[Federal Register Volume 59, Number 206 (Wednesday, October 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26478]


[[Page Unknown]]

[Federal Register: October 26, 1994]


  
  
  
  
  
  
  
  
  
  
  
  
                                                   VOL. 59, NO. 206

                                        Wednesday, October 26, 1994

FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-0851]

 

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 exception to 
the anti-tying restrictions of section 106 of the Bank Holding Company 
Act Amendments of 1970 and the Board's Regulation Y. The proposed 
amendment would establish a ``safe harbor'' permitting a bank to offer 
a discount on any product or package of products if a customer 
maintains a combined minimum balance in deposits and other products 
specified by the bank.

DATES: Comments must be submitted on or before December 9, 1994.

ADDRESSES: Comments should refer to Docket No. R-0851, 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: 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\ A bank engages in a tie for purposes of section 106 
by: (1) offering a discount on 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) allowing the purchase of a product or service 
only if the customer purchases another product or service from the bank 
or from any of its affiliates. Violations of section 106 can be 
addressed by the Board through an enforcement action, by the Department 
of Justice through a request for an injunction, or by a customer or 
other party through an action for damages. 12 U.S.C. 1972, 1973, and 
1975.
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    \1\Although section 106 applies only when a bank offers the 
tying product, the Board in 1971 extended the same restrictions to 
bank holding companies and their nonbank subsidiaries. See 12 CFR 
225.7(a).
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    Section 106 contains an explicit exception (the ``statutory 
traditional bank product exception'') that permits a bank to tie a 
product or service to a loan, discount, deposit, or trust service 
offered by that bank. The Board has recently extended this exception by 
providing that a bank or any of its affiliates also may vary the 
consideration for a traditional bank product on condition that the 
customer obtain another traditional bank product from an affiliate (the 
``regulatory traditional bank product exception'').\2\
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    \2\See 12 CFR 225.7(b)(2).
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    Section 106 authorizes the Board to grant exceptions to its 
restrictions by regulation or order. On October 19, 1994, the Board 
granted an exemption permitting the subsidiary banks of Fleet Financial 
Group, Inc., Providence, Rhode Island (Fleet) to offer a discount on 
the monthly service fee charged for the ``Fleet One Account'' to a 
customer who maintains a combined minimum balance of $10,000 in one or 
more products selected by the customer from a menu of eligible Fleet 
products. The Board decided that, to the extent that Fleet's combined-
balance discount was prohibited by section 106, an exemption was 
warranted given the public benefits and absence of anti-competitive 
concerns generated by the arrangement.
    The Fleet One Account provides a customer, for a $14 monthly fee, 
discounts and premiums on various Fleet services, such as free checking 
and lower installment loan rates. Under the Board's order, Fleet may 
waive the $14 fee for any customer who maintains a $10,000 combined 
balance among the following eligible products: (1) deposits and certain 
loans at the Fleet bank at which the customer establishes the Fleet One 
Account;\3\ (2) credit card balances at a Fleet bank; (3) investment 
securities held at Fleet's brokerage subsidiary and (4) shares held in 
a family of mutual funds advised by a Fleet subsidiary. All products 
offered as part of these arrangements are separately available to 
customers at competitive prices.
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    \3\These products include: checking, savings, cash reserve and 
sweep accounts; certificates of deposit; installment and home equity 
lines of credit and certain loans.
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Proposed Rule

    The Board is proposing to use its statutory authority to grant a 
regulatory exception to section 106 for combined-balance discount 
arrangements akin to that offered by Fleet. The Board is proposing the 
exception in order to provide certainty as to the general 
permissibility of combined-balance discounts, and because it believes 
that such discounts are pro-consumer and not anti-competitive.

Applicability of Section 106

    The combined-balance discount offered by Fleet appears to be 
covered by section 106, which prohibits a bank from offering a discount 
on a product or service on the condition that the customer obtain some 
additional product or service from the bank or from any of its 
affiliates. Although the discount on the Fleet One Account fee is not 
conditioned on any particular product being purchased, the customer is 
required to purchase some product or products from the menu of eligible 
products in order to receive the discount.\4\ Furthermore, the 
packaging of some of those products in the form proposed by Fleet does 
not appear to qualify for the statutory or regulatory traditional bank 
product exception.\5\
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    \4\Coverage of combined-balance discounts also appears to be 
consistent with the purposes of section 106. Section 106 was enacted 
because of Congress's concern that banks would use their power over 
credit to gain a competitive advantage in other markets. Ordinarily, 
a tying arrangement involves an attempt to gain a competitive 
advantage in one product market, but the fact that a bank is 
attempting to gain a smaller advantage in a larger number of product 
markets raises similar concerns.
    \5\Under the Board's regulations, a bank or nonbank could offer 
a discount on brokerage services on condition that a customer 
purchase a traditional bank product from the bank or company 
offering the brokerage services or from an affiliate. However, no 
exception allows the reverse case, where discounts on bank products 
are being used to induce customers to purchase brokerage services.
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    In addition, although the discount plan offered by Fleet is 
structured so as to avoid any anti-competitive effects, the Board notes 
that in other cases the number and attractiveness of traditional bank 
products offered in such an arrangement could be substantially less 
than those offered by Fleet, and the effect of the tie to non-
traditional products that much stronger. In addition, there is the 
potential for such discount plans to be manipulated in order to have 
the same effect as a classic tie--that is, structured so that the 
customer is effectively required to purchase one product in order to 
receive, or to receive a discount on, another product.

Exception

    In deciding to permit Fleet to offer the Fleet One Account, the 
Board concluded that the combined-balance discount on the Fleet One 
Account was consistent with the type of banking relationships that 
section 106 recognized were important to preserve.\6\ Section 106 
preserves such relationships through the statutory traditional bank 
product exception, which permits a bank to tie a product or service to 
a loan, discount, deposit, or trust service offered by that bank. The 
legislative history of section 106 notes that this exception 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 with the bank. The proposed exception serves the 
same purpose.
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    \6\The Board also granted Fleet an exemption allowing Fleet 
banks to condition the Fleet One Account on a customer's obtaining 
two products from Fleet, but the Board is not proposing to make this 
exemption broadly available through regulation. Rather, the Board 
has concluded that such exemptions should be granted on a case-by-
case basis.
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    Moreover, under the statutory and regulatory traditional bank 
product exceptions, a bank already could offer a combined-balance 
discount on an account where all the products in the arrangement were 
traditional bank products (loans, discounts, deposits, and trust 
services). Granting an exception for a combined-balance discount would 
simply permit the bank to increase customer choice by adding a 
customer's securities brokerage account or other non-traditional 
products to the menu of traditional products that count toward the 
minimum balance.
    For these reasons, the Board is proposing to establish, through a 
regulatory exception, a safe harbor for arrangements offering benefits 
similar to those in Fleet. The proposed safe harbor is not only 
consistent with the statute's goal of preserving traditional banking 
relationships, but also its concerns about anti-competitive behavior. 
The proposal requires that the offering bank offer deposits and that 
all such deposits be considered in determining whether the customer has 
reached the minimum balance required to waive the relevant fee. 
Furthermore, all products offered as part of the arrangement would be 
required to be separately available for purchase at competitive 
prices.\7\ Because a customer could qualify for a combined-balance 
discount based solely on deposit balances and because the bank would be 
required to offer customers all products involved in the arrangement 
separately and at competitive prices, a customer would not have an 
incentive to establish a brokerage account, or obtain any other 
product, that the customer did not want in order to obtain the 
discount. For this reason, the Board does not believe that the proposed 
rule would allow coercive or anticompetitive practices, or otherwise 
contravene the purposes of section 106.\8\
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    \7\The Board's anti-tying regulation currently conditions all 
regulatory exceptions on all products involved in the tying 
arrangement being separately available for purchase, and that 
condition would apply to the proposed exception. The Board has 
sought comment on an amendment to this condition providing that 
products be separately available for purchase ``at competitive 
prices.'' 59 FR 39709 (August 4, 1994).
    \8\Under antitrust precedent, concerns over tying arrangements 
are 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.
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    Finally, the Board believes that the proposed rule would benefit 
the public. Bank customers would be presented with lower costs.

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, as proposed to be amended at 59 FR 39711, 
August 4, 1994, a new paragraph (b)(4) is added to read as follows:


Sec. 225.7   Tying restrictions.

* * * * *
    (b) * * *
    (4) Safe harbor for combined-balance discounts. A bank may vary the 
consideration for any product or package of products offered by the 
bank or its affiliates based on a customer maintaining a combined 
minimum balance in certain products specified by the bank (``eligible 
products''), provided that:
    (i) The bank offers deposits, and all such deposits are eligible 
products; and
    (ii) Balances in all eligible products count equally toward the 
minimum balance.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, October 20, 1994.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 94-26478 Filed 10-25-94; 8:45 am]
BILLING CODE 6210-01-P