[Federal Register Volume 59, Number 51 (Wednesday, March 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6050]


[[Page Unknown]]

[Federal Register: March 16, 1994]


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FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-0832]

 

Revisions Regarding Tie-in Prohibitions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board is seeking public comment on proposed amendments to 
Regulation Y that would permit bank holding companies to offer 
discounts on brokerage commissions if the customer obtains a 
traditional bank product (a loan, discount, deposit, or trust service) 
from any affiliate. The Board recently approved an exemption permitting 
discounts on brokerage commissions for First Union Corporation, 
Charlotte, North Carolina (First Union), and the proposed rule would 
make it available to bank holding companies generally, thus avoiding 
the need for action on individual requests.
    The proposal also seeks comment on whether the Board should adopt 
an exception to the antitying prohibitions to permit a bank to discount 
a traditional bank product if the customer obtains another traditional 
bank product from an affiliate of the bank. This exemption extends to 
affiliates the statutory exemption that permits a bank to offer 
discounts on packages of traditional bank products. The Board has 
received several requests for exemptions involving individual 
traditional bank products and believes that such an exemption is more 
appropriately addressed in rulemaking.

DATES: Comments must be submitted on or before April 14, 1994.

ADDRESSES: Comments, which should refer to Docket No. R-0832, may be 
mailed to the Board of Governors of the Federal Reserve System, 20th 
and Constitution Avenue, NW., Washington, DC 20551, to the attention of 
Mr. William W. Wiles, Secretary; or delivered to room B-2223, Eccles 
Building, between 8:45 a.m. and 5:15 p.m. Comments may be inspected in 
room MP-500 between 9:00 a.m. and 5:00 p.m., except as provided in 
Sec.  261.8 of the Board's Rules Regarding Availability of Information, 
12 CFR 261.8.

FOR FURTHER INFORMATION CONTACT: Robert deV. Frierson, Managing Senior 
Counsel (202/452-3711); Laurie S. Schaffer, Senior Attorney (202/452-
2246), or David S. Simon, Attorney (202/452-3611), Legal Division; or 
Anthony Cyrnak, Economist, (202/452-2917), Division of Research and 
Statistics, Board of Governors. For the hearing impaired only, 
Telecommunication Device for the Deaf (TDD), Dorothea Thompson (202/
452-3544), Board of Governors of the Federal Reserve System, 20th & C 
Street, NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

Background

    Section 106(b) of the Bank Holding Company Act Amendments of 1970 
(12 U.S.C. 1971 et seq.) (Section 106) generally prohibits banks from 
tying a product or service to another offered by the bank or any of its 
affiliates. A prohibited tie-in occurs if a bank: (1) varies the 
consideration for credit or other service on the condition that the 
customer obtain some additional service from the bank or any of its 
affiliates; or (2) actually requires the customer to purchase another 
product or service from the bank or any of its affiliates as a 
condition for providing the customer the first product or service. In 
1971, the Board applied these antitying prohibitions to bank holding 
companies and their nonbank subsidiaries as if they were banks.
    The statute provides an exemption permitting a bank to tie a 
product with a traditional bank product\1\ offered from that bank, but 
not from any of its affiliates. Thus, Section 106 permits a bank to 
discount the consideration paid for credit if a customer also obtains a 
traditional banking product from that bank (but not an affiliate of 
that bank).
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    \1\ These products are defined for purposes of tie-in 
prohibitions as ``a loan, discount, deposit, or trust service.'' 12 
U.S.C. 1972(1)(A).
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    Section 106 provides that the Board may, by regulation or order, 
permit exceptions from the antitying prohibition where the Board 
determines that an exception will not be contrary to the purposes of 
the section.

Analysis of Proposed Amendments

    Discounts on Brokerage Services. The Board recently approved an 
exemption for a brokerage subsidiary of a First Union bank to offer 
discounts on commissions for brokerage services to customers who 
maintain a minimum balance in accounts at any First Union bank.\2\ The 
Board found that the market for retail brokerage services is national 
in scope and highly competitive therefore making it unlikely that First 
Union--or any other provider of brokerage services--could exercise 
sufficient market power to impair competition in the market for 
traditional banking services. The Board also noted that, under 
antitrust precedent, concerns over these types of arrangements were 
substantially reduced where the buyer is free to take either product by 
itself even though the seller also may offer the two items as a unit at 
a single price.\3\ Under these circumstances, the Board concluded that 
the requested exemption was consistent with the legislative purpose of 
the statute (to prevent banks from using their economic power to lessen 
competition or engage in anticompetitive practices) and the legislative 
purpose of the Board's exemptive authority (to allow appropriate 
traditional banking practices based on sound economic analysis).
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    \2\ First Union Corporation, 80 Federal Reserve Bulletin 166 
(1994) (``First Union Order'').
    \3\ Northern Pacific R. Co. v. United States, 356 U.S. 1, 6, n.4 
(1958).
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    The Board believes that this exemption should be available to all 
bank holding companies, and the proposed rule implements this exemption 
by permitting a bank to offer a discount on brokerage services if the 
customer obtains a traditional banking product from that bank or any 
affiliate. The brokerage services and traditional banking products 
offered in the arrangement, however, could be separately purchased by 
the customer.
    Traditional Bank Products. As noted, Section 106 contains an 
exemption that permits a bank to tie a product to a traditional bank 
product so long as both products are offered by the bank itself. The 
statute does not permit a bank to tie its products to a traditional 
bank product offered by an affiliate bank or nonbank, however. The 
Board has received several requests for exemptions involving proposed 
discounts on individual traditional bank products offered by a bank and 
its affiliates.\4\ The proposal seeks comment on adopting an exception 
to the antitying restrictions of Section 106 to permit a bank to offer 
a discount on a traditional bank product it offers if the customer 
obtains another traditional bank product from an affiliate of the bank, 
provided that all the products are available for separate purchase by 
the customer.
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    \4\ A request by First Union, which would permit any First Union 
bank to vary the consideration on traditional bank products to 
customers who maintain a minimum balance in accounts at any bank 
affiliate, was published and received 10 comments. All the 
commenters favored the proposal, and several commenters requested 
the Board to broaden the exemption to include all traditional bank 
products through rulemaking.
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    The Board believes that such an exemption is consistent with the 
purposes of the statute, and the Congressional intent not to affect 
traditional banking relationships. In this regard, the Senate Report 
states that the traditional bank products exemption was intended to 
preserve a customer's ability to negotiate the price of multiple 
banking services with the bank on the basis of the customer's entire 
relationship.\5\ The Senate Report also suggests that the Board could 
use its exemptive authority to continue to allow appropriate 
traditional banking practices.\6\
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    \5\ S. Rep. No. 1084, 91st Cong., 2d Sess., 16-17 (1970) 
(``Senate Report''). The Senate Report cites the following 
application of the exemption: ``where the customer uses multiple 
banking services such as deposit, loan, fiduciary, and commercial 
accounts or facilities, the parties may be free to fix or vary the 
consideration for any services upon the existence or extent of 
utilization of such banking services.'' Senate Report at 17. Senator 
Bennett noted when introducing the tie-in amendment that 
``[c]learly, neither a bank nor its customer should be attacked 
under [Section 106] for taking advantage of the economies and 
efficiencies of full-service banking.'' 116 Cong. Rec. S15708 
(1970).
    \6\ Senate Report at 46.
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    Banks organized in a bank holding company structure currently are 
subject to regulatory burdens not imposed on single banks offering 
discounts on traditional bank products. Moreover, it does not appear to 
further the purpose of the statute to allow a bank to discount a 
product it offers if the customer has purchased a traditional bank 
product from the bank, but not to allow the discount when the customer 
has purchased the very same traditional bank product from an affiliate 
bank or nonbank. By removing this regulatory burden, the Board believes 
that consumers would benefit from costs savings realized through more 
efficient operations.
    The same efficiencies and costs savings to consumers would be 
realized by permitting discounts on traditional bank products offered 
by nonbank affiliates in a package arrangement with an affiliate bank. 
In this regard, the legislative history for provisions involving tying 
prohibitions enacted after Section 106 support these types of package 
arrangements for traditional bank products offered in combination with 
nonbanking affiliates.\7\
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    \7\ In the Competitive Equality Banking Act of 1987 (Pub. L. 
100-86), which applied the tie-in restrictions to nonbank banks, 
Congress indicated that ``the anti-tying restrictions [of Section 
106] would not be violated by tying one of these traditional banking 
services offered by a grandfathered nonbank bank to another 
traditional banking service offered by an affiliate.'' H.R. Conf. 
Rep. No. 261, 100th Cong., 1st Sess. 128-29 (1987). While this 
excerpt does not accurately reflect the literal terms of Section 
106, it lends support for the proposed extension of an exemption for 
tie-in arrangements for traditional banking services offered by a 
bank and its nonbanking affiliates or parent holding company.
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Paperwork Reduction Act

    No collections of information pursuant to section 3504(h) of the 
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) are contained in the 
proposed rule.

Regulatory Flexibility Act

    It is hereby certified that this proposed rule, if adopted as a 
final rule, will not have a significant economic impact on a 
substantial number of small entities that would be subject to the 
regulation.

List of Subjects in 12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Holding 
companies, Reporting and recordkeeping requirements, Securities.
    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR part 225 as set forth below:

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

    1. The authority citation for part 225 continues to read as 
follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3907, 3909, 3310, and 
3331-3351.

    2. In Sec.  225.4, new paragraphs (d)(3) and (d)(4) are added to 
read as follows:

Sec. 225.4   Corporate practices.

* * * * *
    (d)(1)
* * * * *
    (3) Exemption for brokerage services. A bank may vary the 
consideration charged for brokerage services on the condition or 
requirement that the customer also obtain a loan, discount, deposit, or 
trust service (but no other products) from that bank or any affiliate, 
if the brokerage services and the loan, discount, deposit, or trust 
service offered in the arrangement also are separately available for 
purchase by the customer. The exemption granted pursuant to this 
paragraph shall terminate upon a finding by the Board that the 
arrangement is resulting in anticompetitive practices.
    (4) Exemption for traditional bank products. A bank may vary the 
consideration charged for a loan, discount, deposit, or trust service 
(but no other products) on the condition or requirement that the 
customer also obtain a loan, discount, deposit, or trust service (but 
no other products) from an affiliate of that bank, if all these 
products are separately available for purchase by the customer. The 
exemption granted pursuant to this paragraph shall terminate upon a 
finding by the Board that the arrangement is resulting in 
anticompetitive practices.

* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, March 10, 1994.
Jennifer J. Johnson,
Associate Secretary of the Board.
[FR Doc. 94-6050 Filed 3-15-94; 8:45 am]
BILLING CODE 6210-01-F