be
treated as a separate activity.
(ii) The Board also considers nondemand deposits withdrawable by
check or other similar means for payment to third parties or others to
constitute a separate line of business for purposes of applying the
activity limitation. In this regard, the Board has previously
recognized that this line of business constitutes a permissible but
separate activity under section 4 of the BHC Act. Furthermore, the
offering of accounts with transaction capability requires different
expertise and systems than non-transaction deposit-taking and
represented a distinct new activity that traditionally separated banks
from thrift and similar institutions.
(iii) Support for this view may also be found in the House
Banking Committee report on proposed legislation prior to CEBA that
contained a similar prohibition on new activities for nonbank banks. In
discussing the activity limitation, the report recognized a distinction
between demand deposits and accounts with transaction capability and
those without transaction capability:
With respect to deposits, the Committee
recognizes that it is legitimate for an institution currently involved
in offering demand deposits or other third party transaction accounts
to make use of new technologies that are in the process of replacing
the existing check-based, paper payment system. Again, however, the
Committee does not believe that technology should be used as a lever
for an institution that was only incidentially involved in the payment
system to transform itself into a significant offeror of transaction
account capability.{6}
{6H. Rep. No. 99--175, 99th Cong., 1st Sess. 13 (1985).}
(iv) Finally, this distinction between demand and
nondemand checkable accounts and accounts not subject to withdrawal by
check was specifically recognized by Congress in the redefinition of
the term "bank" in CEBA to include an institution that takes
demand deposits or "deposits that the depositor may withdraw by
check or other means for payment to third parties or others" as well
as in various exemptions from that definition for trust companies,
credit card banks, and certain industrial
banks.{7}
{7 See 12 U.S.C.
1841(c)(2)(D), (F), (H), and (I).}
(v) Thus, an institution that as of March 5, 1987, offered only
time and savings accounts that were not withdrawable by check for
payment to third parties could not thereafter begin offering accounts
with transaction capability, for example, NOW accounts or other types
of transaction accounts.
(3) Lending. As noted, the CEBA activity limitation
does not treat lending as a single activity; it clearly
distinguishes between commerical and other types of lending. This
distinction is also reflected in the definition of "bank"
in the BHC Act in effect both prior to and after enactment of CEBA as
well as in various of the exceptions from this definition. In addition,
commercial lending is a specialized form of lending involving different
techniques and analysis from other types of lending. Based upon these
factors, the Board would view commercial lending as a separate and
distinct activity for purposes of the activity limitation in section
4(f)(3). The Board's decisions under section 4 of the BHC Act have not
generally differentiated between types of commercial lending, and thus
the Board would view commercial lending as a single activity for
purposes of CEBA. Thus, a nonbank that made commercial loans as of
March 5, 1987, could make any type of commercial loan
thereafter.
{{2-28-06 p.6110.28-L-41}}
(i) Commercial lending. For purposes of the activity
limitation, a commercial loan is defined in accordance with the Supreme
Court's decision in Board of Governors v. Dimension Financial
Corporation, 474 U.S. 361 (1986), as a direct loan to a business
customer for the purpose of providing funds for that customer's
business. In this regard, the Board notes that whether a particular
transaction is a commercial loan must be determined not from the face
of the instrument, but from the application of the definition of
commercial loan in the Dimension decision to that
transaction. Thus, certain transactions of the type mentioned in the
Board's ruling at issue in Dimension and in the Senate and
Conference Reports in the CEBA
legislation{8}
{8S. Rep. No. 100--19 at 31; Conference Report at 123.}
would be commercial loans if they meet the test for commercial loans
established in Dimension. Under this test, a commercial loan
would not include, for example, an open-market investment in a
commercial entity that does not involve a borrower-lender relationship
or negotiation of credit terms, such as a money market transaction.
(ii) Other lending. Based upon the guidance in the
Act as to the degree of specificity required in applying the activity
limitation with respect to lending, the Board believes that, in
addition to commercial lending, there are three other types of lending
activities: consumer mortgage lending, consumer credit card lending,
and other consumer lending. Mortgage lending and credit card lending
are recognized, discrete lines of banking and business activity,
involving techniques and processes that are different from and more
specialized than those required for general consumer lending. For
example, these activities are, in many cases, conducted by specialized
institutions, such as mortgage companies and credit card institutions,
or through separate organizational structures within an institution,
particularly in the case of mortgage lending. Additionally, the Board's
decisions under section 4 of the Act have recognized mortgage banking
and credit card lending as separate activities for bank holding
companies. The Board's Regulation Y reflects this specialization,
noting as examples of permissible lending activity: consumer finance,
credit card and mortgage lending. 12 CFR 225.25(b)(1). Finally, CEBA
itself recognizes the specialized nature of credit card lending by
exempting an institution specializing in that activity from the bank
definition. For purpose of the activity limitation, a consumer mortgage
loan will mean any loan to an individual that is secured by real estate
and that is not a commercial loan. A credit card loan would be any loan
made to an individual by means of a credit card that is not a
commercial loan.
(4) Trust activities. Under section 4 of the Act, the
Board has historically treated trust activities as a single activity
and has not differentiated the function on the basis of whether the
customer was an individual or a business. See
12 CFR 225.25(b)(3).
Similarly, the trust company exemption from the bank definition in CEBA
makes no distinction between various types of trust activities.
Accordingly, the Board would view trust activities as a separate
activity without additional differentiation for purposes of the
activity limitation in section 4(f)(3).
(5) Other activities. With respect to activities
other than the various traditional deposit-taking, lending or trust
activities, the Board believes it appropriate, for the reasons
discussed above, to apply the activity limitation in section 4(f)(3) as
the term "activity" generally applies in other provisions of
section 4 of the BHC Act. Thus, a grandfathered nonbank bank could not,
for example, commence after March 5, 1987, any of the following
activities (unless it was engaged in such an activity as of that date):
discount securities brokerage, full-service securities brokerage
investment advisory services, underwriting or dealing in government
securities as permissible for member banks, foreign exchange
transaction services, real or personal property leasing, courier
services, data processing for third parties, insurance agency
activities,{9}
{9In this area, section 4 of the Act does not treat all
insurance agency activities as a single activity.9Continued Thus, for example, the Act
treats the sale of credit-related life, accident and health insurance
as a separate activity from general insurance agency activities. See 12
U.S.C. 1843(c)(8). }
real estate development, real estate brokerage, real
{{2-28-06 p.6110.28-L-42}}estate
syndication, insurance underwriting, management consulting, futures
commission merchant, or activities of the general type listed in
§ 225.25(b) of Regulation Y.
(6) Meaning of "engaged in". In order
to be "engaged in" an activity, a nonbank bank must demonstrate
that it had a program in place to provide a particular product or
service included within the grandfathered activity to a customer and
that it was in fact offering the product or service to customers as of
March 5, 1987. Thus, a nonbank bank is not engaged in an activity as of
March 5, 1987, if the product or service in question was in a planning
state as of that date and had not been offered or delivered to a
customer. Consistent with prior Board interpretations of the term
activity in the grandfather provisions of section 4, the Board does not
believe that a company may be engaged in an activity on the basis of a
single isolated transaction that was not part of a program to offer the
particular product or to conduct in the activity on an ongoing basis.
For example, a nonbank bank that held an interest in a single real
estate project would not thereby be engaged in real estate development
for purposes of this provision, unless evidence was presented
indicating the interest was held under a program to commence a real
estate development business.
(7) Meaning of "as of". The Board
believes that the grandfather date "as of March 5, 1987" as used
throughout section 4(f)(3) should refer to activities engaged in on
March 5, 1987, or a reasonably short period proceding this date not
exceeding 13 months. 133 Cong. Rec. S3957 (daily ed. March 26, 1987).
(Remarks of Senators Dodd and Proxmire). Activities that the
institution had terminated prior to March 5, 1988, however, would not
be considered to have been conducted or engaged in "as of" March
5. For example, if within 13 months of March 5, 1987, the nonbank bank
had terminated its commercial lending activity in order to avoid the
"bank" definition in the Act, the nonbank bank could not
recommence that activity after enactment of CEBA.
(d) Cross-marketing limitation.--(1) In
general. Section 4(f)(3) also limits cross-marketing activities by
nonbank banks and their affiliates. Under this provision, a nonbank
bank may not offer or market a product or service of an affiliate
unless the product or service may be offered by bank holding companies
generally under section 4(c)(8)
of the BHC Act. In addition, a nonbank bank may not permit any of its
products or services to be offered or marketed by or through a nonbank
affiliate unless the affiliate engages only in activities permissible
for a bank holding company under section 4(c)(8). These limitations are
subject to an exception for products or services that were being so
offered or marketed as of March 5, 1987, but only in the same manner in
which they were being offered or marketed as of that date.
(2) Examples of impermissible
cross-marketing. The Conference Report illustrates the
application of this limitation to the following two covered
transactions: (i) products and services of an affiliate that bank
holding companies may not offer under the BHC Act, and (ii) products
and services of the nonbank bank. In the first case, the restrictions
would prohibit, for example, a company from marketing life insurance or
automotive supplies through its affiliate nonbank bank because these
products are not generally permissible under the BHC Act. Conference
Report at 126. In the second case, a nonbank bank may not permit its
products or services to be offered or marketed through a life insurance
affiliate or automobile parts retailer because these affiliates engage
in activities prohibited under the BHC Act. Id.
(3) Permissible cross-marketing. On the other
hand, a nonbank bank could offer to its customers consumer loans from
an affiliated mortgage banking or consumer finance company. These
affiliates could likewise offer their customers the nonbank bank's
products or services provided the affiliates engaged only in activities
permitted for bank holding companies under the
closely-releated-to-banking standard of section 4(c)(8) of the BHC Act.
If the affiliate is engaged in both permissible and impermissible
activities within the meaning
{{2-28-06 p.6110.28-L-43}}of
section 4(c)(8) of the BHC Act, however, the affiliate could not offer
or market the nonbank bank's products or services.
(4) Product approach to cross-marketing
restriction. (i) Unlike the activity restrictions, the
cross-marketing restrictions of CEBA apply by their terms to individual
products and services. Thus, an affiliate of a nonbank bank that was
engaged in activities that are not permissible for bank holding
companies and that was marketing a particular product or service of a
nonbank bank on the grandfather date could continue to market that
product and, as discussed below, could change the terms and conditions
of the loan. The nonbank affiliate could not, however, begin to offer
or market another product or service of the nonbank bank.
(ii) The Board believes that the term "product or service"
must be interpreted in light of its accepted ordinary commercial usage.
In some instances, commercial usage has identified a group of products
so closely related that they constitute a product line (e.g.,
certificates of deposit) and differences in versions of the
product (e.g., a one-year certificate of deposit) simply
represent a difference in the terms of the
product.{10}
{10American Bankers Association, Banking Terminology
(1981).}
This approach is consistent with the treatment of CEBA's legislative
history of certificates of deposit as a product line rather than each
particular type of CD as a separate
product.{11}
{11During the Senate debates on CEBA, Senator Proxmire in
response to a statement from Senator Cranston that the joint-marketing
restrictions do not lock into place the specific terms or conditions of
the particular grandfathered product or service, stated:
That is correct. For example, if a nonbank bank was
jointly marketing on March 5, 1987, a 3 year, $5,000 certificate of
deposit, this bill would not prohibit offering in the same manner a 1
year, $2,000 certificate of deposit with a different interest rate. 133
Cong. Rec. S3959 (daily ed. March 26, 1987).}
(iii) In the area of consumer lending, the Board believes the
following provide examples of different consumer loan products:
mortgage loans to finance the purchase of the borrower's residence,
unsecured consumer loans, consumer installment loans secured by the
personal property to be purchased (e.g. automobile, boat or
home appliance loans), or second mortgage
loans.{12}
{12In this regard, the Supreme Court in United States v.
Philadelphia National Bank, noted that "the principal banking
products are of course various types of credit, for example: unsecured
personal and business loans, mortgage loans, loans secured by
securities or accounts receivable, automobile installment and consumer
goods, installment loans, tuition financing, bank credit cards,
revolving credit funds." 374 U.S. 321, 326 n.5 (1963).}
Under this interpretation, a nonbank bank that offered automobile loans
through a nonbank affiliate on the grandfather date could market boat
loans, appliance loans or any type of secured consumer installment loan
through that affiliate. It could not, however, market unsecured
consumer loans, home mortgage loans or other types of consumer loans.
(iv) In other areas, the Board believes that the determination as
to what constitutes a product or service should be made on a
case-by-case basis consistent with the principles that the terms
"product or service" must be interpreted in accordance with their
ordinary commercial usage and must be narrower in scope than the
definition of activity. Essentially, the concept applies in this
analysis is one of permitting the continuation of the specific product
marketing activity that was undertaken as of March 5, 1987. Thus, for
example, while insurance underwriting may constitute a separate
activity under CEBA, a nonbank bank could not market a life insurance
policy issued by the affiliate if on the grandfather date it had only
marketed homeowners' policies issued by the affiliate.
(5) Change in terms and conditions permitted. (i)
The cross-marketing restrictions would not limit the ability of the
institution to change the specific terms and conditions of a particular
grandfathered product or service. The Conference Report indicates a
legislative intent not to lock into place the specific terms or
conditions of a grandfathered product or service. Conference Report at
126. For example, a nonbank bank marketing a three-year, $5,000
certificate of deposit through an affiliate under the exemption could
offer a one-year $2,000 certificate of deposit with a different
interest rate after the grandfather date. See footnote
11 above. Modifications that alter the type of product, however, are
not
{{2-28-06 p.6110.28-L-44}}permitted. Thus, a nonbank bank
that marketed through affiliates on March 5, 1987, only certificates of
deposit could not commence marketing MMDA's or NOW accounts after the
grandfather date.
(ii) General changes in the character of the product or service
as the result of market or technological innovation are similarly
permitted to the extent that they do not transform a grandfathered
product into a new product. Thus, an unsecured line of credit could not
be modified to include a lien on the borrower's residence without
becoming a new product.
(6) Meaning of "offer or market". In the
Board's opinion, the terms "offer or market" in the
cross-marketing restrictions refer to the presentation to a customer of
an institution's products or service through any type of program,
including telemarketing, advertising brochures, direct mailing,
personal solicitation, customer referrals, or joint-marketing
agreements or presentations. An institution must have offered or
actually marketed the product or service on March 5 or shortly before
that date (as discussed above) to qualify for the grandfather
privilege. Thus, if the cross-marketing program was in the planning
stage on March 5, 1987, the program would not qualify for grandfather
treatment under CEBA.
(7) Limitations on cross-marketing to "in the same
manner". (i) The cross-marketing restriction in section
4(f)(3) contains a grandfather provision that permits products or
services that would otherwise be prohibited from being offered or
marketed under the provision to continue to be offered or marketed by a
particular entity if the products or services were being so offered or
marketed as of March 5, 1987, but "only in the same manner in which
they were being offered or marketed as of that date." Thus, to
qualify for the grandfather provision, the manner of offering or
marketing the otherwise prohibited product or service must remain the
same as on the grandfather date.
(ii) In interpreting this provision, the Board notes that
Congress designed the joint-marketing restrictions to prevent the
significant risk to the public posed by the conduct of such activities
by insured banks affiliated with companies engaged in generarl
commerce, to ensure objectivity in the credit-granting process and to
"minimize the unfair competitive advantage that grandfathered
commercial companies owning nonbank banks might otherwise engage over
regulated bank holding companies and our competing commercial companies
that have no subsidiary bank." Conference Report at 125--126. The
Board believes that determinations regarding the manner of
cross-marketing of a particular product or service may best be
accomplished by applying the limitation to the particular facts in each
case consistent with the stated purpose of this provision of CEBA and
the general principle that grandfather restrictions and exceptions to
general prohibitions must be narrowly construed in order to prevent the
exception from nullifying the rule. Essentially, as in the scope of the
term "product or service", the guiding principle of Congressional
intent with respect to this term is to permit only the continuation of
the specific types of cross-marketing activity that were undertaken as
of March 5, 1987.
(8) Eligibility for cross-marketing grandfather
exemption. The Conference Report also clarifies that entitlement
to an exemption to continue to cross-market products and services
otherwise prohibited by the statute applies only to the specific
company that was engaged in the activity as of March 5, 1987.
Conference Report at 126. Thus, an affiliate that was not engaged in
cross-marketing products or services as of the grandfather date may not
commence these activities under the exemption even if such activities
were being conducted by another affiliate. Id.; see also S.
Rep. No. 100--19 at 33--34.
(e) Eligibility for grandfathered nonbank bank
status. In reviewing the reports required by CEBA, the Board
notes that a number of institutions that had not commenced business
operations on August 10, 1987, the date of enactment of CEBA, claimed
grandfather privileges under section 4(f)(3) of CEBA. To qualify for
grandfather privileges under section 4(f)(3), the institution must have
"bec[o]me a bank as a result of the enactment of [CEBA]" and
must have been controlled by a nonbanking company on March 5, 1987. 12
U.S.C. 1843(f)(1)(A). An institution that did not have FDIC insurance
on August 10, 1987, and that did not accept demand deposits or
transaction accounts or
{{12-31-07 p.6110.28-L-45}}engage in
the business of commercial lending on that date, would not have become
a "bank" as a result of enactment of CEBA. Thus, institutions
that had not commenced operations on August 10, 1987, could not qualify
for grandfather privileges under section 4(f)(3) of CEBA. This view is
supported by the activity limitations of section 4(f)(3), which, as
noted, limit the activities of grandfather nonbank banks to those in
which they were lawfully engaged as of March 5, 1987. A nonbank bank
that had not commenced conducting business activities on March 5, 1987,
could not after enactment of CEBA engage in any activities under this
provision.
[Codified to 12 C.F.R. § 225.145]
[Source: Section 225.145 added at 53 Fed. Reg. 37746, Septembe 28,
1988, effective October 28, 1988; 62 Fed. Reg. 9343, February 28, 1997,
effective April 21, 1997]
Subpart J—Merchant Banking
Investments
§ 225.170 What type of investments are permitted by this
subpart, and under what conditions may they be made?
(a) What types of investments are permitted by this
subpart? Section 4(k)(4)(H) of the Bank Holding Company Act
(12 U.S.C. 1843(k)(4)(H)) and
this subpart authorize a financial holding company, directly or
indirectly and as principal or on behalf of one or more persons, to
acquire or control any amount of shares, assets or ownership interests
of a company or other entity that is engaged in any activity not
otherwise authorized for the financial holding company under section 4
of the Bank Holding Company Act. For purposes of this subpart, shares,
assets or ownership interests acquired or controlled under section
4(k)(4)(H) and this subpart are referred to as "merchant banking
investments." A financial holding company may not directly or
indirectly acquire or control any merchant banking investment except in
compliance with the requirements of this subpart.
(b) Must the investment be a bona fide merchant banking
investment? The acquisition or control of shares, assets or
ownership interests under this subpart is not permitted unless it is
part of a bona fide underwriting or merchant or investment banking
activity.
(c) What types of ownership interests may be
acquired? Shares, assets or ownership interests of a company or
other entity include any debt or equity security, warrant, option,
partnership interest, trust certificate or other instrument
representing an ownership interest in the company or entity, whether
voting or nonvoting.
(d) Where in a financial holding company may merchant banking
investments be made? A financial holding company and any
subsidiary (other than a depository institution or subsidiary of a
depository institution) may acquire or control merchant banking
investments. A financial holding company and its subsidiaries may not
acquire or control
{{2-28-01 p.6110.28-M}}merchant banking investments on behalf
of a depository institution or subsidiary of a depository institution.
(e) May assets other than shares be held directly? A
financial holding company may not under this subpart acquire or control
assets, other than debt or equity securities or other ownership
interests in a company, unless:
(1) The assets are held by or promptly transferred to a portfolio
company;
(2) The portfolio company maintains policies, books and records,
accounts, and other indicia of corporate, partnership or limited
liability organization and operation that are separate from the
financial holding company and limit the legal liability of the
financial holding company for obligations of the portfolio company; and
(3) The portfolio company has management that is separate from
the financial holding company to the extent required by § 225.171.
(f) What type of affiliate is required for a financial
holding company to make merchant banking investments? A financial
holding company may not acquire or control merchant banking investments
under this subpart unless the financial holding company qualifies under
at least one of the following paragraphs:
(1) Securities affiliate. The financial holding
company is or has an affiliate that is registered under the Securities
Exchange Act of 1934 (15 U.S.C.
78c, 78o,
78o--4) as:
(i) A broker or dealer; or
(ii) A municipal securities dealer, including a separately
identifiable department or division of a bank that is registered as a
municipal securities dealer.
(2) Insurance affiliate with an investment adviser
affiliate. The financial holding company controls:
(i) An insurance company that is predominantly engaged in
underwriting life, accident and health, or property and casualty
insurance (other than credit-related insurance), or providing and
issuing annuities; and
(ii) A company that:
(A) Is registered with the Securities and Exchange Commission as
an investment adviser under the Investment Advisers Act of 1940
(15 U.S.C. 80b--1 et
seq.); and
(B) Provides investment advice to an insurance company.
[Codified to 12 C.F.R. § 225.170]
[Section 225.170 added at 65 Fed. Reg. 16473, March 28, 2000,
effective March 17, 2000; amended at 66 Fed. Reg. 8484, January 31,
2001, effective February 15, 2001]
§ 225.171 What are the limitations on managing or operating a
portfolio company held as a merchant banking investment?
(a) May a financial holding company routinely manage or
operate a portfolio company? Except as permitted in paragraph (e)
of this section, a financial holding company may not routinely manage
or operate any portfolio company.
(b) When does a financial holding company routinely manage or
operate a company?
(1) Examples of routine management or
operation.--(i) Executive officer interlocks at the
portfolio company. A financial holding company routinely manages
or operates a portfolio company if any director, officer or employee of
the financial holding company serves as or has the responsibilities of
an executive officer of the portfolio company.
(ii) Interlocks by executive officers of the financial holding
company.--
(A) Prohibition. A financial holding company
routinely manages or operates a portfolio company if any executive
officer of the financial holding company serves as or has the
responsibilities of an officer or employee of the portfolio company.
(B) Definition. For purposes of paragraph
(b)(1)(ii)(A) of this section, the term "financial holding
company" includes the financial holding company and only the
following subsidiaries of the financial holding company:
(1) A securities broker or dealer registered under the
Securities Exchange Act of 1934;
(2) A depository institution;
{{2-28-01 p.6110.28-N}}
(3) An affiliate that engages in merchant banking
activities under this subpart or insurance company investment
activities under section 4(k)(4)(I) of the Bank Holding Company Act
(12 U.S.C. 1843(k)(4)(I));
(4) A small business investment company (as defined in
section 302(b) of the Small Business Investment Act of 1958 (15 U.S.C.
682(b)) controlled by the financial holding company or by any
depository institution controlled by the financial holding company; and
(5) Any other affiliate that engages in significant
equity investment activities that are subject to a special capital
charge under the capital adequacy rules or guidelines of the Board.
(iii) Covenants regarding ordinary course of
business. A financial holding company routinely manages or
operates a portfolio company if any covenant or other contractual
arrangement exists between the financial holding company and the
portfolio company that would restrict the portfolio company's ability
to make routine business decisions, such as entering into transactions
in the ordinary course of business or hiring officers or employees
other than executive officers.
(2) Presumptions of routine management or
operation. A financial holding company is presumed to routinely
manage or operate a portfolio company if:
(i) Any director, officer, or employee of the financial holding
company serves as or has the responsibilities of an officer (other than
an executive officer) or employee of the portfolio company; or
(ii) Any officer or employee of the portfolio company is
supervised by any director, officer, or employee of the financial
holding company (other than in that individual's capacity as a
director of the portfolio company).
(c) How may a financial holding company rebut a presumption
that it is routinely managing or operating a portfolio company? A
financial holding company may rebut a presumption that it is routinely
managing or operating a portfolio company under paragraph (b)(2) of
this section by presenting information to the Board demonstrating to
the Board's satisfaction that the financial holding company is not
routinely managing or operating the portfolio company.
(d) What arrangements do not involve routinely managing or
operating a portfolio company?--(1) Director representation
at portfolio companies. A financial holding company may select
any or all of the directors of a portfolio company or have one or more
of its directors, officers, or employees serve as directors of a
portfolio company if:
(i) The portfolio company employs officers and employees
responsible for routinely managing and operating the company; and
(ii) The financial holding company does not routinely manage or
operate the portfolio company, except as permitted in paragraph (e) of
this section.
(2) Covenants or other provisions regarding extraordinary
events. A financial holding company may, by virtue of covenants
or other written agreements with a portfolio company, restrict the
ability of the portfolio company, or require the portfolio company to
consult with or obtain the approval of the financial holding company,
to take actions outside of the ordinary course of the business of the
portfolio company. Examples of the types of actions that may be subject
to these types of covenants or agreements include, but are not limited
to, the following:
(i) The acquisition of significant assets or control of another
company by the portfolio company or any of its subsidiaries;
(ii) Removal or selection of an independent accountant or auditor
or investment banker by the portfolio company;
(iii) Significant changes to the business plan or accounting
methods or policies of the portfolio company;
(iv) Removal or replacement of any or all of the executive
officers of the portfolio company;
(v) The redemption, authorization or issuance of any equity or
debt securities (including options, warrants or convertible shares) of
the portfolio company or any borrowing by the portfolio company outside
of the ordinary course of business;
{{2-28-01 p.6110.28-O}}
(vi) The amendment of the articles of incorporation or by-laws
(or similar government documents) of the portfolio company; and
(vii) The sale, merger, consolidation, spin-off,
recapitalization, liquidation, dissolution or sale of substantially all
of the assets of the portfolio company or any of its significant
subsidiaries.
(3) Providing advisory and underwriting services to, and
having consultations with, a portfolio company. A financial
holding company may:
(i) Provide financial, investment and management consulting
advice to a portfolio company in a manner consistent with and subject
to any restrictions on such activities contained in §§ 225.28(b)(6)
or 225.86(b)(1) of this part (12
CFR 225.28(b)(6) and
225.86(b)(1));
(ii) Provide assistance to a portfolio company in connection with
the underwriting or private placement of its securities, including
acting as the underwriter or placement agent for such securities; and
(iii) Meet with the officers or employees of a portfolio company
to monitor or provide advice with respect to the portfolio company's
performance or activities.
(e) When may a financial holding company routinely manage or
operate a portfolio company?--(1) Special circumstances
required. A financial holding company may routinely manage or
operate a portfolio company only when intervention by the financial
holding company is necessary or required to obtain a reasonable return
on the financial holding company's investment in the portfolio company
upon resale or other disposition of the investment, such as to avoid or
address a significant operating loss or in connection with a loss of
senior management at the portfolio company.
(2) Duration Limited. A financial holding company may
routinely manage or operate a portfolio company only for the period of
time as may be necessary to address the cause of the financial holding
company's involvement, to obtain suitable alternative management
arrangements, to dispose of the investment, or to otherwise obtain a
reasonable return upon the resale or disposition of the investment.
(3) Notice required for extended involvement. A
financial holding company may not routinely manage or operate a
portfolio company for a period greater than nine months without prior
written notice to the Board.
(4) Documentation required. A financial holding
company must maintain and make available to the Board upon request a
written record describing its involvement in routinely managing or
operating a portfolio company.
(f) May a depository institution or its subsidiary routinely
manage or operate a portfolio company?--(1) In
general. A depository institution and a subsidiary of a
depository institution may not routinely manage or operate a portfolio
company in which an affiliated company owns or controls an interest
under this subpart.
(2) Definition applying provisions governing routine
management or operation. For purposes of this section other than
paragraph (e) and for purposes of § 225.173(d), a financial holding
company includes a depository institution controlled by the financial
holding company and a subsidiary of such a depository institution.
(3) Exception for certain subsidiaries of depository
institutions. For purposes of paragraph (e) of this section, a
financial holding company includes a financial subsidiary held in
accordance with section 5136A of the Revised Statutes (12 U.S.C. 24a)
or section 46 of the Federal Deposit Insurance Act
(12 U.S.C. 1831w), and a
subsidiary that is a small business investment company and that is held
in accordance with the Small Business Investment Act (15 U.S.C. 661
et seq.), and such a subsidiary may, in accordance with the
limitations set forth in this section, routinely manage or operate a
portfolio company in which an affiliated company owns or controls an
interest under this subpart.
[Codified to 12 C.F.R. § 225.171]
[Section 225.171 added at 65 Fed. Reg. 16473, March 28,
2000, effective March 17, 2000; amended at 66 Fed. Reg. 8485, January
31, 2001, effective February 15, 2001]
{{2-28-01 p.6110.28-P}}
§ 225.172 What are the holding periods permitted for merchant
banking investments?
(a) Must investments be made for resale? A financial
holding company may own or control shares, assets and ownership
interests pursuant to this subpart only for a period of time to enable
the sale or disposition thereof on a reasonable basis consistent with
the financial viability of the financial holding company's merchant
banking investment activities.
(b) What period of time is generally permitted for holding
merchant banking investments?--(1) In general. Except
as provided in this section or § 225.173, a financial holding company
may not, directly or indirectly, own, control or hold any share, asset
or ownership interest pursuant to this subpart for a period that
exceeds 10 years.
(2) Ownership interests acquired from or transferred to
companies held under this subpart. For purposes of paragraph
(b)(1) of this section, shares, assets or ownership interests--
(i) Acquired by a financial holding company from a company in
which the financial holding company held an interest under this subpart
will be considered to have been acquired by the financial holding
company on the date that the share, asset or ownership interest was
acquired by the company; and
(ii) Acquired by a company from a financial holding company will
be considered to have been acquired by the company on the date that the
share, asset or ownership interest was acquired by the financial
holding company if--
(A) The financial holding company held the share, asset, or
ownership interest under this subpart; and
(B) The financial holding company holds an interest in the
acquiring company under this subpart.
(3) Interests previously held by a financial holding
company under limited authority. For purposes of paragraph (b)(1)
of this section, any shares, assets, or ownership interests previously
owned or controlled, directly or indirectly, by a financial holding
company under any other provision of the Federal banking laws that
imposes a limited holding period will if acquired under this subpart be
considered to have been acquired by the financial holding company under
this subpart on the date the financial holding company first acquired
ownership or control of the shares, assets or ownership interests under
such other provision of law. For purposes of this paragraph (b)(3), a
financial holding company includes a depository institution controlled
by the financial holding company and any subsidiary of such a
depository institution.
(4) Approval required to hold interests held in excess of
time limit. A financial holding company may seek Board approval
to own, control or hold shares, assets or ownership interests of a
company under this subpart for a period that exceeds the period
specified in paragraph (b)(1) of this section. A request for approval
must:
(i) Be submitted to the Board at least 90 days prior to the
expiration of the applicable time period;
(ii) Provide the reasons for the request, including information
that addresses the factors in paragraph (b)(5) of this section; and
(iii) Explain the financial holding company's plan for divesting
the shares, assets or ownership interests.
(5) Factors governing Board determinations. In
reviewing any proposal under paragraph (b)(4) of this section, the
Board may consider all the facts and circumstances related to the
investment, including:
(i) The cost to the financial holding company of disposing of the
investment within the applicable period;
(ii) The total exposure of the financial holding company to the
company and the risks that disposing of the investment may pose to the
financial holding company;
(iii) Market conditions;
(iv) The nature of the portfolio company's business;
(v) The extent and history of involvement by the financial
holding company in the management and operations of the company;
and
{{12-31-07 p.6110.28-Q}}
(vi) The average holding period of the financial holding
company's merchant banking investments.
(6) Restrictions applicable to investments held beyond time
period. A financial holding company that directly or indirectly
owns, controls or holds any share, asset or ownership interest of a
company under this subpart for a total period that exceeds the period
specified in paragraph (b)(1) of this section must--
(i) For purposes of determining the financial holding company's
regulatory capital, apply to the financial holding company's adjusted
carrying value of such shares, assets, or ownership interests a capital
charge determined by the Board that must be:
(A) Higher than the maximum marginal Tier 1 capital charge
applicable under the Board's capital adequacy rules or guidelines
(see 12 CFR 225 Appendix
A) to merchant banking investments held by that financial
holding company; and
(B) In no event less than 25 percent of the adjusted carrying
value of the investment; and
(ii) Abide by any other restrictions that the Board may impose in
connection with granting approval under paragraph (b)(4) of this
section.
[Codified to 12 C.F.R. § 225.172]
[Section 225.172 added at 65 Fed. Reg. 16474, March 28, 2000,
effective March 17, 2000; 66 Fed. Reg. 8486, January 31, 2001,
effective February 15, 2001]
§ 225.173 How are investments in private equity funds treated
under this subpart?
(a) What is a private equity fund? For purposes of this
subpart, a "private equity fund" is any company that:
(1) Is formed for the purpose of and is engaged exclusively in
the business of investing in shares, assets, and ownership interests of
financial and nonfinancial companies for resale or other disposition;
(2) Is not an operating company;
(3) No more than 25 percent of the total equity of which is held,
owned or controlled, directly or indirectly, by the financial holding
company and its directors, officers, employees and principal
shareholders;
(4) Has a maximum term of not more than 15 years; and
(5) Is not formed or operated for the purpose of making
investments inconsistent with the authority granted under section
4(k)(4)(H) of the Bank Holding Company Act
(12 U.S.C. 1843(k)(4)(H)) or
evading the limitations governing merchant banking investments
contained in this subpart.
(b) What form may a private equity fund take? A private
equity fund may be a corporation, partnership, limited liability
company or other type of company that issues ownership interests in any
form.
(c) What is the holding period permitted for interests in
private equity funds?
(1) In general. A financial holding company may own,
control or hold any interest in a private equity fund under this
subpart and any interest in a portfolio company that is owned or
controlled by a private equity fund in which the financial holding
company owns or controls any interest under this subpart for the
duration of the fund, up to a maximum of 15 years.
(2) Request to hold interest for longer period. A
financial holding company may seek Board approval to own, control or
hold an interest in or held through a private equity fund for a period
longer than the duration of the fund in accordance with § 225.172(b)
of this subpart.
(3) Application of rules. The rules described in
§ 225.172(b)(2) and (3) governing holding periods of interests
acquired, transferred or previously held by a financial holding company
apply to interests in, held through, or acquired from a private equity
fund.
(d) How do the restrictions on routine management and
operation apply to private equity funds and investments held through a
private equity fund?--(1) Portfolio companies held through
a private equity fund. A financial holding company may not
routinely
{{12-31-07 p.6110.28-R}}manage or operate a portfolio company
that is owned or controlled by a private equity fund in which the
financial holding company owns or controls any interest under this
subpart, except as permitted under § 225.171(e).
(2) Private equity funds controlled by a financial holding
company. A private equity fund that is controlled by a financial
holding company may not routinely manage or operate a portfolio
company, except as permitted under § 225.171(e).
(3) Private equity funds that are not controlled by a
financial holding company. A private equity fund may routinely
manage or operate a portfolio company so long as no financial holding
company controls the private equity fund or as permitted under
§ 225.171(e).
(4) When does a financial holding company control a private
equity fund? A financial holding company controls a private
equity fund for purposes of this subpart if the financial holding
company, including any director, officer, employee or principal
shareholder of the financial holding company:
(i) Serves as a general partner, managing member, or trustee of
the private equity fund (or serves in a similar role with respect to
the private equity fund);
(ii) Owns or controls 25 percent or more of any class of voting
shares or similar interests in the private equity fund;
(iii) In any manner selects, controls or constitutes a majority
of the directors, trustees or management of the private equity fund; or
(iv) Owns or controls more than 5 percent of any class of voting
shares or similar interests in the private equity fund and is the
investment adviser to the fund.
[Codified to 12 C.F.R. § 225.173]
[Section 225.173 added at 65 Fed. Reg. 16475, March 28, 2000,
effective March 17, 2000; 66 Fed. Reg. 8487, January 31, 2001,
effective February 15, 2001]
§ 225.174 What aggregate thresholds apply to merchant banking
investments?
(a) In general. A financial holding company may not,
without Board approval, directly or indirectly acquire any additional
shares, assets or ownership interests under this subpart or make any
additional capital contribution to any company the shares, assets or
ownership interests of which are held by the financial holding company
under this subpart if the aggregate carrying value of all merchant
banking investments held by the financial holding company under this
subpart exceeds:
(1) 30 percent of the Tier 1 capital of the financial holding
company; or
(2) After excluding interests in private equity funds, 20 percent
of the Tier 1 capital of the financial holding company.
(b) How do these thresholds apply to a private equity
fund? Paragraph (a) of this section applies to the interest
acquired or controlled by the financial holding company under this
subpart in a private equity fund. Paragraph (a) of this section does
not apply to any interest in a company held by a private equity fund or
to any interest held by a person that is not affiliated with the
financial holding company.
(c) How long do these thresholds remain in effect? This
§ 225.174 shall cease to be effective on the date that a final rule
issued by the Board that specifically addresses the appropriate
regulatory capital treatment of merchant banking investments becomes
effective.
[Codified to 12 C.F.R. § 225.174]
[Section 225.174 added at 65 Fed. Reg. 16475, March 28, 2000,
effective March 17, 2000; amended at 66 Fed. Reg. 8488, January 31,
2001, effective February 15, 2001]
§ 225.175 What risk management, record keeping and reporting
policies are required to make merchant banking investments?
(a) What internal controls and records are
necessary?--(1) General. A financial holding company,
including a private equity fund controlled by a financial holding
company, that makes investments under this subpart must establish and
maintain policies,
{{2-28-01 p.6110.28-S}}procedures, records and systems
reasonably designed to conduct, monitor and manage such investment
activities and the risks associated with such investment activities in
a safe and sound manner, including policies, procedures, records and
systems reasonably designed to:
(i) Monitor and assess the carrying value, market value and
performance of each investment and the aggregate portfolio;
(ii) Identify and manage the market, credit, concentration and
other risks associated with such investments;
(iii) Identify, monitor and assess the terms, amounts and risks
arising from transactions and relationships (including contingent fees
or contingent interests) with each company in which the financial
holding company holds an interest under this subpart;
(iv) Ensure the maintenance of corporate separateness between the
financial holding company and each company in which the financial
holding company holds an interest under this subpart and protect the
financial holding company and its depository institution subsidiaries
from legal liability for the operations conducted and financial
obligations of each such company; and
(v) Ensure compliance with this part and any other provisions of
law governing transactions and relationships with companies in which
the financial holding company holds an interest under this subpart
(e.g., fiduciary principles or sections 23A and 23B of the
Federal Reserve Act (12 U.S.C.
371c, 371c--1), if
applicable).
(2) Availability of records. A financial holding
company must make the policies, procedures and records required by
paragraph (a)(1) of this section available to the Board or the
appropriate Reserve Bank upon request.
(b) What periodic reports must be filed? A financial
holding company must provide reports to the appropriate Reserve Bank in
such format and at such times as the Board may prescribe.
(c) Is notice required for the acquisition of
companies?--(1) Fulfillment of statutory notice
requirement. Except as required in paragraph (c)(2) of this
section, no post-acquisition notice under section 4(k)(6) of the Bank
Holding Company Act (12 U.S.C.
1843(k)(6)) is required by a financial holding company in
connection with an investment made under this subpart if the financial
holding company has previously filed a notice under § 225.87
indicating that it had commenced merchant banking investment activities
under this subpart.
(2) Notice of large individual investments. A
financial holding company must provide written notice to the Board on
the appropriate form within 30 days after acquiring more than 5 percent
of the voting shares, assets or ownership interests of any company
under this subpart, including an interest in a private equity fund, at
a total cost to the financial holding company that exceeds the lesser
of 5 percent of the Tier 1 capital of the financial holding company or
$200 million.
[Codified to 12 C.F.R. § 225.175]
[Section 225.175 added at 65 Fed. Reg. 16476, March 28, 2000,
effective March 17, 2000; amended at 66 Fed. Reg. 8488, January 31,
2001, effective February 15, 2001]
§ 225.176 How do the statutory cross marketing and sections 23A
and B limitations apply to merchant banking investments?
(a) Are cross marketing activities
prohibited?--(1) In general. A depository
institution, including a subsidiary of a depository institution,
controlled by a financial holding company may not:
(i) Offer or market, directly or through any arrangement, any
product or service of any company if more than 5 percent of the
company's voting shares, assets or ownership interests are owned or
controlled by the financial holding company pursuant to this subpart;
or
(ii) Allow any product or service of the depository institution,
including any product or service of a subsidiary of the depository
institution, to be offered or marketed,
{{2-28-01 p.6110.28-T}}directly or through any arrangement, by
or through any company described in paragraph (a)(1)(i) of this
section.
(2) How are certain subsidiaries treated? For
purposes of paragraph (a)(1) of this section, a subsidiary of a
depository institution does not include a financial subsidiary held in
accordance with section 5136A of the Revised Statutes (12 U.S.C. 24a)
or section 46 of the Federal Deposit Insurance Act
(12 U.S.C. 1831w), any
company held by a company owned in accordance with section 25 or 25A of
the Federal Reserve Act (12 U.S.C. 601 et seq.;
12 U.S.C. 611 et seq.),
or any company held by a small business investment company owned in
accordance with the Small Business Investment Act of 1958 (15 U.S.C.
661 et seq.).
(3) How do the cross marketing restrictions apply to
private equity funds? The restriction contained in paragraph
(a)(1) of this section does not apply to:
(i) Portfolio companies held by a private equity fund that the
financial holding company does not control; or
(ii) The sale, offer or marketing of any interest in a private
equity fund, whether or not controlled by the financial holding
company.
(b) When are companies held under section 4(k)(4)(H)
affiliates under sections 23A and B?--(1) Rebuttable
presumption of control. The following rebuttable presumption of
control shall apply for purposes of sections 23A and 23B of the Federal
Reserve Act (12 U.S.C. 371c,
371c--1): if a financial holding
company directly or indirectly owns or controls more than 15 percent of
the total equity of a company pursuant to this subpart, the company
shall be presumed to be an affiliate of any member bank that is
affiliated with the financial holding company.
(2) Request to rebut presumption. A financial holding
company may rebut this presumption by providing information acceptable
to the Board demonstrating that the financial holding company does not
control the company.
(3) Presumptions that control does not exist. Absent
evidence to the contrary, the presumption in paragraph (b)(1) of this
section will be considered to have been rebutted without Board approval
under paragraph (b)(2) of this section if any one of the following
requirements are met:
(i) No officer, director or employee of the financial holding
company serves as a director, trustee, or general partner (or
individual exercising similar functions) of the company;
(ii) A person that is not affiliated or associated with the
financial holding company owns or controls a greater percentage of the
equity capital of the portfolio company than the amount owned or
controlled by the financial holding company, and no more than one
officer or employee of the holding company serves as a director or
trustee (or individual exercising similar functions) of the company; or
(iii) A person that is not affiliated or associated with the
financial holding company owns or controls more than 50 percent of the
voting shares of the portfolio company, and officers and employees of
the holding company do not constitute a majority of the directors or
trustees (or individuals exercising similar functions) of the company.
(4) Convertible instruments. For purposes of
paragraph (b)(1) of this section, equity capital includes options,
warrants and any other instrument convertible into equity capital.
(5) Application of presumption to private equity
funds. A financial holding company will not be presumed to own or
control the equity capital of a company for purposes of paragraph
(b)(1) of this section solely by virtue of an investment made by the
financial holding company in a private equity fund that owns or
controls the equity capital of the company unless the financial holding
company controls the private equity fund as described in
§ 225.173(d)(4).
(6) Application of sections 23A and B to U.S. branches and
agencies of foreign banks. Sections 23A and 23B of the Federal
Reserve Act (12 U.S.C. 371c,
371c--1) shall apply to all
covered transactions between each U.S. branch and agency of a foreign
bank that acquires or controls, or that is affiliated with a company
that acquires or controls, merchant banking investments and--
(i) Any portfolio company that the foreign bank or affiliated
company controls or is presumed to control under paragraph (b)(1) of
this section; and
{{2-28-06 p.6110.28-U}}
(ii) Any company that the foreign bank or affiliated company
controls or is presumed to control under paragraph (b)(1) of this
section if the company is engaged in acquiring or controlling merchant
banking investments and the proceeds of the covered transaction are
used for the purpose of funding the company's merchant banking
investment activities.
[Codified to 12 C.F.R. § 225.176]
[Section 225.176 added at 66 Fed. Reg. 8488, January 31, 2001,
effective February 15, 2001]
§ 225.177 Definitions.
(a) What do references to a financial holding company
include?--(1) Except as otherwise expressly provided, the term
"financial holding company" as used in this subpart means the
financial holding company and all of its subsidiaries, including a
private equity fund or other fund controlled by the financial holding
company.
(2) Except as otherwise expressly provided, the term
"financial holding company" does not include a depository
institution or subsidiary of a depository institution or any portfolio
company controlled directly or indirectly by the financial holding
company.
(b) What do references to a depository institution
include? For purposes of this subpart, the term "depository
institution" includes a U.S. branch or agency of a foreign bank.
(c) What is a portfolio company? A portfolio company is
any company or entity:
(1) That is engaged in any activity not authorized for the
financial holding company under section 4 of the Bank Holding Company
Act (12 U.S.C. 1843); and
(2) Any shares, assets or ownership interests of which are held,
owned or controlled directly or indirectly by the financial holding
company pursuant to this subpart, including through a private equity
fund that the financial holding company controls.
(d) Who are the executive officers of a
company?--(1) An executive officer of a company is any person who
participates or has the authority to participate (other than in the
capacity as a director) in major policymaking functions of the company,
whether or not the officer has an official title, the title designates
the officer as an assistant, or the officer serves without salary or
other compensation.
(2) The term "executive officer" does not include--
(i) Any person, including a person with an official title, who
may exercise a certain measure of discretion in the performance of his
duties, including the discretion to make decisions in the ordinary
course of the company's business, but who does not participate in the
determination of major policies of the company and whose decisions are
limited by policy standards fixed by senior management of the company;
or
(ii) Any person who is excluded from participating (other than in
the capacity of a director) in major policymaking functions of the
company by resolution of the board of directors or by the bylaws of the
company and who does not in fact participate in such policymaking
functions.
[Codified to 12 C.F.R. § 225.177]
[Section 225.177 added at 66 Fed. Reg. 8489, January 31, 2001,
effective February 15, 2001]
§ 225.200 Conditions to Board's section 20 orders.
(a) Introduction. Under section 20 of the Glass-Steagall
Act (12 U.S.C. 377) and section 4(c)(8) of the Bank Holding Company Act
(12 U.S.C. 1843(c)(8)), a
nonbank subsidiary of a bank holding company may to a limited extent
underwrite and deal in securities for which underwriting and dealing by
a member bank is prohibited. Pursuant to the Securities Act of 1933 and
the Securities Exchange Act of 1934, these so-called section 20
subsidiaries are required to register with the SEC as broker-dealers
and are subject to all the financial reporting, anti-fraud and
financial responsibility rules applicable to broker-dealers. In
addition, transactions between insured depository institutions and
their section 20 affiliates are restricted by sections 23A and 23B of
the Federal Reserve Act (12 U.S.C. 371c and 371c--1). The Board expects
a section 20 subsidiary, like any other subsidiary of a
bank
{{2-28-06 p.6110.28-V}}holding company,
to be operated prudently. Doing so would include observing corporate
formalities (such as the maintenance of separate accounting and
corporate records), and instituting appropriate risk management,
including independent trading and exposure limits consistent with
parent company guidelines.
(b) Conditions. As a condition of each order approving
establishment of a section 20 subsidiary, a bank holding company shall
comply with the following conditions.
(1) Capital. (i) A bank holding company shall
maintain adequate capital on a fully consolidated basis. If operating a
section 20 authorized to underwrite and deal in all types of debt and
equity securities, a bank holding company shall maintain strong capital
on a fully consolidated basis.
(ii) In the event that a bank or thrift affiliate of a section 20
subsidiary shall become less than well capitalized (as defined in
section 38 of the Federal Deposit Insurance Act, 12 U.S.C. 1831o), and
the bank holding company shall fail to restore it promptly to the well
capitalized level, the Board may, in its discretion, reimpose the
funding, credit extension and credit enhancement firewalls contained in
its 1989 order allowing underwriting and dealing in bank-ineligible
securities,{1}
{1Firewalls 5--8, 19, 21 and 22 of J.P. Morgan & Co., The
Chase Manhattan Corp., Bankers Trust New York Corp., Citicorp, and
Security Pacific Corp., 75 Federal Reserve Bulletin 192, 214--16
(1989).}
or order the bank holding company to divest the section 20 subsidiary.
(iii) A foreign bank that operates a branch or agency in the
United States shall maintain strong capital on a fully consolidated
basis at levels above the minimum levels required by the Basle Capital
Accord. In the event that the Board determines that the foreign bank's
capital has fallen below these levels and the foreign bank fails to
restore its capital position promptly, the Board may, in its
discretion, reimpose the funding, credit extension and credit
enhancement firewalls contained in its 1990 order allowing foreign
banks to underwrite and deal in bank-ineligible
securities,{2}
{2Firewalls 5--8, 19, 21 and 22 of Canadian Imperial Bank
of Commerce, The Royal Bank of Canada, Barclays PLC and Barclays Bank
PLC, 76 Federal Reserve Bulletin 158, (1990).}
or order the foreign bank to divest the section 20 subsidiary.
(2) Internal controls. (i) Each bank holding company
or foreign bank shall cause it subsidiary banks, thrifts, branches or
agencies{3}
{3The terms "branch" and "agency" refer to a U.S.
branch and agency of a foreign bank.}
to adopt policies and procedures, including appropriate limits on
exposure, to govern their participation in transactions underwritten or
arranged by a section 20 affiliate.
(ii) Each bank holding company or foreign bank shall ensure that
an independent and thorough credit evaluation has been undertaken in
connection with participation by a bank, thrift, or branch or agency in
such transactions, and that adequate documentation of that evaluation
is maintained for review by examiners of the appropriate federal
banking agency and the Federal Reserve.
(3) Interlocks restriction. (i) Directors, officers
or employees of a bank or thrift subsidiary of a bank holding company,
or a bank or thrift subsidiary or branch or agency of a foreign bank,
shall not serve as a majority of the board of directors or the chief
executive officer of an affiliated section 20 subsidiary.
(ii) Directors, officers or employees of a section 20 subsidiary
shall not serve as a majority of the board of directors or the chief
executive officer of an affiliated bank or thrift subsidiary or branch
or agency, except that the manager of a branch or agency may act as a
director of the underwriting subsidiary.
(iii) For purposes of this standard, the manager of a branch or
agency of a foreign bank generally will be considered to be the chief
executive officer of the branch or agency.
(4) Customer disclosure--(i) Disclosure to
section 20 customers. A section 20 subsidiary shall provide, in
writing, to each of its retail
customers,{4}
{4For purposes of this operating standard, a retail customer is
any customer that is not an "accredited investor" as defined in
17 CFR 230.501(a).}
at the time an investment account is opened, the same minimum
disclosures, and obtain the same customer acknowledgement, described in
the Interagency Statement on Retail Sales of Nondeposit Investment
Products (Statement) as applicable in such situations. These
disclosures must be
{{12-31-07 p.6110.28-W}}provided regardless of whether the
section 20 subsidiary is itself engaged in activities through
arrangements with a bank that is covered by the Statement.
(ii) Disclosures accompanying investment advice. A
director, officer, or employee of a bank, thrift, branch or agency may
not express an opinion on the value or the advisability of the purchase
or the sale of a bank-ineligible security that he or she knows is being
underwritten or dealt in by a section 20 affiliate unless he or she
notifies the customer of the affiliate's role.
(5) Intra-day credit. Any intra-day extension of
credit to a section 20 subsidiary by an affiliated bank, thrift, branch
or agency shall be on market terms consistent with section 23B of the
Federal Reserve Act.
(6) Restriction on funding purchases of securities during
underwriting period. No bank, thrift, branch or agency shall
knowingly extend credit to a customer secured by, or for the purpose of
purchasing, any bank-ineligible security that a section 20 affiliate is
underwriting or has underwritten within the past 30 days, unless:
(i) The extension of credit is made pursuant to, and consistent
with any conditions imposed in a preexisting line of credit that was
not established in contemplation of the underwriting; or
(ii) The extension of credit is made in connection with clearing
transactions for the section 20 affiliate.
(7) Reporting requirement. (i) Each bank holding
company or foreign bank shall submit quarterly to the appropriate
Federal Reserve Bank any FOCUS report filed with the NASD or other
self-regulatory organizations, and any information required by the
Board to monitor compliance with these operating standards and section
20 of the Glass-Steagall Act, on forms provided by the Board.
(ii) In the event that a section 20 subsidiary is required to
furnish notice concerning its capitalization to the Securities and
Exchange Commission pursuant to 17 CFR 240.17a--11, a copy of the
notice shall be filed concurrently with the appropriate Federal Reserve
Bank.
(8) Foreign banks. A foreign bank shall ensure that
any extension of credit by its branch or agency to a section 20
affiliate, and any purchase by such branch or agency, as principal or
fiduciary, of securities for which a section 20 affiliate is a
principal underwriter, conforms to sections 23A and 23B of the Federal
Reserve Act, and that its branches and agencies not advertise or
suggest that they are responsible for the obligations of a section 20
affiliate, consistent with section
23B(c) of the Federal Reserve Act.
[Section 225.200 added at 62 Fed. Reg. 45306, August 27, 1997,
effective October 27, 1997; amended at 63 Fed. Reg. 14804, March 27,
1998]
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