[Federal Register Volume 59, Number 149 (Thursday, August 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18723]


[[Page Unknown]]

[Federal Register: August 4, 1994]


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FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-0843]

 

Revisions Regarding Tying Restrictions

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 a proposed amendment to 
the anti-tying provisions of Regulation Y. The proposed amendment would 
permit a bank holding company or its nonbank subsidiary to discount any 
of its products or services on condition that a customer obtain another 
product or service from that company or subsidiary or from any of its 
nonbank affiliates, provided that all products offered in the package 
arrangement are separately available for purchase. This exception would 
not apply when any product in the arrangement is offered by a bank. The 
board believes that this will increase the efficiency with which 
banking organizations can deliver banking services.

DATES: Comments must be submitted on or before September 17, 1994.

ADDRESSES: Comments should refer to Docket No. R-0843, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, D.C. 20551. Comments also may be delivered to room B-2222 
of the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to 
the guard station in the Eccles Building courtyard on 20th Street, N.W. 
(between Constitution Avenue and C Street) at any time. Comments may be 
inspected in room MP-500 between 9:00 a.m. and 5:00 p.m. weekdays, 
except as provided in 12 CFR 261.8 of the Board's rules regarding 
availability of information.

FOR FURTHER INFORMATION CONTACT: Robert deV. Frierson, Assistant 
General Counsel (202/452-3711); Gregory A. Baer, Managing Senior 
Counsel (202/452-3236), 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 of the Federal Reserve 
System. For the hearing impaired only, Telecommunication Device for the 
Deaf (TDD), Dorothea Thompson (202/452-3544).

SUPPLEMENTARY INFORMATION:

Background

    Section 106(b) of the Bank Holding Company Act Amendments of 1970 
(12 U.S.C. 1972) generally prohibits a bank from tying a product or 
service to another product or service offered by the bank or by any of 
its affiliates.1 In 1971, the Board applied these tying 
restrictions to bank holding companies and their nonbank subsidiaries 
as if they were banks. 12 CFR 225.4(d)(1); 36 FR 10777, 10778 (1971).
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    \1\ A prohibited tie-in occurs if a bank: (1) varies the 
consideration for a product or service (the ``tying product'') on 
the condition that the customer obtain some additional product or 
service (the ``tied product'') from the bank or from any of its 
affiliates; or (2) as a condition for providing a customer a product 
or service, requires the customer to purchase another product or 
service from the bank or from any of its affiliates.
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    On March 11, 1994, the Board requested public comment on proposed 
amendments to Regulation Y, including an extension of the so-called 
traditional bank product exception of section 106 to package 
arrangements with affiliates. 59 FR 12202 (March 16, 1994). In addition 
to comments on the proposed rule, which is being made final in a 
separate document published elsewhere in this issue of the Federal 
Register, the Board received various requests for interpretation or 
extension of regulatory exceptions to the tying restrictions imposed by 
section 106 and Regulation Y. In particular, commenters urged the Board 
to reconsider its extension of the tying restrictions of section 106 to 
bank holding companies and their nonbank subsidiaries.

Proposed Amendments

    After considering those requests, the Board has decided to propose 
an amendment to its anti-tying regulation to conform it more closely to 
section 106 and its focus on tying by banks. Under the proposed rule, 
bank holding companies and their nonbanking subsidiaries would be 
permitted to offer discounts on packaged products when: (1) Both the 
tying and tied products2 are offered by bank holding companies or 
their nonbanking subsidiaries--in other words, where no affiliated bank 
is involved in the arrangement; and (2) both the tying and tied 
products are separately available.3 In cases that do not qualify 
for this (or some other) exception, the general restrictions of section 
106 and Regulation Y would continue to apply; for example, if the 
package arrangement involved a product offered by an affiliated bank, 
the exception would not apply and the nonbanking subsidiary could only 
offer discount package arrangements involving exclusively traditional 
bank products or securities brokerage services, under exceptions 
recently adopted by the Board and to take effect in thirty days. The 
antitrust laws also would continue to apply in all cases.
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    \2\ The ``tying'' product is the product whose consideration is 
being varied or whose availability is being conditioned. The 
``tied'' product is the product that must be purchased in order to 
receive a discount on the tying product or become eligible to 
purchase the tying product.
    \3\ The Board recognizes that requiring the products to be 
separately available effectively requires that the exception be 
limited to discounting, and vice versa, but is proposing both 
conditions in order to avoid any ambiguity.
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    The Board believes that the proposed exception is consistent with 
the terms and purposes of section 106, is justified by the competitive 
environment in which nonbanking subsidiaries generally operate, and is 
potentially beneficial both to banking organizations and consumers.

Consistency With Section 106

    By its terms, section 106 applies only when a bank offers the tying 
product--that is, when a bank is varying the consideration or 
conditioning the availability of a product in order to create an 
incentive for the customer to purchase another product from the bank or 
an affiliate. This coverage was consistent with the stated purpose of 
section 106: To prevent banks from using their market power over 
certain products to gain an unfair competitive advantage in other 
products. See, e.g., S. Rep. No. 1084, 91st Cong., 2d Sess., 16 (1970) 
(section 106 was ``intended to provide specific statutory assurance 
that the use of the economic power of a bank will not lead to a 
lessening of competition or unfair competitive practices''). The 
proposed exception would apply only when nonbanks are offering the 
packaged products. Such arrangements are not covered by the terms of 
section 106; nor do they raise the specific concerns that section 106 
was intended to address.

Consistency With Regulation Y

    The tying restrictions of section 106 were imposed by the Bank 
Holding Company Act Amendments of 1970 in conjunction with an extension 
of new nonbanking powers to bank holding companies and their nonbank 
subsidiaries. The potential for anticompetitive behavior by such 
subsidiaries--which were then uncommon--was uncertain pending 
implementation of the Act, and the Board therefore adopted a 
prophylactic rule in applying the restrictions of section 106 to bank 
holding companies and their nonbank subsidiaries.
    Much has changed, however, since adoption of that rule. Competition 
in most financial markets has increased substantially since 1971, and 
through its experience in the supervision of nonbank subsidiaries of 
bank holding companies, the Board has been able to assess the role of 
nonbanking subsidiaries in those markets. The Board believes that 
neither bank holding companies nor their nonbanking subsidiaries 
generally appear to possess sufficient market power in the products 
that they offer to impair competition. For example, the ``laundry 
list'' activities in which bank holding companies and their nonbanking 
subsidiaries are permitted to engage are generally conducted in 
competitive national or regional markets that are characterized by 
large numbers of actual or potential competitors and low barriers to 
entry.4 In such markets, the potential for a market participant to 
gain a competitive advantage through tying is substantially reduced.
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    \4\ The ``laundry list'' activities are specified by regulation. 
See 12 CFR 225.25.
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    Moreover, if the Board's proposal were adopted, ties involving bank 
holding companies and their nonbanking subsidiaries would, as noted, 
continue to be restricted by the federal antitrust laws (primarily the 
Clayton and Sherman Acts)--the same restrictions that bind their 
competitors. In addition, section 106 would continue to restrict tying 
by banks, and the Board would continue to apply special restrictions to 
tying by a nonbank when the tied product is offered by an affiliated 
bank. As a final protection, the Board would retain the authority to 
terminate or modify any exception that resulted in anticompetitive 
practices.
    Furthermore, the Board is proposing to rescind its special 
restrictions on tying between nonbanks only where the products are 
separately available and a discount is being offered.5 These 
conditions prevent the conditioning of the availability of one product 
on the purchase of another and allow consumers to compare prices. The 
Board recognizes that to the extent that the market for products 
offered by bank holding companies and their nonbanking subsidiaries is 
competitive, these conditions should not be strictly necessary. The 
Board seeks comment on whether these conditions should be retained as a 
precaution against any anti-competitive practices. The Board also seeks 
comment on a clarification to the requirement of separate availability, 
applicable to all the regulatory exceptions, that would provide that 
products must be separately available ``at competitive prices.'' This 
amendment would clarify that if a product is available outside a 
package arrangement only at a non-competitive price, it is not truly 
separately available.
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    \5\ Under antitrust law, concerns over tying arrangements are 
substantially reduced where the buyer is free to take either product 
by itself, even though the seller may also offer the two items as a 
unit at a single price. Northern Pacific R. Co. v. Unites States, 
356 U.S. 1, 6 n.4 (1958).
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Costs of Tying Restrictions

    The special tying restrictions imposed on nonbank subsidiaries of 
bank holding companies not only appear to be unnecessary to prevent 
those companies from gaining an unfair competitive advantage, but also 
place those companies at a competitive disadvantage with other 
providers of the same products and services. As a result of Regulation 
Y's current prohibition, a nonbanking company is generally prohibited 
from offering discounted packages of its own products or discounted 
packages that include its own products and those of other affiliated 
nonbanking companies. Their competitors who are not affiliated with 
banks are not similarly constrained. Several commenters in the Board's 
recent rulemaking noted that brokerage firms and other nonbank 
competitors are offering the types of discounts currently prohibited by 
Regulation Y, which are not generally illegal for purposes of the 
federal antitrust laws.
    The inability of nonbanks in a holding company structure to offer 
discounts not only diminishes their competitiveness but also deprives 
their customers of an opportunity to receive discounts. The Board 
believes that under the proposed rule, customers would be presented 
with more choices and potentially lower costs.

Congressional Intent

    The Board notes that this proposed treatment of tying by nonbanking 
subsidiaries is consistent with recent Congressional action in the 
tying area. In applying anti-tying restrictions to savings associations 
in the Garn-St. Germain Depository Institutions Act, Public Law No. 97-
320, section 331, 96 Stat. 1496, Congress closely paralleled section 
106 in applying the restriction only when the tying product was offered 
by the savings association. An extension of the restrictions to non-
savings association affiliates of the type adopted by the Board was 
neither included by Congress nor subsequently adopted by the Office of 
Thrift Supervision.

Other Issues

    Finally, the Board is proposing to amend Regulation Y to clarify 
that the Board's retained authority to revoke an exception that is 
resulting in anti-competitive practices includes authority to halt such 
practices at an individual institution.

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 12 CFR 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 section 225.7, a new paragraph (b)(3) is added and paragraph 
(c) is revised to read as follows:


Sec. 225.7  Tying Restrictions.

* * * * *
    (b) * * *
    (3) Discounts on tie-in arrangements not involving banks. A bank 
holding company or any nonbank subsidiary thereof may vary the 
consideration for any extension of credit, lease or sale of property of 
any kind, or service, on the condition or requirement that the customer 
obtain some additional credit, property, or service from itself or a 
nonbank affiliate, provided that all products and services offered in 
the arrangement also are separately available for purchase by the 
customer.
    (c) Limitations on exceptions. (1) The exceptions of this section 
shall apply only if all products involved in the tying arrangement are 
separately available for purchase at competitive prices.
    (2) Any exception granted pursuant to this section shall terminate 
upon a finding by the Board that the arrangement is resulting in anti-
competitive practices. The eligibility of a bank holding company or 
bank or nonbank subsidiary thereof to operate under any exception 
granted pursuant to this section shall terminate upon a finding by the 
Board that its exercise of this authority is resulting in anti-
competitive practices.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, July 27, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-18723 Filed 8-3-94; 8:45 am]
BILLING CODE 6210-01-P