[Federal Register Volume 61, Number 129 (Wednesday, July 3, 1996)]
[Proposed Rules]
[Pages 34749-34751]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16841]
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FEDERAL RESERVE SYSTEM
12 CFR Parts 218 and 250
[Regulation R; Docket No. R-0931]
Relations With Dealers in Securities Under Section 32, Banking
Act of 1933; Miscellaneous Interpretations
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Board is proposing to amend its regulations to remove
Regulation R concerning relations with dealers in securities under
section 32 of the Banking Act of 1933, which the Board believes is no
longer necessary. The Board also is proposing to amend its regulations
to remove an interpretation of section 32 of the Glass-Steagall Act,
which the Board believes is no longer necessary. This interpretation
explains the position of the Board regarding the application of the
prohibitions of section 32 to bank holding companies.
DATES: Comments must be received by August 2, 1996.
ADDRESSES: Comments should refer to Docket No. R-0931 and may be mailed
to William W. Wiles, Secretary, Board of Governors of the Federal
Reserve System, Docket No. R-0931, 20th Street and Constitution Avenue,
NW., Washington, DC 20551. Comments addressed to Mr. Wiles may also be
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and
to the security control room outside of those hours. Both the mail room
and control room are accessible from the courtyard entrance on 20th
Street between Constitution Avenue and C Street, NW. Comments may be
inspected in room MP-500 between 9 a.m. and 5 p.m., except as provided
in Sec. 261.8 of the Board's Rules Regarding Availability of
Information, 12 CFR 261.8.
FOR FURTHER INFORMATION CONTACT: Richard M. Ashton, Associate General
Counsel (202/452-3750), or Thomas M. Corsi, Senior Attorney (202/452-
3275), Legal Division. For the hearing impaired only,
Telecommunications Device for the Deaf (TDD), Dorothea Thompson (202/
452-3544).
SUPPLEMENTARY INFORMATION:
Section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (CDRI Act)
Section 303(a) of the CDRI Act (12 U.S.C. 4803(a)) requires the
Board, as well as the other federal banking agencies, to review its
regulations and written policies in order to streamline and modify
these regulations and policies to improve efficiency, reduce
unnecessary costs, and eliminate unwarranted constraints on credit
availability. The Board has reviewed its interpretations of section 32
of the Glass-Steagall Act (12 U.S.C. 78) with this purpose in mind,
and, as is explained in greater detail in the text that follows,
proposes to amend these interpretations in a way designed to meet the
goals of section 303(a).
Substantive Provisions of Regulation R
The Board's Regulation R (12 CFR Part 218) implements section 32 of
the Glass-Steagall Act. Section 32 prohibits officer, director and
employee interlocks between member banks and firms ``primarily
engaged'' in underwriting and dealing in securities, and authorizes the
Board to exempt from this prohibition, under limited circumstances,
certain interlocks by regulation. Currently, Regulation R restates the
statutory language of section 32, and sets forth the only exemption
adopted by the Board since passage of the Glass-Steagall Act. The Board
also has codified in the CFR 14 interpretations of the substantive
provisions of section 32 and the regulation.1 The Board also has
issued other interpretations of section 32 that are contained in the
Federal Reserve Regulatory Service (FRRS).
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\1\ 12 CFR 218.101-218.114.
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The exemption in Regulation R, adopted by the Board in 1969,
permits interlocks between member banks and securities firms whose
securities underwriting and dealing activities are limited to
underwriting and dealing in only securities that a national bank would
be authorized to underwrite and deal in. The adoption of the express
exemption was apparently based on the assumption that the literal
language of the section 32 prohibition could at least arguably cover
bank-eligible securities activities.
Subsequently, in orders approving applications under the Bank
Holding Company Act (12 U.S.C. 1841 et seq.), the Board interpreted the
prohibitions of section 20 of the Glass-Steagall Act, which prohibits a
member bank from being affiliated with a firm engaged principally in
underwriting and dealing in securities, as not applying on their face
to underwriting and dealing in securities that may be underwritten and
dealt in directly by a state member bank. In these decisions, the Board
also expressed the view that section 32 similarly did not cover an
interlock between a member bank and a firm that was not engaged in
securities activities covered by section 20.2 Accordingly, in
light of the Board's more recent view of the scope of section 32, the
express exemption from the provisions of section 32 for bank-eligible
securities activities is no longer necessary.3 Moreover, the Board
has never adopted any other exemption to the interlocks provision and
historically, requests that the Board create new exemptions have been
infrequent and have been uniformly denied.4
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\2\ This interpretation has been upheld by the courts.
Securities Industry Association v. Board of Governors of the Federal
Reserve System, 839 F.2d 47, 62 (2d Cir. 1988), cert. denied, 486
U.S. 1059 (1988).
\3\ The Board is proposing to adopt a new interpretation of
section 32 to clarify this point.
\4\ A footnote to Regulation R that dates to 1936 makes it clear
that a broker who is engaged solely in executing orders for the
purchase and sale of securities on behalf of others in the open
market is not engaged in the business referred to in section 32. The
Board has since authorized bank holding companies to engage in this
activity directly, reiterating that securities brokerage is not a
proscribed activity under either sections 32 or 20 of the Glass-
Steagall Act. BankAmerica Corporation, 69 Federal Reserve Bulletin
105 (1983). The courts upheld the Board's interpretation. Securities
Industry Assn. v. Board of Governors, 468 U.S. 207 (1984). The
removal of Regulation R does not affect this interpretation.
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Since the exemption in Regulation R is no longer necessary, and it
is not necessary to have a substantive regulation solely to restate a
statutory provision, the Board is proposing to rescind Regulation R.
Bank Holding Company Interpretation of Section 32 of the Glass-
Steagall Act
With one exception, the 14 interpretations of section 32 now
contained in the CFR, would be retained and transferred to 12 CFR Part
250,
[[Page 34750]]
which contains miscellaneous Board interpretations.
By their terms, the prohibitions of section 32 apply only to member
banks. In 1969, the Board issued an interpretation that extended the
prohibitions of section 32 to a bank holding company where the
principal activity of the bank holding company is the ownership and
control of member banks.5 The Board is now seeking public comment
on rescinding this interpretation.
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\5\ 12 CFR 218.114.
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The Board based its 1969 interpretation not so much on the literal
language of section 32, but on its belief that where the ownership and
control of member banks is the principal activity of a bank holding
company, the same possibilities of abuse that section 32 was designed
to prevent would be present in the case of a director of the holding
company as in the case of the member bank.6 The Board believed
that giving cognizance to the separate corporate entities in such a
situation would partially frustrate Congressional purpose in enacting
section 32.
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\6\ As noted in the Board's interpretation, section 32 is
directed to the probability or likelihood that a bank director
interested in the underwriting business may use his or her influence
in the bank to involve it or its customers in securities sold by his
or her underwriting house.
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The Board now believes that it could rescind this interpretation
and give some measure of regulatory burden relief to bank holding
companies in a manner consistent with section 32, and without
frustrating the Congressional purpose underlying the section. The Board
is not barred by the literal terms of the Glass-Steagall Act from
rescinding the interpretation. As noted above, section 32 specifically
restricts only those interlocks involving member banks. While the bank
holding company structure was not in widespread use when section 32 was
adopted, Congress has amended section 32 since the section was adopted
and since bank holding companies have become commonplace, but never has
extended the prohibitions in the section to bank holding companies.
Notably, in 1987, Congress extended the prohibitions of section 32 to
cover interlocks involving nonmember banks and thrift institutions but
not interlocks involving bank holding companies.7
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\7\ The provisions extending the prohibitions of section 32 to
nonmember banks and thrifts expired in 1988.
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The potential that removal of the interpretation could frustrate
Congressional purpose in enacting section 32 is mitigated by the fact
that the prohibitions of section 32 would continue to apply to member
banks. Accordingly, the directors, officers and employees of these
banks, none of whom may be interlocked with a securities firm, could
serve as a check against the possibilities of abuse that section 32 is
intended to prohibit. In addition, the Board believes that by
rescinding this interpretation, it would be granting some measure of
regulatory relief to bank holding companies by giving them access to a
larger pool of persons from which to choose their officers, directors,
and employees.8
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\8\ Should the Board determine to rescind this interpretation,
this action would not affect other Board decisions or determinations
that restrict interlocks to ensure compliance with section 20 of the
Glass-Steagall Act (12 U.S.C. 377). See, e.g., Mellon Bank
Corporation, 79 Federal Reserve Bulletin 626 (1993).
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Other Interpretations of Section 32
The Board also seeks comment on whether any of the other
interpretations of section 32 previously adopted by the Board could be
amended.
Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.
L. 95-354, 5 U.S.C. 601 et seq.), the Board of Governors of the Federal
Reserve System certifies that adoption of this proposed rule will not
have a significant economic impact on a substantial number of small
entities that would be subject to the regulation.
This amendment will remove a regulation and an interpretation that
the Board believes are no longer necessary. The amendment does not
impose more burdensome requirements on bank holding companies than are
currently applicable.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the proposed rule
under the authority delegated to the Board by the Office of Management
and Budget. No collections of information pursuant to the Paperwork
Reduction Act are contained in the proposed rule.
List of Subjects
12 CFR Part 218
Antitrust, Federal Reserve System, Securities.
12 CFR Part 250
Federal Reserve System.
For the reasons set forth in the preamble and under the authority
of 12 U.S.C. 248, the Board proposes to amend Chapter II of the Code of
Federal Regulations as set forth below:
PART 218--[AMENDED]
Secs. 218.101 through 218.113 [Redesignated as Secs. 250.400 through
250.412]
1. Sections 218.101 through 218.113 are redesignated as set forth
in the following table:
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New
0ld Section section
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218.101...................................................... 250.400
218.102...................................................... 250.401
218.103...................................................... 250.402
218.104...................................................... 250.403
218.105...................................................... 250.404
218.106...................................................... 250.405
218.107...................................................... 250.406
218.108...................................................... 250.407
218.109...................................................... 250.408
218.110...................................................... 250.409
218.111...................................................... 250.410
218.112...................................................... 250.411
218.113...................................................... 250.412
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PART 218--[REMOVED]
2. Part 218 is removed.
PART 250--MISCELLANEOUS INTERPRETATIONS
1. The authority citation for part 250 is revised to read as
follows:
Authority: 12 U.S.C. 78, 248(i) and 371c(e).
2. A new center heading is added immediately preceding newly
designated Sec. 250.400 to read as follows:
Interpretations of Section 32 of the Glass-Steagall Act
3. Section 250.413 is added to read as follows:
Sec. 250.413 ``Bank-eligible'' securities activities.
Section 32 of the Glass-Steagall Act (12 U.S.C. 78) prohibits any
officer, director, or employee of any corporation or unincorporated
association, any partner or employee of any partnership, and any
individual, primarily engaged in the issue, flotation, underwriting,
public sale, or distribution, at wholesale or retail, or through
syndicate participation, of stocks, bonds, or other similar securities,
from serving at the same time as an officer, director, or employee of
any member bank of the Federal Reserve System. The Board is of the
opinion that to the extent that a company, other entity or person is
engaged in securities activities that are expressly authorized for a
state member bank under section 16 of the Glass-Steagall Act (12 U.S.C.
24(7), 335), the company, other entity or individual is not engaged in
the types of activities described in section 32. In addition, a
securities broker who is engaged solely in executing orders for the
purchase and
[[Page 34751]]
sale of securities on behalf of others in the open market is not
engaged in the business referred to in section 32.
By order of the Board of Governors of the Federal Reserve
System.
Date: June 26, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-16841 Filed 7-02-96; 8:45am]
Billing Code 6210-01-P