[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