[Federal Register Volume 59, Number 243 (Tuesday, December 20, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31186]


  Federal Register / Vol. 59, No. 243 / Tuesday, December 20, 1994 /
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[[Page Unknown]]

[Federal Register: December 20, 1994]


                                                   VOL. 59, NO. 243

                                         Tuesday, December 20, 1994

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: Final rule.

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SUMMARY: The Board is adopting a final rule amending the anti-tying 
provisions of Regulation Y to permit a bank holding company or its 
nonbank subsidiary to offer a discount on its product or service on 
condition that a customer obtain any other product or service from that 
company or from any of its nonbank affiliates. Thus, the final rule 
would generally remove Board-imposed restrictions on tying when no bank 
is involved in the arrangement and the products are separately 
available for purchase by the customer. The Board believes that the 
amendment will relieve bank holding companies of a competitive 
disadvantage, promote efficiency in the delivery of services, and 
provide benefits for consumers.

EFFECTIVE DATE: January 23, 1995.

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. 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 a 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 a customer purchases another product from the bank or from any of 
its affiliates. Although section 106 applies only when a bank offers 
the tying product, the Board in 1971 extended section 106 to products 
offered by bank holding companies and their nonbank subsidiaries. 12 
CFR 225.7(a).
    On July 27, 1994, the Board proposed an amendment to conform the 
anti-tying provisions of Regulation Y more closely to section 106 and 
its focus on banks. 59 FR 39709 (August 4, 1994). The proposed 
amendment would permit bank holding companies and their nonbank 
subsidiaries to offer discounts on packaged products when: (1) Both the 
tying and tied products are offered by bank holding companies or their 
nonbank subsidiaries--in other words, when no affiliated bank was 
involved in the arrangement; and (2) both the tying and tied products 
are separately available for purchase at competitive prices. If the 
package arrangement included a product offered by an affiliated bank, 
the proposed amendment would not apply (although the arrangement might 
qualify for another exception adopted by the Board).

General Summary of Comments

    The Board received 31 comments on its proposal. Those commenting 
included 17 banking organizations, eight trade associations, and five 
Reserve Banks. Commenters overwhelmingly supported the proposed 
amendment. One banking trade association opposed the Board's proposal 
because it believed that a blanket exception could have anti-
competitive effects in small towns. This commenter recommended that the 
Board act on exemption requests on a case-by-case basis.

Discussion

    The Board is adopting the amendment substantially as proposed. It 
is important to note that the amendment is not an exception to section 
106, which 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.1 The amendment will apply 
only when nonbanks offer all of the packaged products--a case that 
would otherwise be covered by the Board's extension of section 106 to 
tying within a bank holding company organization.
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    \1\The purpose of section 106 was 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). Although banks, like their 
nonbank competitors, already were subject to general antitrust 
prohibitions on tying, Congress concluded that special restrictions 
were necessary given the unique role of banks in the economy. 
Section 106's restrictions on banks are broader than those of the 
antitrust laws, as no proof of economic power in the tying product 
or anti-competitive effects in the tied product market are required 
for a violation to occur.
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    The amendment will not permit the types of anti-competitive 
practices that the Board's regulatory extension was designed to 
prevent. Neither bank holding companies nor their nonbanking 
subsidiaries generally appear to possess sufficient market power in the 
products that they offer to impair competition.2 Moreover, bank 
holding companies and their nonbank subsidiaries will continue to be 
restricted by the antitrust laws--the same restrictions that bind their 
non-bank holding company competitors--and the Board will retain the 
authority to terminate or modify any arrangement that resulted in anti-
competitive practices. Section 106 will continue to restrict tying by 
banks, and Regulation Y will continue to restrict tying by a nonbank 
when the tied product is offered by an affiliated bank. Finally, the 
amendment will rescind Regulation Y's restrictions on tying between 
nonbanks only where discounting is involved and the products are 
separately available.
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    \2\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. See 12 CFR 225.25.
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    The final rule is further justified by the competitive environment 
in which bank holding companies and their nonbank subsidiaries operate 
nationwide. The amendment will relieve bank holding companies of a 
competitive disadvantage, promote efficiency in the delivery of 
services, and provide benefits for consumers. In particular, the 
amendment will provide customers with greater choices and potentially 
lower costs by allowing bank holding companies to offer the same types 
of discounts that their competitors already offer.

Other Issues

    The Board sought public comment on several particulars of the 
proposed amendment, including: (1) The Board's requirement that all 
products offered in a package arrangement be separately available for 
purchase; (2) that these products be separately available ``at 
competitive prices''; and (3) the Board's clarification that its 
authority to revoke an exception that is resulting in anti-competitive 
practices includes authority to halt such practices at an individual 
institution.
    Commenters were split on the proposed requirement that all products 
in a package arrangement be separately available for purchase, with 
five in favor and seven opposed. The requirement of separate 
availability, like the requirement that the arrangement involve a 
discount, effectively prevents a bank holding company from conditioning 
the availability of one product on the purchase of another. In a 
competitive market, a company should be unable to profit from such an 
arrangement--as customers are free to purchase the desired, tying 
product from a competitor without having to purchase the less desired, 
tied product. Although, as noted, the markets for products offered by 
bank holding company affiliates are generally competitive, there may be 
a few markets that are less competitive, and the discounting and 
separate availability restrictions would therefore act as a further 
safeguard to protect against anti-competitive practices in such 
markets. Accordingly, these requirements will be retained.3
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    \3\ The proposed rule contained specific language emphasizing 
that all products in a package arrangement must be separately 
available for purchase by the customer. Because all anti-tying 
exceptions granted by the Board already are subject to this 
requirement, this language has been deleted in the final rule to 
avoid redundancy. See 12 CFR 225.7(c)(1).
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    Commenters generally opposed the addition of a clarifying phrase 
providing that products be separately available ``at competitive 
prices,'' with four in favor and seven opposed. The purpose of this 
clarification was to prevent evasion of the separate availability and 
discounting requirements. Such an evasion could occur by establishing 
the price of a product so far above its package price that customers 
would effectively be required to purchase the package in order to 
obtain the product. The effect would be the same as an explicit 
conditioning of the availability of the product, as described above.
    Commenters expressed concern about the difficulties of determining 
what constitutes a competitive price, particularly in products that are 
unusual or unique. Because of these concerns, the Board has not adopted 
this clarification but will continue to interpret ``separately 
available'' to mean available at a price that would generally attract 
customers and therefore leaves customers desiring a product a 
meaningful choice between purchasing the product alone or through a 
package.
    Commenters did not object to the Board's retained authority to 
revoke an exception that is resulting in anti-competitive practices or 
the Board's ability to halt such practices at an individual 
institution. The Board has retained such authority in the final rule.

Additional Relief Requested by the Commenters

    Several commenters suggested that the Board grant additional relief 
from the tying restrictions of section 106 and Regulation Y. In 
particular, nine commenters recommended that the Board completely 
repeal the extension of section 106 to bank holding companies and their 
nonbank subsidiaries. Commenters also suggested that the Board extend 
the proposed amendment to allow a nonbank subsidiary of a bank holding 
company to offer a discount on a product or service to a customer who 
purchases a product or service from a bank affiliate.
    Seven commenters recommended revisions to the regulatory 
traditional bank product exception recently adopted by the Board.4 
The commenters requested that the Board extend the regulatory 
traditional bank product exception beyond cases where only traditional 
bank products are part of the package. These commenters noted that the 
statutory traditional bank product exception permits a bank to tie any 
product (not just a traditional bank product) to a traditional bank 
product, and suggested that the same exception should apply to ties 
between affiliates. Finally, several commenters requested that the 
Board clarify the treatment of operating subsidiaries of banks under 
section 106 and further expand the definition of traditional bank 
products.
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    \4\See 12 CFR 225.7(b)(1). Section 106 contains an explicit 
exception (the ``statutory traditional bank product exception'') 
that permits a bank to tie any product or service to a loan, 
discount, deposit, or trust service (a traditional bank product) 
offered by that bank. The regulatory traditional bank product 
exception partially extends the statutory traditional bank product 
exception by permitting a bank or any of its affiliates to vary the 
consideration for a traditional bank product on condition that the 
customer obtain another traditional bank product from an affiliate. 
In other words, a bank may offer a customer a discount on one 
product (e.g., a deposit account) if the customer obtains another 
product (e.g., a loan) from an affiliate, so long as both products 
are traditional bank products.
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    The Board continues to analyze all of these issues and will 
consider these proposals, and others, after the recent amendments have 
been implemented.

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 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, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

    For the reasons set forth in the preamble, the Board amends 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 is revised to read as 
follows:

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

    2. In Sec. 225.7, a new paragraph (b)(3) is added and paragraph 
(c)(2) 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.
    (c) * * *
    (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, December 14, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-31186 Filed 12-19-94; 8:45 am]
BILLING CODE 6210-01-P