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6000 - Bank Holding Company Act
INTERPRETATIONS
§ 225.101 Bank holding company's subsidiary banks owning shares
of nonbanking companies.
(a) The Board's opinion has been requested on the following related
matters under the Bank Holding Company Act of 1956.
(b) The question is raised as to whether shares in a nonbanking
company which were acquired by a banking subsidiary of the bank holding
company many years ago when their acquisition was lawful and are now
held as investments, and which do not include more than 5 percent of
the outstanding voting securities of such nonbanking company and do not
have a value greater than 5 percent of the value of the bank holding
company's total assets, are exempted from the divestment requirements
of the Act by the provisions of section 4(c)(5) of the Act.
(c) In the Board's opinion, this exemption is as applicable to such
shares when held by a banking subsidiary of a bank holding company as
when held directly by the bank holding company itself. While the
exemption specifically refers only to shares held or acquired by the
bank holding company, the prohibition of the Act against retention of
nonbanking interests applies to indirect as well as direct ownership of
shares of a nonbanking company, and, in the absence of a clear mandate
to the contrary, any exception to this prohibition should be given
equal breadth with the prohibition. Any other interpretation would lead
to unwarranted results.
(d) Although certain of the other exemptions in
section 4(c) of the Act
specifically refer to shares held or acquired by banking subsidiaries,
an analysis of those exemptions suggests that such specific reference
to banking subsidiaries was for the purpose of excluding
{{2-28-06 p.6110.28-L-1}}nonbanking subsidiaries from such
exemptions, rather than for the purpose of providing an inclusionary
emphasis on banking subsidiaries.
(e) It should be noted that the Board's view as to this question
should not be interpreted as meaning that each banking subsidiary could
own up to 5 percent of the stock of the same nonbanking organization.
In the Board's opinion the limitations set forth in section 4(c)(5)
apply to the aggregate amount of stock held in a particular
organization by the bank holding company itself and by all of its
subsidiaries.
(f) Secondly, question is raised as to whether shares in a
nonbanking company acquired in satisfaction of debts previously
contracted (d.p.c.) by a banking subsidiary of the bank holding company
may be retained if such shares meet the conditions contained in section
4(c)(5) as to value and amount, notwithstanding the requirement of
section 4(c)(2) that shares acquired d.p.c. be disposed of within two
years after the date of their acquisition or the date of the Act,
whichever is later. In the Board' s opinion, the 5 percent exemption
provided by section 4(c)(5) covers any shares, including shares
acquired d.p.c., that meet the conditions set forth in that exemption,
and, consequently, d.p.c. shares held by a banking subsidiary of a bank
holding company which meet such conditions are not subject to the
two-year disposition requirement prescribed by section 4(c)(2),
although any such shares would, of course, continue to be subject to
such requirement for disposition as may be prescribed by provisions of
any applicable banking laws or by the appropriate bank supervisory
authorities.
(g) Finally, question is raised as to whether shares held by
banking subsidiaries of the bank holding company in companies holding
bank premises of such subsidiaries are exempted from the divestment
requirements of section 4(c)(1) of the Act. It is the Board's view that
section 4(c)(1), exempting shares owned or acquired by a bank holding
company in any company engaged solely in holding or operating
properties used wholly or substantially by any subsidiary bank, is to
be read and interpreted, like section 4(c)(5), as applying to shares
owned indirectly by a bank holding company through a banking subsidiary
as well as to shares held directly by the bank holding company. A
contrary interpretation would impair the right that member banks
controlled by bank holding companies would otherwise have to invest,
subject to the limitations of section 24A of the Federal Reserve Act,
in stock of companies holding their bank premises; and such a result
was not, in the Board's opinion, intended by the Bank Holding Company
Act.
[Codified to 12 C.F.R. § 225.101]
[Source: 21 Fed. Reg. 10472, December 29,
1956]
§ 225.102 Bank holding company indirectly owning nonbanking
company through subsidiaries.
(a) The Board of Governors has been requested for an opinion
regarding the exemptions contained in
section 4(c)(5) of the Bank
Holding Company Act of 1956. It is stated that Y Company is an
investment company which is not a bank holding company and which is not
engaged in any business other than investing in securities, which
securities do not include more than 5 per centum of the outstanding
voting securities of any company and do not include any asset having a
value greater than 5 per centum of the value of the total assets of X
Corporation, a bank holding company. It is stated that direct ownership
by X Corporation of voting shares of Y Company would be exempt by
reason of 4(c)(5) from the prohibition of section 4 of the Act against
ownership by bank holding companies of nonbanking assets.
(b) It was asked whether it makes any difference that the shares of
Y Company are not owned directly by X Corporation but instead are owned
through Subsidiaries A and B. X Corporation owns all the voting shares
of Subsidiary A, which owns one-half of the voting shares of Subsidiary
B. Subsidiaries A and B each own one-third of the voting shares of Y
Company.
(c) Section 4(c)(5) is divided into two parts. The first part
exempts the ownership of securities of nonbanking companies when the
securities do not include more than 5 percent of the voting securities
of the nonbanking company and do not have a value greater than 5
percent of the value of the total assets of the bank holding company.
The second part exempts the ownership of securities of an investment
company which is not a bank holding
{{2-28-06 p.6110.28-L-2}}company and is not engaged in any
business other than investing in securities, provided the securities
held by the investment company meet the 5 percent tests mentioned
above.
(d) In § 225.101, the Board expressed the opinion that the first
exemption in section 4(c)(5):
* * * is as applicable to such shares when held by a
banking subsidiary of a bank holding company as when held directly by
the bank holding company itself. While the exemption specifically
refers only to shares held or acquired by the bank holding company, the
prohibition of the Act against retention of nonbanking interests
applies to indirect as well as direct ownership of shares of a
nonbanking company, and, in the absence of a clear mandate to the
contrary, any exception to this prohibition should be given equal
breadth with the prohibition. Any other interpretation would lead to
unwarranted results.
(e) The Board is of the view that the principles stated in that
opinion are also applicable to the second exemption in section 4(c)(5),
and that they apply whether or not the subsidiary owning the shares is
a banking subsidiary. Accordingly, on the basis of the facts presented,
the Board is of the opinion that the second exemption in section
4(c)(5) applies to the indirect ownership by X Corporation of shares of
Y Company through Subsidiaries A and B.
[Codified to 12 C.F.R. § 225.102]
[Source: 22 Fed. Reg. 2533, April 13,
1957]
§ 225.103 Bank holding company acquiring stock by dividends,
stock splits or exercise of rights.
(a) The Board of Governors has been asked whether a bank holding
company may receive bank stock dividends or participate in bank stock
splits without the Board's prior approval, and whether such a company
may exercise, without the Board's prior approval, rights to subscribe
to new stock issued by banks in which the holding company already owns
stock.
(b) Neither a stock dividend nor a stock split results in any
change in a stockholder's proportional interest in the issuing company
or any increase in the assets of that company. Such a transaction would
have no effect upon the extent of a holding company's control of the
bank involved; and none of the five factors required by the Bank
Holding Company Act to be considered by the Board in approving a stock
acquisition would seem to have any application. In view of the
objectives and purposes of the Act, the word "acquire" would not
seem reasonably to include transactions of this kind.
(c) On the other hand, the exercise by a bank holding company of
the right to subscribe to an issue of additional stock of a bank could
result in an increase in the holding company's proportional interest in
the bank. The holding company would voluntarily pay additional funds
for the extra shares and would "acquire" the additional stock
even under a narrow meaning of that term. Moreover, the exercise of
such rights would cause the assets of the issuing company to be
increased and in a sense, therefore, the "size or extent" of the
bank holding company system would be expanded.
(d) In the circumstances, it is the Board's opinion that receipt of
bank stock by means of a stock dividend or stock split, assuming no
change in the class of stock, does not require the Board's prior
approval under the Act, but that purchase of bank stock by a bank
holding company through the exercise of rights does require the Board's
prior approval, unless one of the exceptions set forth in section 3(a)
is applicable.
[Codified to 12 C.F.R. § 225.103]
[Source: 22 Fed. Reg. 7461, September 19,
1957]
§ 225.104 "Services" under
section 4(c)(1) of Bank Holding Company
Act.
(a) Section 4(c)(1) of the Bank Holding Company Act, among other
things, exempts from the nonbanking divestment requirements of section
4(a) of the Act shares of a company engaged "solely in the business
of furnishing services to or performing services for" its bank
holding company or subsidiary banks thereof.
(b) The Board of Governors has had occasion to express opinions as
to whether this section of law applies to the following two sets of
facts:
{{2-28-06 p.6110.28-L-3}}
(1) In the first case, Corporation X, a nonbanking subsidiary of
a bank holding company (Holding Company A), was engaged in the business
of purchasing installment paper suitable for investment by banking
subsidiaries of Holding Company A. All installment paper purchased by
Corporation X was sold by it to a bank which is a subsidiary of Holding
Company A, without recourse, at a price equal to the cost of the
installment paper to Corporation X, and with compensation to the latter
based on the earnings from such paper remaining after certain reserves,
expenses and charges. The subsidiary bank sold participations in such
installment paper to the other affiliated banks of Holding Company A
which desired to participate. Purchases by Corporation X consisted
mainly of paper insured under Title I of the National Housing Act and,
in addition, Corporation X purchased time payment contracts covering
sales of appliances by dealers under contractual arrangements with
utilities, as well as paper covering home improvements which was not
insured. Pursuant to certain service agreements, Corporation X made all
collections, enforced guaranties, filed claims under Title I insurance
and performed other services for the affiliated banks. Also Corporation
X rendered to banking subsidiaries of Holding Company A various
accounting, statistical and advisory services such as payroll, life
insurance and budget loan installment account.
(2) In the second case, Corporation Y, a nonbanking subsidiary of
a bank holding company (Holding Company B, which was also a bank),
solicited business on behalf of Holding Company B from dealers,
throughout several adjoining or contiguous States, who made time sales
and desired to convert their time sales paper into cash; but
Corporation Y made no loans or purchases of sales contracts and did not
discount or advance money for time sales obligations. Corporation Y
investigated credit standings of purchasers obligated on time sale
contracts to be acquired by Holding Company B. Corporation Y
received from dealers the papers offered by them and inspected
such papers to see that they were in order, and transmitted to Holding
Company B for its determination to purchase, including, in some cases,
issuance of drafts in favor of dealers in order to facilitate their
prompt receipt of payment for installment paper purchased by Holding
Company B. Corporation Y made collections of delinquent paper or
delinquent installments, which sometimes involved repossession and
resale of the automobile or other property which secured the paper.
Also, upon request of purchasers obligated on paper held by Holding
Company B, Corporation Y transmitted installment payments to Holding
Company B. Holding Company B reimbursed Corporation Y for its actual
costs and expenses in performing the services mentioned above,
including the salaries and wages of all Corporation Y officers and
employees.
(c) While the term "services" is sometimes used in a broad
and general sense, the legislative history of the Bank Holding Company
Act indicates that in section 4(c)(1) the word was meant to be somewhat
more limited in its application. An early version of the bill
specifically exempted companies engaged in serving the bank holding
company and its subsidiary banks in "auditing, appraising,
investment counseling." The statute as finally enacted does not
expressly mention any specific type of servicing activity for
exemption. In recommending the change, the Senate Banking and Currency
Committee stated that the types of services contemplated are "in the
fields of advertising, public relations, developing new business,
organization, operations, preparing tax returns, personnel, and many
others," which indicates that latitude should be given to the range
of activities contemplated by this section beyond those specifically
set forth in the early draft of the bill. (84th Cong., 2d Sess., Senate
Report 1095, Part 2, p. 3.) It nevertheless seems evident that Congress
intended such services to be types of activities generally comparable
to those mentioned above from the early bill ("auditing, appraising,
investment counseling") and in the excerpt from the Committee Report
on the later bill ("advertising, public relations, developing new
business, organization, operations, preparing tax returns, personnel,
and many others"). This legislative history and the context in which
the term "services" is used in section 4(c)(1) seem to suggest
that the term was in general intended to refer to servicing operations
which a bank could carry on itself, but which the bank or its holding
company chooses to have done through another organization. Moreover,
the report of the Senate Banking and Currency Committee indicated that
the types of servicing permitted under section 4(c)(1) are to be
distinguished from activities of a "financial, fiduciary, or
insurance nature," such as those which might be considered for
possible exemption under section 4(c)(6) of the Act.
(d) With respect to the first set of facts, the Board expressed the
opinion that certain of
{{2-28-06 p.6110.28-L-4}}the activities of Corporation X, such
as the accounting, statistical and advisory services referred to above,
may be within the range of servicing activities contemplated by section
4(c)(1), but that this would not appear to be the case with the main
activity of Corporation X, which was the purchase of installment paper
and the resale of such paper at cost, without recourse, to banking
subsidiaries of Holding Company A. This latter and basic activity of
Corporation X appeared to involve essentially a financial relationship
between it and the banking subsidiaries of Holding Company A and
appeared beyond the category of servicing exemptions contemplated by
section 4(c)(1) of the Act. Accordingly, it was the Board's view that
Corporation X could not be regarded as qualifying under section 4(c)(1)
as a company engaged "solely in the business of furnishing services
to or performing services for" Holding Company A or subsidiary banks
thereof.
(e) With respect to the second set of facts, the Board expressed
the opinion that some of the activities engaged in by Corporation Y
were clearly within the range of servicing activities contemplated by
section 4(c)(1). There was some question as to whether or not some of
the other activities of Corporation Y mentioned above could meet the
test, but on balance, it seemed that all such activities probably were
activities in which Holding Company B, which as already indicated was a
bank, could itself engage, at the present locations of Corporation Y,
without being engaged in the operation of bank branches at those
locations. In the circumstances, while the question was not free from
doubt, the Board expressed the opinion that the activities of
Corporation Y were those of a company engaged "solely in the
business of furnishing services to or performing services for"
Holding Company B within the meaning of section 4(c)(1) of the Act, and
that, accordingly, the control by Holding Company B of shares in
Corporation Y was exempted under that section.
[Codified to 12 C.F.R. § 225.104]
[Source: 23 Fed. Reg. 2675, May 23, 1958]
§ 225.107 Acquisition of stock in small business investment
company.
(a) A registered bank holding company requested an opinion by the
Board of Governors with respect to whether that company and its banking
subsidiaries may acquire stock in a small business investment company
organized pursuant to the Small Business Investment Act of 1958.
(b) It is understood that the bank holding company and its
subsidiary banks propose to organize and subscribe for stock in a small
business investment company which would be chartered pursuant to the
Small Business Investment Act of 1958 which provides for long-term
credit and equity financing for small business concerns.
(c) Section 302(b) of the Small Business Investment Act authorizes
national banks, as well as other member banks and nonmember insured
banks to the extent permitted by applicable State law, to invest
capital in small business investment companies not exceeding one
percent of the capital and surplus of such banks.
Section 4(c)(4) of the Bank
Holding Company Act exempts from the prohibitions of section 4 of the
Act "shares which are of the kinds and amounts eligible for
investment by national banking associations under the provisions of
section 5136 of the Revised Statutes." Section 5136 of the Revised
Statutes (paragraph "Seventh") in turn provides, in part, as
follows:
"Except as hereinafter provided or otherwise permitted
by law, nothing herein contained shall authorize the purchase by
the association for its own account of any shares of stock of any
corporation." (Italics supplied.)
Since the shares of a small business investment company are of a
kind and amount expressly made eligible for investment by a national
bank under the Small Business Investment Act of 1958, it follows,
therefore, that the ownership or control of such shares by a bank
holding company would be exempt from the prohibitions of section 4 of
the Bank Holding Company Act by virtue of the provisions of section
4(c)(4) of that Act. Accordingly, the ownership or control of such
shares by the bank holding company would be exempt from the
prohibitions of section 4 of the Bank Holding Company Act.
(d) An additional question is presented, however, as to whether
section 6 of the Bank Holding Company Act prohibits banking
subsidiaries of the bank holding company from purchasing stock in a
small business investment company where the latter is a
"subsidiary" under that Act.
{{2-28-06 p.6110.28-L-5}}
(e) Section 6(a)(1) of the Act makes it unlawful for a bank to
invest any of its funds in the capital stock of any other subsidiary of
the bank holding company. However, section 6(a)(1) was, in effect,
amended by section 302(b) of the Small Business Investment Act (15
U.S.C. 682) as amended by the Act of June 11, 1960 (Public Law 86-502)
so as to nullify this prohibition when the "subsidiary" is a
small business investment company.
(f) Accordingly, section 6 of the Bank Holding Company Act does not
prohibit banking subsidiaries of the bank holding company from
purchasing stock in a small business investment company organized
pursuant to the Small Business Investment Act of 1958, where that
company is or will be a subsidiary of the bank holding company.
[Codified to 12 C.F.R. § 225.107]
[Source: 25 Fed. Reg. 7485, August 9,
1960]
§ 225.109 "Services" under
section 4(c)(1) of Bank Holding
Company Act.
(a) The Board of Governors has been requested by a bank holding
company for an interpretation under section 4(c)(1) of the Bank Holding
Company Act which, among other things, exempts from the nonbanking
divestment requirements of section 4(a) of the Act, shares of a company
engaged "solely in the business of furnishing services to or
performing services for" its bank holding company or subsidiary
banks thereof.
(b) It is understood that a nonbanking subsidiary of the holding
company engages in writing comprehensive automobile insurance (fire,
theft, and collision) which is sold only to customers of a subsidiary
bank of the holding company in connection with the bank's retail
installment loans; that when payment is made on a loan secured by a
lien on a motor vehicle, renewal policies are not issued by the
insurance company; and that the insurance company receives the usual
agency commissions on all comprehensive automobile insurance written
for customers of the bank.
(c) It is also understood that the insurance company writes credit
life insurance for the benefit of the bank and its installment-loan
customers; that each insured debtor is covered for an amount equal to
the unpaid balance of his note to the bank, not to exceed $5,000; that
as the note is reduced by regular monthly payments, the amount of
insurance is correspondingly reduced so that at all times the debtor is
insured for the unpaid balance of his note; that each insurance
contract provides for payment in full of the entire loan balance upon
the death or permanent disability of the insured borrower; and that
this credit life insurance is written only at the request of, and
solely for, the bank's borrowing customers. It is further understood
that the insurance company engages in no other activity.
(d) As indicated in § 225.104 (23 F.R. 2675), the term
""services,'' while sometimes used in a broad and general sense,
appears to be somewhat more limited in its application in section
4(c)(1) of the Bank Holding Company Act. Unlike an early version of the
Senate bill (S. 2577, before amendment), the Act as finally enacted
does not expressly mention any type of servicing activity for
exemption. The legislative history of the Act, however, as indicated in
the relevant portion of the report of the Senate Banking and Currency
Committee on amended S. 2577 (84th Cong., 2d Sess., Sente Report 1095,
Part 2, p. 3) makes it evident that Congress had in mind the exemption
of services comparable to the types of activities mentioned expressly
in the early Senate bill ("auditing, appraising, investment
counseling") and in the Committee Report on the later bill
("advertising, public relations, developing new business,
organization, operations, preparing tax returns, personnel, and many
others"). Furthermore, this Committee Report expressly stated that
the provision of section 4(c)(1) with respect to "furnishing
services to or performing services for" was not intended to supplant
the exemption contained under section 4(c)(6) of the Act.
(e) The only activity of the insurance company (writing
comprehensive automobile insurance and credit life insurance) appears
to involve an insurance relationship between it and a banking
subsidiary of the holding company which the legislative history clearly
indicates does not come within the meaning of the phrase "furnishing
services to or performing services for" a bank holding company or
its banking subsidiaries.
(f) Accordingly, it is the Board's view that the insurance company
could not be regarded as qualifying as a company engaged "solely in
the business of furnishing services to or performing services for"
the bank holding company or banks with respect to which the latter is a
bank holding company.
{{2-28-06 p.6110.28-L-6}}
[Codified to 12 C.F.R. § 225.109]
[Source: 23 Fed. Reg. 9017, November 20,
1958]
§ 225.111 Limit on investment by bank holding company system in
stock of small business investment companies.
(a) Under the provisions of section
4(c)(5) of the Bank Holding Company Act, as amended (12 U.S.C.
1843), a bank holding company may acquire shares of nonbank companies
"which are of the kinds and amounts eligible for investment" by
national banks. Pursuant to section 302(b) of the Small Business
Investment Act of 1958 (15 U.S.C. 682(b)), as amended by Title II of
the Small Business Act Amendments of 1967 (Public Law 90-104, 81 Stat.
268, 270), a national bank may invest in stock of small business
investment companies (SBICs) subject to certain restrictions.
(b) On the basis of the foregoing statutory provisions, it is the
position of the Board that a bank holding company may acquire direct or
indirect ownership or control of stock of an SBIC subject to the
following limits:
(1) The total direct and indirect investments of a bank holding
company in stock of SBICs may not exceed:
(i) With respect to all stock of SBICs owned or controlled
directly or indirectly by a subsidiary bank, 5 percent of that bank's
capital and surplus;
(ii) With respect to all stock of SBICs owned directly by a bank
holding company that is a bank, 5 percent of that bank's capital and
surplus; and
(iii) With respect to all stock of SBICs otherwise owned or
controlled directly or indirectly by a bank holding company, 5 percent
of its proportionate interest in the capital and surplus of each
subsidiary bank (that is, the holding company's percentage of that
bank's stock times that bank's capital and surplus) less that bank's
investment in stock of SBICs; and
(2) A bank holding company may not acquire direct or indirect
ownership or control of 50 percent or more of the shares of any class
of equity securities of an SBIC that have actual or potential voting
rights.
(c) A bank holding company or a bank subsidiary that acquired
direct or indirect ownership or control of 50 percent or more of any
such class of equity securities prior to January 9, 1968, is not
required to divest to a level below 50 percent. A bank that acquired 50
percent or more prior to January 9, 1968, may become a subsidiary in a
holding company system without any necessity for divesting to a level
below 50 percent: Provided, That such action does not result
in the bank holding company acquiring control of a percentage greater
than that controlled by such bank.
[Codified to 12 C.F.R. § 225.111]
[Source: 33 Fed. Reg. 6967, May 9,
1968]
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