[Federal Register Volume 63, Number 59 (Friday, March 27, 1998)]
[Rules and Regulations]
[Pages 14803-14804]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7972]



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 Rules and Regulations
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  Federal Register / Vol. 63, No. 59 / Friday, March 27, 1998 / Rules 
and Regulations  

[[Page 14803]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-1010]


Bank Holding Companies and Change in Bank Control; Clarification 
to the Board's Section 20 Orders

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final Conditions to Board Orders.

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SUMMARY: The Board is clarifying one of the operating standards 
established in its decisions under the Bank Holding Company Act and 
section 20 of the Glass-Steagall Act permitting a nonbank subsidiary of 
a bank holding company to underwrite and deal in securities. The Board 
is modifying the customer disclosure operating standard to make clear 
that a section 20 subsidiary operating off bank premises may satisfy 
the standard by providing a one-time disclosure in writing when an 
investment account is opened.

EFFECTIVE DATE: March 27, 1998.

FOR FURTHER INFORMATION CONTACT: Thomas Corsi, Senior Counsel, (202) 
452-3275, Legal Division; Michael J. Schoenfeld, Senior Supervisory 
Financial Analyst, (202) 452-2781, Division of Banking Supervision and 
Regulation; for the hearing impaired only, Telecommunications Device 
for the Deaf (TDD), Diane Jenkins, (202) 452-3544.

SUPPLEMENTARY INFORMATION: In August 1997 the Board approved a 
substantial revision to the prudential limitations governing the 
activities of section 20 subsidiaries of bank holding 
companies.1 The Board removed all of the existing firewalls 
and adopted in their place 8 operating standards.2 Operating 
standard 4(i) mandates that a section 20 subsidiary provide its retail 
customers with the same oral and written disclosures that are required 
of depository institutions by the Interagency Statement on the Retail 
Sale of Nondeposit Investment Products (Interagency 
Statement),3 even when the section 20 subsidiary is 
operating off bank premises.4
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    \1\ 62 FR 45295 (August 27, 1997). Section 20 subsidiaries are 
companies that underwrite and deal in, to a limited extent, 
securities that a member bank may not underwrite or deal in.
    \2\ These operating standards are set out at 12 CFR 225.200.
    \3\ I FRRS para. 3-1579.51.
    \4\ 12 CFR 225.200(b)(4)(i).
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    The Interagency Statement generally applies to retail sales of 
securities and other nondeposit investment products on the premises of 
depository institutions, and requires that customers be informed that 
the products being sold are not FDIC-insured, are not deposits of or 
guaranteed by any depository institution, and are subject to investment 
risks, including possible loss of principal. The Statement requires 
that these disclosures be given orally during sales presentations, in 
connection with investment advice, and when an investment account is 
opened. Written disclosures also are required when an investment 
account is opened.5 Disclosures are generally required in 
advertisements and promotional materials as well as in customer 
confirmations and account statements.
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    \5\ The Interagency Statement states that customers should sign 
a statement acknowledging that they understand the written 
disclosures that they receive.
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    A section 20 subsidiary, like any affiliated or unaffiliated 
broker, operating on the premises of a depository institution is 
subject to the provisions of the Interagency Statement. The operating 
standards extend the disclosure requirements of the Interagency 
Statement to apply even when a section 20 subsidiary is operating off 
the premises of a depository institution.
    The Board recently received a request from several bank holding 
companies that control section 20 subsidiaries to clarify the operating 
standard on disclosures. These holding companies believe that requiring 
a section 20 subsidiary to comply with the oral disclosures mandated by 
the Interagency Statement when operating off the premises of a 
depository institution is excessively burdensome. The holding companies 
contend that it is not unusual for customers to call a broker several 
times a day to solicit the broker's views on a particular security. The 
companies believe that requiring brokers to provide oral disclosures to 
customers in every instance is potentially damaging to customer 
relationships and serves no purpose.
    The Board retained a disclosure requirement as one of the section 
20 operating standards to avoid customer confusion regarding whether 
products sold by a section 20 subsidiary are federally insured or 
guaranteed by an affiliated bank. The Board sought to limit the burden 
of the disclosure requirement on section 20 subsidiaries by requiring 
only disclosures to retail customers, and requiring the disclosures in 
the Interagency Statement, which are familiar to banking organizations. 
The Board stated that the disclosure requirement provides some benefit 
at minimal cost.
    The requesting bank holding companies are now stating that the cost 
of complying with the disclosure requirement is higher than anticipated 
when the Board adopted the operating standards. The cost has become 
particularly apparent in view of the large numbers of registered 
representatives employed by broker-dealers that have been acquired by 
bank holding companies in recent months. The burden on large numbers of 
brokers in complying with the oral disclosure requirement, and the 
burden on institutions of monitoring compliance with the requirement 
does not appear to be offset by a corresponding benefit. The potential 
for customer confusion regarding the nature of products being purchased 
should be less when a section 20 subsidiary is not operating on bank 
premises. Accordingly, it appears appropriate to reduce the regulatory 
burden on bank holding companies in these instances.
    When a section 20 subsidiary is operating off bank premises, the 
concern regarding customer confusion should be adequately mitigated if, 
when a retail customer opens an investment account, the subsidiary 
provides the customer with the written disclosures required by the 
Interagency Statement in that situation. None of the other provisions 
of the Interagency Statement would apply to a section 20 subsidiary 
unless it is engaged in activities through arrangements with a bank 
that are

[[Page 14804]]

covered by the Interagency Statement. This revised requirement should 
relieve some of the compliance burden on section 20 subsidiaries while 
continuing to mitigate the concerns expressed by the Board in adopting 
the disclosure requirement.

Public Comment and Deferred Effective Date

    The Board does not believe that the notice, public comment and 
delayed effective date requirements of the Administrative Procedure Act 
at 5 U.S.C. 553 apply with respect to this action. The requirements of 
section 553 do not apply when an agency finds that notice and public 
procedure thereon are ``impracticable, unnecessary, or contrary to the 
public interest.'' 5 U.S.C. 553(b). Similarly, a delayed effective date 
is not required with respect to agency action that relieves a 
restriction. 5 U.S.C. 553(d)(1).
    The Board believes that notice, public procedure and a delayed 
effective date are unnecessary in connection with this action. The 
Board recently amended this restriction after providing notice and 
seeking public comment. Furthermore, this action would relieve a 
restriction on bank holding companies that operate section 20 
subsidiaries. Accordingly, the Board concludes that the requirements of 
section 553 do not apply to this action.

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 out in the preamble, the Board amends 12 CFR 
Part 225 as follows:

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

    1. The authority citation for 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(l), 3106, 3108, 3310, 3331-3351, 3907, 
3908, and 3909.

    2. Section 225.200 is amended by revising paragraph (b)(4)(i) to 
read as follows:


Sec. 225.200  Conditions to Board's section 20 orders.

* * * * *
    (b) Conditions. * * *
    (4) Customer disclosure--(i) Disclosure to section 20 customers. A 
section 20 subsidiary shall provide, in writing, to each of its retail 
customers,4 at the time an investment account is opened, the 
same minimum disclosures, and obtain the same customer acknowledgment, 
described in the Interagency Statement on Retail Sales of Nondeposit 
Investment Products (Statement) as applicable in such situations. These 
disclosures must be provided regardless of whether the section 20 
subsidiary is itself engaged in activities through arrangements with a 
bank that is covered by the Statement.
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    \4\ For purposes of this operating standard, a retail customer 
is any customer that is not an ``accredited investor'' as defined in 
17 CFR 230.501(a).
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* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, March 23, 1998.
William W. Wiles,
Secretary of the Board.
[FR Doc. 98-7972 Filed 3-26-98; 8:45 am]
BILLING CODE 6210-01-P