[Federal Register Volume 63, Number 230 (Tuesday, December 1, 1998)]
[Proposed Rules]
[Pages 66339-66346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31151]



  Federal Register / Vol. 63, No. 230 / Tuesday, December 1, 1998 / 
Proposed Rules  

[[Page 66339]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 303, 337, and 362

RIN 3064-AC20


Activities of Insured State Banks and Insured Savings 
Associations

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The FDIC is seeking public comment on its proposal to amend 
its rules and regulations governing activities and investments of 
insured state banks. The FDIC proposes to add safety and soundness 
standards to govern insured state nonmember banks that engage in the 
public sale, distribution or underwriting of stocks, bonds, debentures, 
notes or other securities through a subsidiary if those activities are 
permissible for a national bank subsidiary but are not permissible for 
the national bank itself. In addition, the FDIC proposes to require 
that insured state nonmember banks file a notice before commencing any 
activities permissible for subsidiaries of a national bank that are not 
permissible for the parent national bank itself. The FDIC also proposes 
to remove and reserve the provisions addressing, ``Securities 
Activities of Subsidiaries of Insured State Banks: Bank Transactions 
with Affiliated Securities Companies.'' The proposed effect of these 
amendments will be to require banks to notify the FDIC prior to 
conducting securities or other activities through subsidiaries that are 
not permissible for the bank itself. These amendments also will 
consolidate all securities activities regulation.

DATES: Comments must be received by February 1, 1999.

ADDRESSES: Send written comments to Robert E. Feldman, Executive 
Secretary, Attention: Comments/OES, Federal Deposit Insurance 
Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments 
may be hand delivered to the guard station at the rear of the 17th 
Street Building (located on F Street), on business days between 7:00 
a.m. and 5:00 p.m. (Fax number (202) 898-3838; Internet Address: 
[email protected]). Comments may be inspected and photocopied in the 
FDIC Public Information Center, Room 100, 801 17th Street, N.W. 
Washington, D.C. 20429, between 9:00 a.m. and 4:30 p.m. on business 
days.

FOR FURTHER INFORMATION CONTACT: Curtis Vaughn, Examination Specialist, 
(202/898-6759), Division of Supervision; Linda L. Stamp, Counsel, (202/
898-7310) or Jamey Basham, Counsel, (202/898-7265), Legal Division, 
FDIC, 550 17th Street, N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. Background

    Recently, the FDIC reassessed part 362 of its rules, ``Activities 
and Investments of Insured State Banks'' (12 CFR part 362) and 
Sec. 337.4 of its rules, ``Securities Activities of Subsidiaries of 
Insured State Banks: Bank Transactions with Affiliated Securities 
Companies'' (12 CFR 337.4). That reassessment resulted in an amended 
part 362 that is published as a final rule elsewhere in this issue of 
the Federal Register. Although, in connection with that reassessment, 
FDIC proposed removing Sec. 337.4, the FDIC decided to leave that rule 
in place to retain the safety and soundness standards governing 
securities activities that are not subject to section 24 of the Federal 
Deposit Insurance Act (FDI Act) (12 U.S.C. 1831a) (discussed below) 
during a further comment period on rules that would govern those 
activities.
    In this proposal, the FDIC seeks comment on proposed safety and 
soundness standards governing an insured state nonmember bank 
subsidiary engaging in the public sale, distribution or underwriting of 
stocks, bonds, debentures, notes or other securities permissible for a 
subsidiary of a national bank that are not permissible for the parent 
national bank directly. The proposal also requests comment on a 
proposed requirement that a notice be filed before an insured state 
nonmember bank subsidiary engages in any other activity permissible for 
a subsidiary of a national bank that is not permissible for the parent 
national bank directly. Under the proposal, the FDIC would remove and 
reserve Sec. 337.4. The proposal is described in more detail below.
    Part 362 of the FDIC's regulations implements the provisions of 
section 24 of the FDI Act. Section 24 was added to the FDI Act by the 
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) 
(Pub. L. 102-242). With certain exceptions, section 24 limits the 
direct equity investments of state chartered insured banks to equity 
investments of a type permissible for national banks. In addition, with 
certain exceptions, section 24 prohibits an insured state bank from 
engaging as principal in any type of activity that is not permissible 
for a national bank unless the bank meets applicable capital 
requirements and the FDIC determines that the activity will not pose a 
significant risk to the appropriate deposit insurance fund. Section 24 
also prohibits an insured state bank subsidiary from engaging as 
principal in any activity or making any equity investment of a type 
that is not permissible for a national bank subsidiary unless the bank 
meets applicable capital requirements and the FDIC determines that the 
activity will not pose a significant risk to the appropriate deposit 
insurance fund.
    Since section 24 was enacted, the Office of the Comptroller of the 
Currency (OCC) has confirmed--through its rule governing operating 
subsidiaries--that there may be activities that are not permissible for 
a national bank itself, but that are permissible for national bank 
subsidiaries. Effective December 31, 1996, the OCC amended its 
regulations governing the acquisition and establishment of operating 
subsidiaries by national banks. 12 CFR part 5. These regulations 
establish a process through which a national bank may seek approval to 
conduct activities in an operating subsidiary that are part of or 
incidental to the business of banking as determined by the OCC pursuant 
to 12 U.S.C. 24 (Seventh) or other statutory authority but that differ 
from the activities that are permissible for the national bank itself. 
The OCC always requires an application from a bank seeking to conduct a 
bank-impermissible activity in an operating subsidiary. If the activity 
proposed for the operating subsidiary has not been approved previously 
by the OCC, the OCC will publish a notice of the application in the 
Federal Register and solicit comment. The OCC may also follow this 
notice and comment procedure if the activity is one that the OCC has 
previously approved. 12 CFR 5.34(f).
    The framework in the regulation sets up a review process that has 
two, equally important components. First, the OCC reviews operating 
subsidiary applications to determine whether the proposed activities 
are legally permissible for an operating subsidiary. Second, the OCC 
evaluates the proposal to determine whether it is consistent with safe 
and sound banking practices and OCC policy and does not endanger the 
safety or soundness of the particular parent national bank.
    The operating subsidiary rule sets out a number of conditions, or 
firewalls, that the OCC will impose each time it approves the conduct 
of an activity in an operating subsidiary that the parent

[[Page 66340]]

bank could not do directly.1 In addition, the rule 
contemplates the imposition of other bank-specific conditions tailored 
to the facts and circumstances presented by the individual application. 
To date, the OCC has received and published notice of three 
applications to conduct activities, through an operating subsidiary, 
which would not be permissible for a national bank. Two applications 
were filed by NationsBank, National Association, (Charlotte, North 
Carolina) to engage in limited real estate development activities in 
connection with bank premises and to provide real estate lease 
financing through operating subsidiaries of the bank. The FDIC, in its 
final rule published elsewhere in today's Federal Register, dealt with 
state nonmember banks which seek to engage in real estate activities 
permissible for a national bank only through a subsidiary (subpart B of 
the amended part 362).
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    \1\ Under these conditions, the Sec. 5.34(f) operating 
subsidiary generally must: be physically separate from the parent; 
hold itself out as a separate and distinct entity; use a different 
name; have adequate capital; maintain separate accounting and 
corporate records; have independent policies and procedures designed 
to inform customers of the independence of the subsidiary; negotiate 
contracts with the parent at arm's length; hold separate board 
meetings; have at least one-third of the members of the board who 
are not directors of the bank who have relevant expertise; and have 
internal controls to manage financial and operational risks. 
Moreover, if the operating subsidiary will be conducting activities 
as principal, additional safety and soundness conditions are 
imposed, including that the bank's equity investment in the 
subsidiary must be deducted from the bank's capital and assets, and 
the assets and liabilities of the subsidiary may not be consolidated 
with those of the bank. In addition, the OCC will apply sections 23A 
and 23B of the Federal Reserve Act (12 U.S.C. 371c and 371c-1) to 
transactions between the parent bank and its operating subsidiary.
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    Another application was filed by Zions First National Bank, (Salt 
Lake City, Utah) (Zions) to conduct municipal revenue bond underwriting 
activities on April 8, 1997. The OCC published notice and requested 
comment in the Federal Register on April 18, 1997. 62 FR 19171. On 
December 11, 1997, the OCC announced its approval of the Zions' 
application allowing an operating subsidiary of a national bank to 
engage in the activities of underwriting, dealing in, and investing in 
state and municipal revenue bonds, subject to certain safety and 
soundness requirements.2
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    \2\ Zions applied to the OCC pursuant to 12 CFR 5.34(f) to 
commence a new activity in an existing operating subsidiary. The 
subsidiary would underwrite, deal in, and invest in securities of 
states and their political subdivisions. These securities include 
the following: (1) Obligations presently defined by the OCC as 
general obligations of states and political subdivisions (General 
Obligation Securities); and (2) other obligations of states and 
their political subdivisions that do not qualify under the OCC's 
current definitions as general obligations (Revenue Bonds). The OCC 
determined that the activity was permissible for an operating 
subsidiary under the authority of 12 U.S.C. 24 (Seventh) that allows 
a national bank to own operating subsidiaries that conduct 
activities that are incidental to the business of banking. In this 
case, the OCC determined that the activity of underwriting revenue 
bonds is incidental to banking by finding that underwriting revenue 
bonds is the functional equivalent or a logical outgrowth of 
activities that are currently conducted by national banks. However, 
the OCC reiterated that section 20 of the Glass-Steagall Act 
prohibits the affiliation of member banks with firms that 
principally engage in underwriting bank-ineligible securities. As a 
result, the OCC imposed a 25 percent revenue limitation on the 
Zions' subsidiary to conform to the limitation for section 20 
subsidiaries set by Board of Governors of the Federal Reserve 
System. The OCC imposed the conditions set forth in Sec. 5.34(f), 
including corporate separateness requirements and the applications 
of sections 23A and 23B of the Federal Reserve Act to transactions 
between the bank and its subsidiary. In addition, the OCC imposed 
other conditions tailored to the Zions' application. For example, it 
required disclosures to customers, including use of the Interagency 
Statement on Retail Sales of Nondeposit Investment Products 
(Interagency Statement), and limited opinions on the bonds by bank 
directors, officers and employees.
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    This OCC approval means that the requirement under section 24 and 
subpart A of part 362, that an insured state nonmember bank apply to 
the FDIC for consent to engage in this activity through a subsidiary, 
no longer applies. However, the FDIC did not remove Sec. 337.4 as 
proposed, but instead left Sec. 337.4 in place to require that an 
insured state nonmember bank file a notice and comply with the FDIC's 
safety and soundness requirements to engage in the distribution or 
underwriting of stocks, bonds, debentures, notes or other securities 
through a subsidiary.3
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    \3\ Section 362.4 of the final regulation establishes rules by 
which subsidiaries of insured state banks may conduct certain 
securities activities which are not permissible for a national bank 
subsidiary. Section 362.8(b) established similar rules for 
securities affiliates of insured state nonmember bank subsidiaries 
of so-called ``nonbank bank holding companies.'' As is specified in 
Sec. 337.4(i), the activities of such subsidiaries and affiliates 
are controlled by part 362, not Sec. 337.4.
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    Section 337.4 of the FDIC's regulations governs securities 
activities of subsidiaries of insured state nonmember banks as well as 
transactions between insured state nonmember banks and their securities 
subsidiaries and affiliates. The regulation was adopted in 1984 (49 FR 
46723) and is designed to promote the safety and soundness of insured 
state nonmember banks that have subsidiaries which engage in securities 
activities that are impermissible for banks directly, under section 16 
of the Banking Act of 1933 (12 U.S.C. 24 (Seventh)), commonly known as 
the Glass-Steagall Act. Section 337.4 requires that these subsidiaries 
qualify as bona fide subsidiaries; establishes transaction restrictions 
between a bank and its subsidiaries or other affiliates that engage in 
securities activities that are prohibited for banks under section 16; 
requires that an insured state nonmember bank give prior notice to the 
FDIC before establishing or acquiring any securities subsidiary; 
requires that disclosures be provided to securities customers in 
certain instances; and requires that a bank's investment in a 
securities subsidiary engaging in activities that are impermissible for 
a bank under section 16 be deducted from the bank's capital.
    Under the current version of Sec. 337.4, a subsidiary of a state 
nonmember bank that wanted to underwrite, deal in, and invest in 
municipal revenue bonds (securities of states and their political 
subdivisions that do not qualify under the OCC's current definition of 
general obligation bonds) would have to file a notice under Sec. 337.4 
and meet its requirements. To underwrite, deal in, or invest in 
municipal revenue bonds, the bank and its subsidiary would be required 
to:
    1. File a notice at least 60 days prior to the consummation of the 
operation of the subsidiary;
    2. Meet the ``bona fide subsidiary'' requirements as set forth in 
definition in Sec. 337.4;
    3. Deduct the capital invested in subsidiary from bank's total 
capital;
    4. Underwrite only debt securities of investment grade, unless the 
subsidiary has been in continuous operation for the five year period 
preceding the notice.4
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    \4\ According to the information provided in the application, 
the Zions' subsidiary appears to meet the 5-year operation test that 
Sec. 337.4 would apply to a state nonmember bank subsidiary. Section 
337.4 has no procedure for a bank to file an application to be 
relieved of the five year operation requirement; however, there is a 
waiver application procedure in Sec. 337.10. Any such application 
would be granted at the discretion of the FDIC's Board of Directors.
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    The applicability of Sec. 337.4 is not impacted by the OCC's 
approval of the Zions application. The application of Sec. 337.4 is 
independent of and was adopted prior to section 24 of the FDI Act and 
part 362. Section 337.4 is invoked based on the securities activities 
of the bank subsidiary and was adopted pursuant to an analysis of the 
Glass-Steagall Act undertaken in the early 1980s. In short, the 
regulation lists securities underwriting and distribution as an 
activity that will not pose a significant risk to the fund if conducted 
through a majority-owned subsidiary that operates in accordance with 
Sec. 337.4. Now, in this rulemaking proceeding, the FDIC proposes to 
remove and reserve Sec. 337.4 and address

[[Page 66341]]

the FDIC's standards governing bank subsidiary activities through part 
362.

II. Description of the Proposal

    In this proposal, the FDIC imposes safety and soundness constraints 
on insured state nonmember bank subsidiaries that engage in the public 
sale, distribution or underwriting of stocks, bonds, debentures, notes 
or other securities that may be permissible for a national bank 
subsidiary but are not permissible for a national bank directly. In 
this proposal, the FDIC also requires that an insured state nonmember 
bank file a 30-day advance notice before the bank's subsidiary may 
engage in other activities not permissible for a national bank directly 
that may be permissible for a national bank subsidiary. This 30-day 
advance notice is designed to allow the FDIC to review any such 
activity and consider whether safety and soundness considerations make 
it prudent that conditions be placed on FDIC's consent to allow such 
activities. The FDIC believes it gave sufficient notice in its August 
26, 1997, proposal to amend part 362 that the FDIC could adopt a final 
rule governing the insured state nonmember bank subsidiaries that 
engage in the public sale, distribution or underwriting of stocks, 
bonds, debentures, notes or other securities that are not permissible 
for a national bank that are permissible for national bank 
subsidiaries. However because regulatory text was not provided in its 
earlier proposal, the FDIC believes that it is appropriate to provide 
an additional opportunity for public comment before approving a final 
rule to govern insured state nonmember bank subsidiaries that engage in 
the public sale, distribution or underwriting of stocks, bonds, 
debentures, notes or other securities that may be permissible for a 
national bank subsidiary but are not permissible for a national bank.

A. Requirements for Securities Activities

    There are three general reasons the FDIC proposes the imposition of 
certain standards upon a state nonmember bank seeking to engage in the 
sale, distribution or underwriting of stocks, bonds, debentures, notes 
or other securities that may be permissible for a national bank 
subsidiary but are not permissible for a national bank itself: to 
ensure the bank is independent and operated in a manner consistent with 
safe and sound banking practices; to protect the insurance fund (the 
FDIC wants to avoid claims against the bank arising out of the public's 
misperception as to with whom it is dealing and in what capacity); and 
to comply with section 21 of the Glass-Steagall Act (12 U.S.C. 378), 
which prohibits securities companies from taking deposits and banks 
from engaging in certain securities activities. The FDIC has attempted 
to meet these goals in a manner that minimizes the burden to insured 
state nonmember banks without jeopardizing the FDIC's goals.
    Thus, the FDIC proposal contains more flexible physical separation 
standards than exist in the current version of Sec. 337.4. The FDIC 
views these proposed physical separation standards, coupled with the 
comprehensive requirements that include affirmative disclosures, 
investment limits, transaction requirements and capital standards, as 
adequate to protect bank safety and soundness, maintain the legal 
separation between the bank and its subsidiary and avoid customer 
confusion.
    The FDIC also proposes to eliminate the different treatment of 
state nonmember bank subsidiaries depending upon the type of securities 
underwritten by the subsidiary. Instead, the FDIC is focusing on 
prudent management policies and practices, and the sufficiency of the 
subsidiary's capitalization. Additionally, the FDIC proposes to 
eliminate the tiered approach to the securities activities of the 
subsidiary, which limited for five years the underwriting by a new 
subsidiary to investment quality debt securities, investment quality 
equity securities, mutual funds that invest exclusively in investment 
quality equity securities and/or investment quality debt securities. 
Section 337.4 currently does not permit a subsidiary to engage in the 
public sale, distribution or underwriting of stocks, bonds, debentures, 
notes or other securities that are not permissible for a bank under 
section 16 of the Glass-Steagall Act, unless the subsidiary meets the 
bona fide definition and the activities are limited to underwriting of 
investment quality securities. Later, a subsidiary can engage in 
additional underwriting if it meets the definition of a bona fide 
subsidiary and the following additional conditions are met:
    (a) The subsidiary is a member in good standing of the National 
Association of Securities Dealers (NASD);
    (b) The subsidiary has been in continuous operation for a five-year 
period preceding the notice to the FDIC;
    (c) No director, officer, general partner, employee or 10 percent 
shareholder has been convicted within five years of any felony or 
misdemeanor in connection with the purchase or sale of any security;
    (d) Neither the subsidiary nor any of its directors, officers, 
general partners, employees, or 10 percent shareholders is subject to 
any state or federal administrative order or court order, judgment or 
decree arising out of the conduct of the securities business;
    (e) None of the subsidiary's directors, officers, general partners, 
employees or 10 percent shareholders are subject to an order entered 
within five years issued by the Securities and Exchange Commission 
(SEC) pursuant to certain provisions of the Securities Exchange Act of 
1934 or the Investment Advisors Act of 1940; and
    (f) All officers of the subsidiary who have supervisory 
responsibility for underwriting activities have at least five years 
experience in similar activities at NASD member securities firms.
    Current Sec. 337.4 requires a bona fide subsidiary to be adequately 
capitalized, and therefore, these subsidiaries are required to meet the 
capital standards of the NASD and SEC. As a protection to the insurance 
fund, a bank's investment in these subsidiaries engaged in securities 
activities that would be prohibited to the bank under section 16 are 
not counted toward the bank's capital; that is, the investment in the 
subsidiary is deducted before compliance with capital requirements is 
measured.
    The FDIC views its established separations for banks and securities 
firms as creating an environment in which the FDIC's responsibility to 
protect the insurance fund has been met without creating too much 
overlapping regulation for the securities firms. The FDIC maintains an 
open dialogue with the NASD and the SEC concerning matters of mutual 
interest. To that end, the FDIC entered into an agreement in principle 
with the NASD concerning examination of securities companies affiliated 
with insured institutions and has begun a dialogue with the SEC 
concerning the exchange of information which may be pertinent to the 
mission of the FDIC.
    The number of banks which have subsidiaries engaging in securities 
activities that cannot be conducted by the bank itself is very small. 
These subsidiaries engage in the underwriting of debt and equity 
securities and distribution and management of mutual funds.
    Since implementation of the FDIC's Sec. 337.4 regulation, the 
relationships between banks and securities firms have not been a matter 
of supervisory concern due to the protections FDIC has in place. 
However, the FDIC realizes that in a time of financial turmoil these 
protections may not be adequate and a

[[Page 66342]]

program of direct examination could be necessary to protect the 
insurance fund. Thus, the continuation of the FDIC's examination 
authority in that area is important.

B. Notice Requirement for Other Activities Generally

    Under a safety and soundness standard, subpart B of the revised 
part 362 requires insured state nonmember bank subsidiaries engaging in 
certain enumerated activities to meet certain standards established by 
the FDIC, even if the OCC has determined that the activity in question 
is permissible for a subsidiary of a particular national bank. Under 
the modifications contained in this proposal, the FDIC would obtain the 
opportunity to review situations in which a state nonmember bank 
subsidiary seeks to engage in any activity determined by the OCC to be 
permissible for a national bank through its subsidiary, rather than 
through the national bank itself. This review would be analogous to the 
safety and soundness evaluation undertaken by the OCC with respect to 
operating subsidiary applications filed under Sec. 5.34(f) of its rules 
(12 CFR 5.34(f)). It also would provide the FDIC with an opportunity to 
impose appropriate conditions on the operations of the subsidiary. The 
FDIC's Board of Directors wants to ensure that the FDIC can make a 
determination if there are adverse effects on the safety and soundness 
of the insured state nonmember bank and reserve authority to impose 
appropriate conditions.

C. Authority

    The FDIC's action in proposing this regulation is fully within the 
agency's authority and is consistent with its stated goal of 
safeguarding the safety and soundness of insured state nonmember banks. 
The courts have recognized that defining what constitutes an unsafe or 
unsound banking practice in a particular fact situation is within the 
domain of the banking agencies. The United States Court of Appeals for 
the Fifth Circuit, on two occasions, stated that ``[o]ne of the 
purposes of the banking acts is clearly to commit the progressive 
definition and eradication of such practices to the expertise of the 
appropriate regulatory agencies.'' Groos National Bank v. Comptroller 
of the Currency, 573 F.2d 880, 897 (5th Cir. 1978); First National Bank 
of LaMargue v. Smith, 610 F.2d 1258, 1265 (5th Cir. 1980). The United 
States Court of Appeals for the D.C. Circuit has stated with regard to 
the OCC's authority under section 8 of the Federal Deposit Insurance 
Act (12 U.S.C. 1818)--one of the statutory provisions from which the 
FDIC derives authority for this rulemaking--that ``the Comptroller is 
entitled to accomplish his regulatory responsibilities over ``unsafe 
and unsound'' practices both by cease and desist proceedings and by 
rules defining and explicating the practices which in his discretion he 
finds threatening to a stable and effective national banking system.'' 
Independent Bankers Association of America v. Heimann, 613 F.2d 1164, 
1169 (D.C. Cir. 1979). In his testimony on financial modernization, the 
FDIC's Chairman recently confirmed the view that barriers between 
banking and commerce should be lowered cautiously and incrementally 
with safeguards to protect the insured bank.5
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    \5\ See ``Testimony on Financial Modernization'' of Andrew C. 
Hove, Jr., Chairman, Federal Deposit Insurance Corporation, Before 
the Subcommittee on Finance and Hazardous Materials, Committee on 
Commerce, United States House of Representatives, July 17, 1997.
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    Under the proposed regulation, the FDIC is not waiving its right to 
address on a case-by-case basis practices, conduct, or acts that are 
not specifically addressed by this regulation which it finds constitute 
unsafe and unsound practices. The FDIC will continue to monitor bank 
direct and indirect involvement in securities activities and will take 
whatever future action is appropriate.
    The FDIC requests comments about all aspects of this proposed 
revision to part 362. In addition, the FDIC is raising specific 
questions for public comment as set out in connection with the analysis 
of the proposal below.

III. Section by Section Analysis

A. Majority-owned Subsidiaries Engaging in the Public Sale, 
Distribution or Underwriting of Stocks, Bonds, Debentures, Notes or 
Other Securities That Are Not Permissible for a National Bank Under 
Section 16 of the Banking Act of 1933

1. Description of the Rule
    In connection with its recent adoption of restrictions, under 
subpart A of part 362, for insured state bank subsidiaries seeking to 
engage in the sale, distribution or underwriting of stocks, bonds, 
debentures, notes or other securities that are not permissible for a 
national bank and its subsidiary, the FDIC has determined that such 
activities may involve risk. The FDIC consequently requires insured 
state banks to file a notice to conduct this activity through a 
majority-owned subsidiary. As long as the FDIC does not object to the 
notice, the bank may conduct the activity in compliance with the 
requirements set out in the rule. The fact that prior consent is not 
required by subpart A does not preclude the FDIC from taking any 
appropriate action with respect to the activities if the facts and 
circumstances warrant such action.
    In developing the proposed amendments under consideration here, the 
FDIC did not see a need for differing treatment based on whether the 
insured state nonmember bank subsidiaries that engage in the public 
sale, distribution or underwriting of stocks, bonds, debentures, notes 
or other securities that are not permissible for a national bank are 
engaging in a similar activity that is permissible for a national bank 
subsidiary. In either instance, the proposal would provide the same 
comprehensive structure for insured state nonmember bank subsidiaries 
that engage in the public sale, distribution or underwriting of stocks, 
bonds, debentures, notes or other securities that are not permissible 
for a national bank.
    Thus, the standards being proposed as amendments to subpart B 
addressing safety and soundness concerns are the same as those that 
were adopted in subpart A in the final rule. The difference is that the 
activities addressed in subpart A are not permissible for a national 
bank subsidiary while the activities addressed in subpart B are those 
that are permissible for a national bank subsidiary. Thus, the 
activities addressed in subpart A are addressed primarily under the 
authority found in section 24 of the FDI Act whereas the activities 
addressed in subpart B are addressed under the authority found in 
section 8 of the FDI Act.
    The revised language would be located in subpart B of part 362 and 
would become part of proposed Sec. 362.8(a).
    Subpart A of part 362 does not grant authority to conduct 
activities or make investments; subpart A only gives relief from the 
prohibitions of section 24 of the FDI Act. In subpart A, the FDIC 
grouped the exception for insured state bank subsidiaries that engage 
in the public sale, distribution or underwriting of stocks, bonds, 
debentures, notes or other securities that are not permissible for a 
national bank together with the real estate exception in the structure 
of the regulation to promote uniform standards across activities. In a 
parallel fashion in subpart B, the FDIC proposes to group the exception 
for insured state nonmember banks that acquire or establish 
subsidiaries that engage in the public sale, distribution or 
underwriting of stocks, bonds, debentures, notes or other securities 
that are permissible for

[[Page 66343]]

a national bank only through a subsidiary together with the real estate 
exception in the structure of the regulation, to promote uniform 
standards across activities.
    Similarly, the authority, constraints and notice process refers 
back to subpart A and incorporates the same requirements and 
limitations as govern securities underwriting activities thereunder. In 
both instances the proposal would require the insured state nonmember 
bank and its subsidiary to meet and continue to meet the following 
standards to engage in the activity after notice to the FDIC, rather 
than making a full application:
    1. The bank must meet the requirements for an ``eligible depository 
institution;'' 6
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    \6\ An ``eligible depository institution'' is a depository 
institution that: (1) Has been chartered and operating for at least 
three years or is in an acceptable holding company structure; (2) 
received an FDIC-assigned composite UFIRS rating of 1 or 2 at its 
most recent examination; (3) received a rating of 1 or 2 under the 
``management'' component of the UFIRS at its most recent 
examination; (4) received at least a satisfactory CRA rating from 
its primary federal regulator at its last examination; (5) received 
a compliance rating of 1 or 2 from its primary federal regulator at 
its last examination; and (6) is not subject to any corrective or 
supervisory order or agreement.
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    2. The bank must be well capitalized after deducting its investment 
in the subsidiary;
    3. The subsidiary must be an ``eligible subsidiary;'' 7
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    \7\ An entity is an ``eligible subsidiary'' if it: (1) Meets the 
capital requirements; (2) is physically separate and distinct in its 
operations; (3) maintains separate accounting and other records; (4) 
observes separate business formalities; (5) has a chief executive 
officer who is not an employee of the bank; (6) has a majority of 
its board of directors who are neither directors nor officers of the 
state-chartered depository institution; (7) conducts business 
pursuant to independent policies and procedures; (8) has only one 
business purpose; (9) has a current written business plan that is 
appropriate to the type and scope of business conducted by the 
subsidiary; (10) has adequate management; and (11) establishes 
policies and procedures to ensure adequate computer, audit and 
accounting systems, internal risk management controls, and has the 
necessary operational and managerial infrastructure to implement the 
business plan.
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    4. The bank and the subsidiary must comply with the investment 
limits, transaction requirements and collateralization requirements in 
dealing with each other;
    5. The bank must adopt policies and procedures to govern its 
participation in financing transactions arranged by the subsidiary;
    6. The bank may not express an opinion of value or advisability of 
securities underwritten by the subsidiary unless the customer is 
notified of the bank's relationship with the subsidiary;
    7. The subsidiary must be registered with SEC and agree to notify 
the regional office of any material actions against the subsidiary by 
any state authorities or the SEC; and
    8. The bank may not buy securities underwritten by the subsidiary 
as principal or fiduciary unless the bank's board of directors 
approves.
    The proposed requirements are uniform with other part 362 notice 
procedures for insured state bank subsidiaries to engage in activities 
not permissible for national banks or their subsidiaries, and would 
recognize the level of risk present in subsidiaries that engage in the 
public sale, distribution or underwriting of stocks, bonds, debentures, 
notes or other securities that are not permissible for a national bank 
itself. These requirements are not all presently found in Sec. 337.4 
but the FDIC believes that only banks that are well-run and well-
managed should be given the opportunity to engage in securities 
activities that are not permissible for a national bank under the 
streamlined notice procedures. These criteria are imposed as expedited 
processing criteria rather than substantive criteria. Banks not meeting 
these criteria that want to engage in these activities should be 
subject to the scrutiny of the application process. Although operations 
not permissible for a national bank are conducted and managed by a 
separate majority-owned subsidiary, such activities are part of the 
analysis of the consolidated financial institution. The condition of 
the institution and the ability of its management are an important 
component in determining if the risks of the securities activities will 
have a negative impact on the insured institution.
    When the FDIC initially implemented Sec. 337.4 on securities 
activities of subsidiaries of insured state nonmember banks, the FDIC 
determined that some risk may be associated with those activities. The 
FDIC continues to see a need to address that risk. The FDIC requests 
comment on the application of these safeguards to these activities, 
including the utility of management and board separations to limit 
controlling person liability and the inappropriate disclosure of 
material nonpublic information; the extent that any securities 
underwriting liability may have been reduced due to the enactment of 
The Private Securities Litigation Reform Act of 1995, Public Law 104-
67; and the efficacy of more limited restrictions on officer and 
director interlocks to prevent both liability and information sharing 
and any related issues.8
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    \8\ Liability of ``controlling persons'' for securities law 
violations by the persons or entities they ``control'' is found in 
section 15 of the Securities Act of 1933, 15 U.S.C. 77o and section 
20 of the Securities and Exchange Act of 1934, 15 U.S.C. 78t(a). 
Although the tests of liability under these statutes vary slightly, 
the FDIC is concerned that liability may be imposed on a parent 
entity that is a bank under the most stringent of these authorities 
in the securities underwriting setting. Under the Tenth Circuit's 
permissive test for controlling person liability, any appearance of 
an ability to exercise influence, whether directly or indirectly, 
and even if such influence cannot amount to control, is sufficient 
to cause a person to be a controlling person within the meaning of 
section 15 or section 20. Although liability may be avoided by 
proving no knowledge or good faith, proving no knowledge requires no 
knowledge of the general operations or actions of the primary 
violator and good faith requires both good faith and 
nonparticipation. See First Interstate Bank of Denver, N.A. v. 
Pring, 969 F.2d 891 (10th Cir. 1992), rev'd on other grounds, 511 
U.S. 164 (1994); Arena Land & Inv. Co. Inc. v. Petty, 906 F. Supp. 
1470 (D. Utah 1994); San Francisco-Oklahoma Petroleum Exploration 
Corp. v. Carstan Oil Co., Inc., 765 F.2d 962 (10th Cir. 1985); 
Seattle-First National Bank v. Carlstedt, 978 F. Supp. 1543 (W.D. 
Okla. 1987). However, to the extent that any securities underwriting 
liability may have been reduced due to the enactment of The Private 
Securities Litigation Reform Act of 1995, Pub .L. 104-67, then the 
FDIC's concerns regarding controlling person liability may be 
reduced. It is likely that the FDIC will want to await the 
development of the standards under this new law before taking 
actions that could risk liability on a parent bank that has a 
subsidiary that engages in the public sale, distribution or 
underwriting of stocks, bonds, debentures, notes or other securities 
that are not permissible for a national bank.
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2. Substantive Changes to the Subsidiary Underwriting Activities
    Generally, these proposed amendments to subpart B, as compared to 
the current provisions of Sec. 337.4 governing the state nonmember bank 
subsidiaries that engage in the public sale, distribution or 
underwriting of stocks, bonds, debentures, notes or other securities 
that are not permissible for a bank under section 16 of Glass-Steagall, 
have been streamlined to make compliance easier. In addition, state 
nonmember banks that deem any particular constraint to be burdensome 
may file an application with the FDIC to have the constraint removed 
for that bank and its majority-owned subsidiary.
    The FDIC has proposed to eliminate those constraints that were 
deemed to overlap with other requirements or that could be eliminated 
and still maintain safety and soundness. The FDIC has determined that 
it can adequately monitor other securities activities through its 
regular reporting and examination processes. We invite comment on 
whether the elimination of the other notices now found in Sec. 337.4, 
such as the notice requirement for any

[[Page 66344]]

securities activity in Sec. 337.4(d), is appropriate.
    The FDIC proposes the removal of the customer disclosures currently 
contained in Sec. 337.4. Instead, the FDIC will be relying on the 
Interagency Statement on the Retail Sale of Nondeposit Investment 
Products (FIL-9-94,9 February 17, 1994) (or any successor 
requirement) as applicable guidance to ensure that appropriate 
disclosures are made when the subsidiary's products are sold on bank 
premises, are sold by bank employees or are sold when the bank receives 
a referral fee. While the current regulation requires disclosures, 
those disclosures are similar but not identical to the disclosures 
required by the Interagency Statement. This change makes compliance 
easier. Comments submitted to the FDIC in connection with its recent 
revisions to subpart A of part 362 support this change and recognize 
that any retail sale of nondeposit investment products to bank 
customers under such circumstances are subject to the Interagency 
Statement. The FDIC requests comment on whether the Interagency 
Statement provides adequate disclosures for retail sales in a 
securities subsidiary and whether required compliance with that policy 
statement needs to be specifically mentioned in the regulatory text. 
Comment is invited on whether any other disclosures currently in 
Sec. 337.4 should be retained or if any additional disclosures would be 
appropriate.
---------------------------------------------------------------------------

    \9 \ Financial institution letters (FILs) are available in the 
FDIC Public Information Center, room 100, 801 17th Street, N.W., 
Washington, D.C. 20429.
---------------------------------------------------------------------------

    The FDIC proposes to continue to impose many of the safeguards 
found in section 23A of the Federal Reserve Act (12 U.S.C. 371c) and to 
impose the safeguards similar to section 23B of the Federal Reserve Act 
(12 U.S.C. 371c-1). The FDIC requests comment on the restrictions that 
have been removed, including whether any of these restrictions should 
be reimposed for securities activities. The FDIC also invites 
suggestions for further improvements.
    The FDIC proposes that the notice period be shortened from the 
existing 60 days to 30 days and that the required notice and 
application procedures be located in subpart G of part 303. Previously, 
specific instructions and guidelines on the form and content of any 
applications or notices required under Sec. 337.4 were found within 
that section.
    With regard to any insured state nonmember banks that have been 
engaging in these activities under a notice filed and in compliance 
with Sec. 337.4, the proposed regulation would allow those activities 
to continue under the terms of that approval. This result differs from 
the approach set out in Sec. 362.5(b) (applicable to state banks 
engaging in securities activities impermissible for a national bank and 
its subsidiary), which requires that the bank and its majority-owned 
subsidiaries meet the core eligibility requirements, the investment and 
transaction limitations, and capital requirements contained in 
Sec. 362.4(c), (d), and (e). The FDIC did not consider the additional 
requirements to be necessary in subpart B, because we are not aware of 
any insured state nonmember banks having subsidiaries that are 
underwriting only securities that would fall under subpart B. We 
believe that any subsidiaries that are underwriting the types of 
securities regulated under subpart B already are required to follow the 
continuation requirements found in subpart A.
3. Notice for Change in Circumstances
    The final rule in subpart A applicable to state banks engaging in 
securities activities impermissible for a national bank and its 
subsidiary (Sec. 362.4(b)(5)) requires the bank to provide written 
notice to the appropriate Regional Office of the FDIC within 10 
business days of a change in circumstances. A change in circumstances 
is described as a material change in a subsidiary's business plan or 
management. Under the proposal, subpart B incorporates this requirement 
by reference. The FDIC believes that it can address a bank's falling 
out of compliance with any of the other requirements of the regulation 
through the normal supervision and examination process.

B. Other Activities Permissible for Subsidiaries of a National Bank 
That Are Not Permissible for a National Bank

    In this proposal, the FDIC requires that an insured state nonmember 
bank file a 30-day advance notice before the bank's subsidiary may 
engage in other activities not permissible for a national bank that may 
be permissible for a national bank subsidiary. This 30-day advance 
notice is designed to allow FDIC to review any such activity and 
consider whether safety and soundness considerations make it prudent 
that conditions be placed on FDIC's consent to allow such activities.
    Since section 24 was enacted, the OCC has confirmed through its 
rule governing operating subsidiaries that there may be activities that 
are permissible for national bank subsidiaries even though the parent 
national bank may not conduct them directly. The FDIC needs to review 
the activities and assess their safety and soundness in determining 
whether the activity is appropriate for an insured state nonmember 
bank's subsidiary. The FDIC also needs to determine whether any 
conditions should be placed on the conduct of that activity. The FDIC 
cannot assess the activities that may be approved in the future and 
adopt specific standards to govern those activities. This safety and 
soundness review and, if appropriate, the imposition of conditions 
should be done on a case-by-case basis. The FDIC has elected to limit 
its review to a 30-day period to limit the burden from this 
requirement.

IV. Additional Requests for Comments

    The FDIC is specifically requesting comments that address the 
following:
    (1) What criteria should the FDIC use to decide whether an activity 
that is permissible for a national bank subsidiary but not permissible 
for the national bank may be conducted in a safe and sound fashion by a 
subsidiary of an insured state nonmember bank?
    (2) Should activities that are permissible for a national bank 
subsidiary but are not permissible for the national bank be limited to 
subsidiaries of insured state nonmember banks of a certain asset size, 
with a certain composite rating, etc.?
    (3) What are the likely competitive effects of authorizing insured 
state nonmember banks to engage (through subsidiaries) in activities 
that are permissible for a national bank subsidiary but are not 
permissible for the national bank?
    (4) Alternately, are there other approaches or methods which would 
facilitate access without compromising traditional safety and soundness 
concerns?
    Comments addressing these issues and any other aspects of the 
general subject of permitting subsidiaries of insured state nonmember 
banks to engage in activities that are permissible for a national bank 
subsidiary but are not permissible for the national bank will be 
welcomed.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 
3501 et seq.) the FDIC may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid Office of Management and Budget (OMB) control number. 
The collection of information contained in this proposed rule has been 
submitted to

[[Page 66345]]

OMB for review. Comments on the collection of information should be 
sent to the desk officer for the agencies: Alexander T. Hunt, Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
New Executive Office Building, Room 3208, Washington, DC 20503. Copies 
of comments should also be sent to: Steven F. Hanft, FDIC Clearance 
Officer, Office of the Executive Secretary, Federal Deposit Insurance 
Corporation, 550 17th Street, NW, Washington, DC 20429, (202) 898-3907. 
Comments may be hand-delivered to the guard station at the rear of the 
17th Street building (located on F Street) on business days between 
7:00 a.m. and 5:00 p.m. [Fax number (202) 898-3838; Internet address: 
[email protected]]. For further information on the Paperwork Reduction 
Act aspect of this rule, contact Steven F. Hanft at the above address.
    Comment is solicited on:
    (i) Whether the proposed collection of information is necessary for 
the proper performance of the functions of the agency, including 
whether the information will have practical utility;
    (ii) The accuracy of the agency's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used;
    (iii) The quality, utility, and clarity of the information to be 
collected; and
    (iv) Ways to minimize the burden of the collection of information 
on those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    Title of the collection: The proposed rule will modify an 
information collection previously approved by OMB titled ``Activities 
and Investments of Insured State Banks'' under control number 3064-
0111.
    Summary of the collection: Generally, the collection includes the 
description of the activity in which an insured state bank or its 
subsidiary proposes to engage that would be impermissible absent the 
FDIC's consent or nonobjection, and information about the relationship 
of the proposed activity to the bank's and /or subsidiary's operation 
and compliance with applicable laws and regulations.
    Need and Use of the information: The FDIC uses the information to 
determine whether to grant consent or provide a nonobjection for the 
insured state bank or its subsidiary to engage in the proposed activity 
that otherwise would be impermissible pursuant to section 8 of the FDI 
Act and 12 CFR part 362.
    Proposed changes to the collection: The proposed rule will modify 
the collection in two ways. First, by adding, at Sec. 362.8(a)(2), the 
requirement of a notice to the FDIC before the state nonmember bank 
through a subsidiary engages in either the public sale, distribution or 
underwriting of stocks, bonds, debenture, notes or other securities if 
those activities are permissible for a national bank subsidiary but are 
not permissible for the national bank itself. Second, by adding, at 
Sec. 362.8(b), the requirement of a notice to the FDIC before the state 
nonmember bank through a subsidiary engages in activities that are 
permissible for a national bank subsidiary but are not permissible for 
the national bank itself. The contents of both notices are described at 
Sec. 303.121(b) of the final part 362 rule also published in today's 
Federal Register.
    Respondents: Banks or their subsidiaries desiring to engage in 
activities that would be impermissible absent the FDIC's consent or 
nonobjection.
    Estimated annual burden resulting from this proposed rulemaking:

Frequency of response: Occasional
Number of responses: 1
Average number of hours to prepare a response: 8 hours
Total annual burden: 8 hours

VI. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
FDIC certifies that this proposed rule will not have a significant 
economic impact on a substantial number of small entities. As noted 
above in connection with the Paperwork Reduction Act, the FDIC 
estimates that the incidences in which insured state nonmember banks 
will be required to file a notice under the rule will be infrequent, 
and will not require significant time to complete. Furthermore, the 
proposed rule streamlines requirements for insured state nonmember 
banks. It simplifies the requirements that apply when insured state 
nonmember banks conduct certain securities activities through majority-
owned corporate subsidiaries. Whenever possible, the rule clarifies the 
expectations of the FDIC when it requires notices or applications to 
consent to activities by insured state banks. The proposed rule will 
make it easier for small insured state banks to locate the rules that 
apply to their investments.

List of Subjects

12 CFR Part 303

    Administrative practice and procedure, Authority delegations 
(Government agencies), Bank deposit insurance, Banks, banking, Bank 
merger, Branching, Foreign branches, Golden parachute payments, Insured 
branches, Interstate branching, Reporting and recordkeeping 
requirements, Savings associations.

12 CFR Part 337

    Banks, banking, Reporting and recordkeeping requirements, Savings 
associations, Securities.

12 CFR Part 362

    Administrative practice and procedure, Authority delegations 
(Government agencies), Bank deposit insurance, Banks, banking, Insured 
depository institutions, Investments, Reporting and recordkeeping 
requirements.

    For the reasons set forth above and under the authority of 12 
U.S.C. 1819(a) (Tenth), the FDIC Board of Directors hereby proposes to 
amend 12 CFR chapter III as follows:

PART 303--FILING PROCEDURES AND DELEGATIONS OF AUTHORITY

    1. The authority citation for part 303 continues to read as 
follows:

    Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817, 1818, 1819 
(Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1, 
1835a, 3104, 3105, 3108, 3207; 15 U.S.C. 1601-1607.

    2. In Sec. 303.122, the first sentence of paragraph (a) and the 
first sentence of paragraph (b) are revised to read as follows:


Sec. 303.122  Processing.

    (a) Expedited processing. A notice filed by an insured state bank 
seeking to commence or continue an activity under Sec. 362.4(b)(3)(i), 
Sec. 362.4(b)(5), Sec. 362.8(a)(2), or Sec. 362.8(b) of this chapter 
will be acknowledged in writing by the FDIC and will receive expedited 
processing, unless the applicant is notified in writing to the contrary 
and provided a basis for that decision. * * *
    (b) Standard processing for applications and notices that have been 
removed from expedited processing. For an application filed by an 
insured state bank seeking to commence or continue an activity under 
Sec. 362.3(a)(iii)(A), Sec. 362.3(b)(2)(i), Sec. 362.3(b)(2)(ii)(C), 
Sec. 362.4(b)(1), Sec. 362.4(b)(2), Sec. 362.4(b)(4), Sec. 362.5(b)(2), 
Sec. 362.8(a)(2), or Sec. 362.8(c) of this chapter or for notices which 
are not processed pursuant to the expedited

[[Page 66346]]

processing procedures, the FDIC will provide the insured state bank 
with written notification of the final action as soon as the decision 
is rendered. * * *

PART 337--UNSAFE AND UNSOUND BANKING PRACTICES

    4. The authority citation for part 337 continues to read as 
follows:

    Authority: 12 U.S.C. 375a(4), 375b, 1816, 1818(a), 1818(b), 
1819, 1820(d)(10), 1821(f), 1828(j)(2), 1831f, 1831f-1.


Sec. 337.4  [Removed and Reserved]

    5. Sec. 337.4 is removed and reserved.

PART 362--ACTIVITIES OF INSURED STATE BANKS AND INSURED SAVINGS 
ASSOCIATIONS

    6. The authority citation for part 362 continues to read as 
follows:

    Authority: 12 U.S.C. 1816, 1818, 1819(a) (Tenth), 1828(m), 
1831a, 1831e.

Subpart B--Safety and Soundness Rules Governing Insured State 
Nonmember Banks

    7. In Sec. 362.6, remove the third sentence and add two sentences 
in its place to read as follows:


Sec. 362.6  Purpose and scope.

    * * * The following standards shall apply for insured state 
nonmember banks to conduct either real estate investment or to engage 
in the public sale, distribution or underwriting of stocks, bonds, 
debentures, notes or other securities through a subsidiary if those 
activities are permissible for a national bank subsidiary but are not 
permissible for the national bank itself. The FDIC also requires that 
notices be filed before insured state nonmember banks conduct any other 
activities through a subsidiary if those activities are permissible for 
a national bank subsidiary but are not permissible for a national bank. 
* * *
    8. In Sec. 362.8, revise paragraph (a), redesignate paragraph (b) 
as paragraph (c) and add new paragraph (b) to read as follows:


Sec. 362.8  Restrictions on activities of insured state nonmember 
banks.

    (a) Real estate investment or engaging in the public sale, 
distribution or underwriting of stocks, bonds, debentures, notes or 
other securities through a subsidiary if those activities are 
permissible for a national bank subsidiary but are not permissible for 
the national bank itself. The FDIC Board of Directors has found that, 
depending on the facts and circumstances presented by a particular 
case, real estate investment or engaging in the public sale, 
distribution or underwriting of stocks, bonds, debentures, notes or 
other securities activities may have adverse effects on the safety and 
soundness of an insured state nonmember bank. Therefore, an insured 
state nonmember bank may not establish or acquire a subsidiary that 
engages in such real estate investment or in the public sale, 
distribution or underwriting of stocks, bonds, debentures, notes or 
other securities activities unless the insured state nonmember bank:
    (1) Has an approval previously granted by the FDIC and continues to 
meet the conditions and restrictions of the approval; or
    (2) Meets the requirements for engaging in real estate investment 
or securities underwriting activities (as relevant) as set forth in 
Sec. 362.4(b)(5), and submits a corresponding notice under Sec. 303.121 
and Sec. 303.122(a) of this chapter to which no objection is taken by 
FDIC, or applies for and obtains the FDIC's consent in accordance with 
the procedures of Sec. 303.121 and Sec. 303.122(b) of this chapter.
    (b) Other activities permissible for subsidiaries of a national 
bank that are not permissible for a national bank. The FDIC Board of 
Directors has found that depending on the facts and circumstances of a 
particular case, the conduct of an activity in a subsidiary of an 
insured state nonmember bank that is not permissible for a national 
bank may have adverse effects on the safety and soundness of the 
insured state nonmember bank. The FDIC Board of Directors has found 
that the FDIC cannot make a determination whether there are adverse 
effects on the safety and soundness of an insured state nonmember bank 
engaging through a subsidiary in an activity not permissible for a 
national bank but permissible for a subsidiary of a national bank, 
unless the FDIC has had an opportunity for prior review of the 
activities. Therefore, an insured state nonmember bank may not 
establish or acquire a subsidiary that engages in such an activity 
unless the insured state nonmember bank obtains the FDIC's consent. 
Consent will be given only if the FDIC determines the activity poses no 
adverse effects on the safety and soundness of the insured state 
nonmember bank. Notices should be filed in compliance with 
Secs. 303.121 and 303.122(a) of this chapter. Approvals granted under 
Sec. 303.122(a) of this chapter may be made subject to any conditions 
or restrictions found by the FDIC to be necessary to protect the 
deposit insurance funds from risk, prevent unsafe or unsound banking 
practices, and/or ensure that the activity is consistent with the 
purposes of federal deposit insurance and other applicable law. If the 
FDIC previously granted an approval to the insured state nonmember bank 
to engage in the activity, the bank need not file another notice under 
this section.
* * * * *

    By order of the Board of Directors.

    Dated at Washington, DC, this 5th day of November 1998.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 98-31151 Filed 11-30-98; 8:45 am]
BILLING CODE 6714-01-P