[Federal Register Volume 60, Number 79 (Tuesday, April 25, 1995)]
[Rules and Regulations]
[Pages 20186-20189]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10120]



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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: Final rule.

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SUMMARY: The Board is adopting a regulatory ``safe harbor'' from the 
anti-tying restrictions of section 106 of the Bank Holding Company Act 
Amendments of 1970 and the Board's Regulation Y. The safe harbor 
permits any bank or nonbank subsidiary of a bank holding company to 
offer a ``combined-balance discount''--that is, a discount based on a 
customer maintaining a combined minimum [[Page 20187]] balance in 
products specified by the company offering the discount.

EFFECTIVE DATE: May 26, 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.1 A bank engages in a tie for purposes of section 
106 by conditioning the availability of, or offering a discount on, one 
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. 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.

    \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 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

    \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 
issued an order permitting the subsidiary banks of Fleet Financial 
Group, Inc., Providence, Rhode Island (Fleet) to offer a discount on 
the monthly service fee charged for its ``Fleet One Account'' to 
customers who maintain a combined minimum balance of at least $10,000 
in one or more products selected from a menu of eligible Fleet 
products. All products offered as part of this arrangement were 
separately available to customers at competitive prices. In granting 
Fleet's request, the Board determined 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.

Final Rule

    On October 21, 1994, the Board proposed a regulatory safe harbor 
from section 106 for combined-balance discounts similar to that offered 
by Fleet (59 FR 53761, October 26, 1994). The proposal would have 
permitted any bank to offer a combined-balance discount provided that 
(1) the bank offered deposits, (2) all such deposits were considered in 
the arrangement, and (3) all balances in products eligible to be 
contributed to the minimum balance counted equally towards the minimum 
balance. In addition, all products involved in the arrangement were 
required to be separately available for purchase. The Board proposed 
the safe harbor to provide certainty as to the general permissibility 
of combined-balance discounts similar to that proposed by Fleet, and 
because it believed that such discounts are pro-consumer and not anti-
competitive.
    As noted above, the proposal included a requirement that all 
deposits count toward the minimum balance. The Board was concerned that 
absent such a requirement, combined-balance discount plans could be 
constructed so that a non-traditional bank product, such as securities 
brokerage services, represented the only viable option for a customer 
to reach the minimum balance. Under the Board's proposal, a customer 
could have qualified for the discount based solely on deposit balances. 
Therefore, there would be no incentive for a customer to establish a 
securities brokerage account, or any other non-traditional bank 
product, that the customer did not want in order to obtain the 
discount.3

    \3\The Board also noted that, under the statutory and regulatory 
traditional bank product exceptions, a bank already could offer a 
combined-balance discount where all products in an arrangement were 
traditional bank products. The proposed safe harbor would simply 
permit a bank to increase customer choice by adding a customer's 
securities brokerage account or other non-traditional products to 
the menu of traditional bank products that count toward the minimum 
balance.
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Summary of Comments

    The Board received 58 comments on its proposal. Those commenting 
included 42 banking organizations, seven trade associations 
representing the banking industry, six Reserve Banks, two thrifts, and 
one law firm representing numerous insurance trade associations. 
Commenters overwhelmingly supported the Board's proposal because they 
believed that it would provide benefits to both consumers and 
banks.4 Commenters stated that the proposal would provide 
customers increased opportunities to obtain services from a bank at 
discounted prices based on the customer's overall relationship with the 
bank by allowing customers to meet combined-balance requirements 
through non-traditional products as well as traditional bank products.

    \4\One commenter continued to oppose blanket exceptions to 
section 106, recommending that the Board act on exemption requests 
on a case-by-case basis. As noted below, the Board believes that a 
safe harbor can be designed narrowly enough to prevent anti-
competitive effects.
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    Commenters also supported the proposed safe harbor because it would 
permit banks to market products more efficiently and compete more 
effectively with their nonbanking competitors who currently offer 
combined-balance discount arrangements. In addition, commenters 
commended the Board for recognizing that the financial services 
industry is evolving as banks provide customers a broader range of 
financial services. The proposed safe harbor would permit banks to 
package these products and therefore attract and retain more customers.
    A few commenters suggested modifications to the Board's proposal 
and recommended that the safe harbor be enlarged. First, six commenters 
objected to the requirement that the bank offering the discount also 
offer deposits because this would prevent a nonbank subsidiary of a 
bank holding company--for example, a trust company--from offering the 
type of combined-balance discount proposed by the Board.5 
Commenters believed that customers could be protected from any anti-
competitive effects so long as an affiliated bank offered deposits and 
those deposits count towards the minimum balance.

    \5\Under the Board's Rules, a nonbank subsidiary of a bank 
holding company could offer a combined-balance discount involving 
products offered by the company and its nonbank affiliates so long 
as no bank was involved in the arrangement. See 12 CFR 225.7(b)(3). 
Because combined-balance discount arrangements under this proposal 
include products and services offered by banks and nonbanks, a 
further exception is required. [[Page 20188]] 
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    Second, thirteen commenters sought modification to the requirement 
that all deposits be eligible products (that is, count toward the 
combined minimum balance). Commenters argued that deposits should not 
be distinguished from other traditional bank products and that 
therefore the safe harbor should include plans where, for example, 
loans are among the eligible products but deposits are not. Commenters 
also argued that requiring all deposits at a bank to be counted as 
eligible products was unnecessary and burdensome, and that a 
requirement that a ``substantial majority'' or ``all types'' of 
deposits would serve to prevent anti-competitive arrangements.
    Finally, eight commenters objected to the requirement that all 
eligible products count equally toward the minimum balance, arguing 
that different products impose different costs on banks and that a 
company should be able to weight the products in an economically 
rational way.6

    \6\One commenter representing the insurance industry indicated 
that the inclusion of certain insurance products in a combined-
balance discount arrangement may undermine or perhaps contradict 
state insurance laws which generally prohibit insurance agents from 
varying the consideration charged for insurance products. The 
Board's regulation is not intended to, and does not, exempt any 
arrangements from state or federal law. Companies offering combined-
balance discount arrangements are responsible for ensuring that 
these arrangements comply with all applicable state and federal 
restrictions.
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Consideration of Comments

    The Board agrees with the commenters that customers should be able 
to count deposits at an affiliated bank toward a minimum balance, and 
thus that a trust company, for example, should be able to offer a 
combined-balance discount arrangement that includes deposits at its 
affiliated bank. Accordingly, the final rule has been modified so that 
a combined-balance discount arrangement involving products from banks 
and nonbanks also may be offered by a nonbank subsidiary of a bank 
holding company so long as a customer may use deposit balances at an 
affiliated bank to reach the minimum balance required to obtain the 
discount. This modification assumes that the affiliated bank offering 
the eligible deposits is reasonably accessible to the customer.
    As noted above, the Board proposed the requirement that a bank 
include deposits among the eligible products in order to ensure that 
any exempt combined-balance discount would offer customers meaningful 
choices and therefore could not have an anti-competitive effect. Loans, 
discounts, or trust services--the other ``traditional bank products'' 
that commenters suggested should be able to replace deposits in a 
combined-balance arrangement--may not be so viable a choice for many 
customers. While the Board believes that deposits should in almost 
every case be an attractive option, a large trust account or mortgage 
loan may be a realistic option for only a small percentage of 
customers. Without deposits as eligible products, customers who are not 
eligible for a large trust account or mortgage loan may effectively be 
required to elect another, non-traditional, product in order to obtain 
the combined-balance discount. Thus, the Board is maintaining a deposit 
requirement for combined-discount plans that fall under this safe 
harbor.7 For similar reasons, the Board is not adopting the 
suggestion by commenters that only some deposits be required to count 
toward the minimum balance, simply because it is impossible to predict 
the effect of this more malleable standard.

    \7\The Board also is retaining the requirement that all products 
involved in a combined-balance discount arrangement are separately 
available for purchase.
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    The Board recognizes, however, that discount arrangements other 
than those within the safe harbor may also be consistent with the 
purposes of section 106. The Board will continue to consider such plans 
on a case-by-case basis and is delegating authority to approve such 
plans to the General Counsel. The Board will also, in appropriate 
cases, expand the safe harbor by rule.
    The Board shares commenters' concerns that the proposal would 
prevent banks from assigning products different weights in counting 
them toward the minimum balance, and thereby could force banks to price 
their products irrationally. Commenters stressed that some products are 
more profitable than others, and that different weights should be 
assigned accordingly. Although there is a concern that weighting could 
be used to require purchase of certain non-traditional products, the 
Board believes this concern can be addressed by the narrower 
requirement that any deposit included in a combined-balance discount 
arrangement count at least as much toward the minimum balance as any 
non-deposit. This approach, which was suggested by several commenters, 
will allow companies to assign different weights among deposits and 
non-deposits.8

    \8\For example, a bank could count toward the minimum balance 
100 percent of demand deposits, 80 percent of certificates of 
deposit, 70 percent of mutual fund shares, and 60 percent of stock 
held in a brokerage account. So long as the percentages assigned to 
all deposits are higher than the percentages assigned to the non-
deposits, the safe harbor would apply.
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    One commenter argued that combined-balance discounts do not violate 
section 106 when a multiplicity of options that includes traditional 
bank products means that there is no ``condition or requirement'' that 
the customer purchase a non-traditional bank product. However, the 
commenter acknowledged that a bank could effectively tie through 
differential pricing. In order to address this possibility, the 
commenter favored general language providing that combined-balance 
discounts generally are not covered by section 106 so long as all 
eligible products are ``meaningful alternatives.'' The commenter urged 
the Board to adopt this reading as an interpretation, in lieu of a safe 
harbor.
    As discussed in the preamble to the proposed rule, section 106 
covers any condition or requirement that a customer purchase ``some 
additional product,'' which would appear to include combined-balance 
discounts. The statutory and regulatory traditional bank product 
exceptions would clearly exempt combined-balance discounts where all 
eligible products are traditional bank products. However, the question 
is whether, when both traditional and non-traditional bank products are 
included in the list of eligible products: (1) The transaction 
continues to be covered, does not qualify for the traditional bank 
product exceptions, and therefore requires an exemption, or (2) the 
transaction is not covered by section 106 because it is possible for a 
customer to meet the minimum balance through traditional products. The 
commenter urges the Board to adopt the second interpretation with the 
added requirement that the choice of traditional products be 
``meaningful.''
    The Board sees no need to resolve this issue in prescribing the 
final rule, as any interpretation would not be binding and the need for 
the safe harbor would be the same in either case. Even under the second 
interpretation, there would remain confusion about what constitutes 
sufficiently ``meaningful'' choice among traditional bank products so 
that a combined-balance discount is not covered by section 106.

Related Issue

    As in past rulemakings in the tying area, the Board has received 
numerous comments recommending that the Board repeal its extension of 
section 106 to bank holding companies and their [[Page 20189]] nonbank 
subsidiaries. These comments argue that section 106, by its terms, only 
applies to banks and the Board's extension of these restrictions places 
bank holding companies and their nonbank subsidiaries at a competitive 
disadvantage. These commenters emphasize that, even without these 
restrictions, bank holding companies and their nonbank subsidiaries 
remain subject to the antitrust laws. The Board has this matter under 
consideration and has asked staff to analyze whether additional steps 
should be taken.

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 
final 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.

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 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, 3310, 3331-3351, 3907, and 
3909.

    2. In section 225.7, 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 holding 
company or any bank or nonbank subsidiary thereof may vary the 
consideration for any product or package of products based on a 
customer's maintaining a combined minimum balance in certain products 
specified by the company varying the consideration (eligible products), 
if:
    (i) That company (if it is a bank) or a bank affiliate of that 
company (if it is not a bank ) offers deposits, and all such deposits 
are eligible products; and
    (ii) Balances in deposits count at least as much as non-deposit 
products toward the minimum balance.
* * * * *
    By order of the Board of Governors of the Federal Reserve System, 
April 19, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-10120 Filed 4-24-95; 8:45am]
BILLING CODE 6210-01-P