[Federal Register Volume 65, Number 29 (Friday, February 11, 2000)]
[Proposed Rules]
[Pages 6924-6925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-3162]


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FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-1060]


Revisions Regarding Tying Restrictions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board of Governors of the Federal Reserve System is 
seeking public comment on a proposed exception to the anti-tying 
restrictions of section 106 of the Bank Holding Company Act Amendments 
of 1970 and the Board's Regulation Y. The proposed amendment would 
establish a ``safe harbor'' permitting a bank to offer a credit card 
that can be used to make purchases from a retailer affiliated with the 
bank.

DATES: Comments must be received by March 13, 2000.

ADDRESSES: Comments should refer to Docket No. R-1060, and may be 
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW, 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays or 
delivered to the guard station in the Eccles Building Courtyard on 20th 
Street, NW (between Constitution Avenue and C Street, NW) at any time. 
All comments received at the above address will be available for 
inspection and copying by any member of the public in the Freedom of 
Information Office, Room MP-500 of the Martin Building, between 9:00 
a.m. and 5:00 p.m. weekdays, except as provided in Sec. 261.14 of the 
Board's Rules Regarding the Availability of Information (12 CFR 
261.14).

FOR FURTHER INFORMATION CONTACT: Scott G. Alvarez, Associate General 
Counsel (202/452-3583), or Andrew S. Baer, Attorney (202/452-2246), 
Legal Division. Users of Telecommunication Device for Deaf (TTD) only, 
contact Diane Jenkins at (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 the availability 
or price of a product or service to the purchase by a customer of 
another product or service offered by the bank or any of its 
affiliates. 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.
    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 (``a 
traditional bank product'') offered by that bank. The Board has 
extended this exception by providing that a bank may condition the 
availability of, or vary the consideration for, any product or service 
on the condition that the customer obtain a traditional bank product 
from an affiliate of the bank (the ``regulatory traditional bank 
product exception'').\1\ The Board adopted the regulatory traditional 
bank product exception in its present form because inter-affiliate 
transactions do not appear to pose any greater risk of anti-competitive 
behavior than intra-bank transactions, and because Congress had 
extended the statutory traditional bank product exception to cover 
inter-affiliate transactions for savings associations and their 
affiliates.\2\
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    \1\ See 12 CFR 225.7(b)(1).
    \2\ See 62 FR 9289, 9314 (February 18, 1997), and 12 U.S.C. 
1464(q)(1)(A).
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    Section 106 authorizes the Board to grant exceptions to its 
restrictions by regulation or order. On December 7, 1999, the General 
Counsel of the Board issued a legal interpretation indicating the 
Board's view that section 106 does not prohibit a credit card bank from 
issuing a credit card that may be used to make purchases from a 
retailer affiliated with the credit card bank (``private-label credit 
card'').\3\ The Interpretation did not address the situation where a 
bank or its retailer affiliate offer discounts on their respective 
products in connection with a private-label credit card arrangement, as 
that situation was not presented by the request for an interpretation. 
The proposed exception also does not cover that situation.
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    \3\ See Letter from J. Virgil Mattingly, Jr., to William S. 
Eckland, Esq., dated December 7, 1999 (the ``Interpretation'').
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Proposed Rule

    The Board is proposing to use its statutory authority to grant a 
regulatory exemption to section 106 for private-label credit cards that 
may be used at a retailer affiliated with the issuing bank. The Board 
is proposing the exception in order to disseminate the Board's view, as 
reflected in the Interpretation, that such arrangements are not as a 
general matter anticompetitive, and to create a rule of more general 
applicability not limited to the facts on which the Interpretation was 
based.

[[Page 6925]]

Applicability of Section 106

    Because section 106 prohibits a bank from offering or discounting a 
product or service on the condition that the customer obtain some 
additional product or service from the bank or from any of its 
affiliates, the question arose as to whether a private-label credit 
card arrangement violates that restriction when credit is extended only 
when a customer makes a purchase from a retailer affiliated with the 
issuing bank. Although the extension of credit through the private-
label credit card is not conditioned on any particular product being 
purchased, or on purchases being made from any particular retailer, the 
lack of a network with other retailers limits the ability of the 
customer to access that credit other than by purchasing a product or 
service from the affiliated retailer. In the private-label credit card 
arrangement described in the Interpretation, there is no contractual 
limitation on where the card can be used to make purchases. The reason 
why the private-label credit card can only be used at the affiliated 
retailer is that the retailer is the only merchant able to communicate 
with the issuing bank regarding whether credit should be extended on 
the card.

Exception

    The Interpretation reflects the Board's belief that private-label 
credit cards issued by a bank affiliated with the relevant retailer do 
not generally involve the type of anticompetitive activity that section 
106 was intended to address. Section 106 was intended to prevent banks 
from using their market power in banking products to gain an unfair 
competitive advantage in markets for non-banking products and services. 
The type of private-label credit card arrangements described in the 
Interpretation do not raise such concerns, however, because they do not 
involve a banking organization's attempt to expand into retailing, but 
rather a retailer's attempt to provide an additional convenience for 
its customers. Additionally, because the same products and services can 
be purchased from the retailer for the same price using payment methods 
other than the private-label credit card, customers wishing to purchase 
those products and services are not coerced into using the private-
label credit card. The Interpretation also noted that such transactions 
are driven by the customer's desire to purchase the product or service, 
not by the availability or nonavailability of credit from the 
affiliated bank.
    For these reasons, the Board is proposing to establish, through a 
regulatory exception, a safe harbor for private-label credit card 
arrangements where such cards may only be used to make purchases from a 
retailer affiliate of the issuing bank. The proposed safe harbor is 
consistent with the concerns of section 106 about anticompetitive 
behavior. The proposal requires that the products or services be 
available for purchase at the same price by means other than the 
private-label credit card, such as cash or credit cards issued by a 
third party. Furthermore, the issuing bank may not discount the credit 
it offers through the private-label credit card to customers who use 
the card to make purchases at the bank's retailer affiliate. Because a 
customer could purchase any product or service from the retailer for 
the same price, regardless of the payment method, the only incentive 
for the customer to use the private-label credit card is the 
convenience it offers as an alternative source of credit for use in 
making purchases from the retailer affiliate. For this reason, the 
Board does not believe that the proposed rule would allow coercive or 
anticompetitive practices, or otherwise contravene the purposes of 
section 106.
    Finally, the Board believes that the proposed rule would benefit 
the public by providing consumers with alternative sources of consumer 
credit.

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 
proposed rule.

Regulatory Flexibility Act

    This proposal is not expected to have a significant economic impact 
on a substantial number of small business entities within the meaning 
of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). It is 
intended to allow affected businesses to expand the services they may 
offer to customers.

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 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, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 
3909.

    2. In Sec. 225.7, a new paragraph (b)(4) is added to read as 
follows:


Sec. 225.7  Exceptions to tying restrictions.

    (b) * * *
    (4) Safe harbor for retailer-affiliated credit card banks. Issue 
credit cards that may be used to purchase products or services from a 
retailer affiliated with the bank, if:
    (i) The products or services may be purchased from the retailer 
affiliate using other payment methods, including credit cards issued by 
other banks;
    (ii) The bank does not discount the credit it offers through the 
credit card to customers of its retailer affiliate; and
    (iii) The retailer affiliate of the bank does not discount its 
products or services when purchased using credit cards issued by the 
bank.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, February 7, 2000.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 00-3162 Filed 2-10-00; 8:45 am]
BILLING CODE 6210-01-P