[Federal Register Volume 65, Number 48 (Friday, March 10, 2000)]
[Rules and Regulations]
[Pages 12905-12916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-5830]



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  Federal Register/Vol. 65, No. 48/Friday, March 10, 2000/Rules and 
Regulations  

[[Page 12905]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 5

[Docket No. 00-07]
RIN 1557-AB80


Financial Subsidiaries and Operating Subsidiaries

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
amending its regulations to implement section 121 of the Gramm-Leach-
Bliley Act, which authorizes national banks to conduct expanded 
financial activities through financial subsidiaries. The OCC also is 
revising its operating subsidiary rule to make conforming changes and 
streamline procedures for banks that engage in activities through 
operating subsidiaries. Finally, the OCC is revising its regulation 
governing other equity investments to make corresponding changes to the 
procedures for certain types of non-controlling investments.

EFFECTIVE DATE: March 11, 2000.

FOR FURTHER INFORMATION CONTACT: Stuart Feldstein, Assistant Director, 
Legislative and Regulatory Activities or Karl Betz, Attorney, 
Legislative and Regulatory Activities Division, (202) 874-5090, Office 
of the Comptroller of the Currency, 250 E Street, SW, Washington, DC, 
20219.

SUPPLEMENTARY INFORMATION:  

Background

    On January 20, 2000, the OCC published a notice of proposed 
rulemaking (65 FR 3157) (proposal) to implement section 121 of the 
Gramm-Leach-Bliley Act, Public Law 106-102 (GLBA), which authorizes 
national banks to invest in a new type of subsidiary called a 
``financial subsidiary.'' As defined in the proposal, a financial 
subsidiary is a company that is controlled by one or more insured 
depository institutions, other than a subsidiary that engages solely in 
activities that national banks may engage in directly (under the same 
terms and conditions that govern the conduct of these activities by 
national banks) or a subsidiary that a national bank is specifically 
authorized to control by the express terms of a Federal statute. Under 
section 121 of the GLBA, a financial subsidiary may engage in specified 
activities that are financial in nature and in activities that are 
incidental to financial activities if the bank and the subsidiary meet 
certain requirements and comply with stated safeguards. The proposal 
incorporates these requirements and establishes alternative procedures 
for banks to obtain OCC approval to acquire control of, or an interest 
in, a financial subsidiary.
    Following the enactment of the GLBA, national banks also may 
continue to use operating subsidiaries to engage in those activities 
that are part of, or incidental to, the business of banking. Thus, the 
proposal also revises the OCC's operating subsidiary regulation (12 CFR 
5.34) to make conforming changes and streamline procedures for banks 
that engage in activities through operating subsidiaries.

Comments Received

    The OCC received 30 comments on the proposal. The comments included 
8 from banks and bank holding companies, 15 from trade associations, 5 
from community groups, and 2 from law firms. Most commenters supported 
the proposal. These commenters generally commended the OCC for 
proposing regulatory changes that enhance the operational flexibility 
of national banks and facilitate the ability of national banks to 
engage in activities through operating subsidiaries and financial 
subsidiaries.
    Several commenters recommended specific changes to the proposal. We 
carefully considered each of the comment letters, and the following 
discussion identifies and discusses comments received and changes and 
additions made to certain sections of the proposal.

Discussion

Financial Subsidiaries (new Sec. 5.39)

Definitions (Sec. 5.39(d))
    The proposal defines a number of key terms used in the rule. One 
commenter recommended that the OCC define the term ``debt'' for 
purposes of the regulation's long term debt rating requirement. We 
believe, however, that in cases where there is a question about whether 
an obligation qualifies as ``debt,'' the issue is better addressed on a 
case-by-case basis. Thus, the final rule adopts the definitions 
contained in the proposal without change.
Permissible Activities for Financial Subsidiaries (Sec. 5.39(e) and 
(f))
    The proposal describes activities that are permissible and 
impermissible for a financial subsidiary. Under proposed Sec. 5.39(e), 
a financial subsidiary may engage only in activities that are financial 
in nature or incidental to a financial activity that are not 
permissible for a national bank to conduct directly (expanded financial 
activities), as well as activities that may be conducted by an 
operating subsidiary pursuant to Sec. 5.34 (activities that are part 
of, or incidental to, the business of banking that are permissible for 
national banks to conduct directly).
    Proposed Sec. 5.39(e) lists the activities that are defined in the 
Act as ``financial in nature.'' Among other things, this list includes 
activities that the Board of Governors of the Federal Reserve System 
(Board) has determined under section 4(c)(8) of the Bank Holding 
Company Act (BHCA) (12 U.S.C. 1843(c)(8)) to be so closely related to 
banking or controlling or managing banks as to be a proper incident 
thereto, and activities that the Board has found under section 4(c)(13) 
of the BHCA (12 U.S.C. 1843(c)(13)) to be usual in connection with the 
transaction of banking or other financial operations abroad.\1\
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    \1\The final rule also recognizes that the Secretary of the 
Treasury (in consultation with the Board) may determine that 
additional activities are financial in nature or incidental to a 
financial activity and therefore are permissible for a financial 
subsidiary. The GLBA provides specific procedures, not covered in 
the final rule, for coordination between the Secretary of the 
Treasury and the Board in defining additional financial and 
incidental activities under this provision.

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[[Page 12906]]

    Proposed Sec. 5.39(f) also lists activities that the GLBA 
specifically describes as impermissible for financial subsidiaries. 
These activities include providing annuities and certain types of 
insurance as principal, real estate development or real estate 
investment (unless otherwise expressly authorized by law), and certain 
activities authorized for financial holding companies by new sections 
4(k)(4)(H) and (I) of the BHCA, as added by the GLBA. At the end of the 
five-year period beginning on November 12, 1999, however, the Board and 
the Secretary of the Treasury may find by regulation that the 
activities authorized under section 4(k)(4)(H) of the BHCA are 
permissible for financial subsidiaries.
    The OCC received no comments on the description of authorized and 
impermissible activities, and the final rule adopts the language in the 
proposal with only minor technical changes.
Qualifications (Sec. 5.39(g))
    Proposed Sec. 5.39(g) contains three conditions that a national 
bank must satisfy to acquire control of, or hold an interest in, a 
financial subsidiary. First, the national bank and each of its 
depository institution affiliates must be ``well capitalized'' and 
``well managed.'' Proposed Sec. 5.39(d) defines these terms consistent 
with their definitions in the GLBA. Second, under the GLBA, the 
aggregate consolidated total assets of all financial subsidiaries of 
the bank may not exceed the lesser of 45 percent of the consolidated 
total assets of the parent bank or $50 billion. The $50 billion limit 
is to be adjusted according to an indexing mechanism established 
jointly by the Secretary of the Treasury and the Board. Third, a 
national bank that is one of the 100 largest insured banks, as 
determined by the bank's consolidated total assets at the end of the 
calendar year, must have outstanding ``eligible debt'' that is rated in 
one of the three highest investment grade rating categories by a 
nationally recognized statistical rating organization (eligible debt 
requirement). If a national bank is one of the second 50 of the 100 
largest insured banks, the proposal permits the bank to satisfy the 
eligible debt requirement if it meets alternative criteria to be set 
jointly through regulation by the Secretary of the Treasury and the 
Board. The eligible debt requirement does not apply, however, if a bank 
intends to acquire control of, or hold an interest in, a financial 
subsidiary that engages solely in activities in an agency capacity.
    One commenter recommended revising the eligible debt requirement to 
account for banks that have not issued debt. This commenter suggested 
permitting a bank to provide a statement from a nationally recognized 
statistical rating organization regarding the appropriate investment 
grade rating category that would apply if the bank were to issue 
outstanding debt. The OCC is aware of these concerns but notes that the 
GLBA requires a bank that is one of the 50 largest insured banks to 
have appropriately rated outstanding debt to acquire control of, or an 
interest in, a financial subsidiary. We also note, however, that the 
Secretary of the Treasury and the Board are authorized to issue 
regulations for the second 50 of the 100 largest insured banks that are 
comparable and consistent with the eligible debt rating requirement. 
Therefore, the final rule adopts these provisions as proposed.
Safeguards (Sec. 5.39(h))
    Under the proposal, a national bank that controls a financial 
subsidiary must comply with several conditions. First, a national bank 
must deduct the aggregate amount of its outstanding equity investment, 
including retained earnings, in its financial subsidiaries from the 
assets and tangible equity of the bank. Further, the bank may not 
consolidate the assets and liabilities of its financial subsidiaries 
with those of the parent bank. Both of these conditions are imposed by 
the GLBA.
    The final rule implements the required deduction from tangible 
equity and requires the bank to deduct the investment from its total 
risk-based capital, with the deduction taken equally from Tier 1 and 
Tier 2 capital. The bank's resulting Tier 1 and Tier 2 capital levels 
will then be used to determine the bank's capital category for purposes 
of 12 CFR part 6, including whether the bank qualifies as ``well 
capitalized'' as required by the GLBA and Sec. 5.39(g)(1).
    Second, any published financial statement of the national bank 
must, in addition to providing information prepared in accordance with 
generally accepted accounting principles, separately present financial 
information for the bank in a manner that reflects these capital 
adjustments. Under the third and fourth conditions, the bank must 
establish reasonable policies and procedures to preserve the separate 
corporate identity and limited liability of the bank and its financial 
subsidiaries, and must establish procedures to identify and manage 
financial and operational risks within the bank and the financial 
subsidiary that adequately protect the bank from these risks.
    The fifth condition provides that a financial subsidiary is deemed 
a subsidiary of a bank holding company and not a subsidiary of the bank 
for purposes of the anti-tying prohibitions in 12 U.S.C. 1971 et seq.
    Finally, the proposal provides that for purposes of sections 23A 
and 23B of the Federal Reserve Act (FRA) (12 U.S.C. 371c and 371c-1) a 
financial subsidiary shall be treated as an affiliate of the bank. 
Sections 23A and 23B therefore apply to certain transactions between a 
bank and its financial subsidiary, except that the proposal exempts 
from the 10 percent quantitative limit of FRA section 23A(a)(1)(A) (12 
U.S.C. 371c(a)(1)(A)) covered transactions between a bank and any 
individual financial subsidiary of the bank. Thus, covered transactions 
between a bank and any one financial subsidiary may exceed 10 percent 
of the bank's capital and surplus, but are subject to the 20 percent 
aggregate limit on transactions with all affiliates and financial 
subsidiaries found in FRA section 23A(a)(1)(B) (12 U.S.C. 
371c(A)(1)(B)). The proposal also provides that, for purposes of FRA 
sections 23A and 23B, the bank's investment in a financial subsidiary 
does not include retained earnings of the financial subsidiary. 
However, the investment in the securities of a financial subsidiary of 
a bank by an affiliate of the bank is considered to be an investment in 
those securities by the bank. In addition, the Board may determine that 
any extension of credit by an affiliate of a bank to a financial 
subsidiary of that bank is an extension of credit by the bank to the 
financial subsidiary. The Board can only require this treatment if it 
determines it is necessary or appropriate to prevent evasions of the 
FRA or the GLBA.
    The final rule adopts the language in the proposal relating to the 
safeguards as proposed, with additional language clarifying the 
implementation of the capital deduction requirement.
Procedures (Sec. 5.39(i))
    The GLBA specifically states that OCC approval for a national bank 
to engage in activities through a financial subsidiary shall be based 
solely upon specific statutory factors. Thus, the proposal establishes 
alternative streamlined procedures for national banks seeking OCC 
approval to acquire control of, or hold an interest in, a financial 
subsidiary, or to commence an expanded financial activity in an 
existing financial subsidiary.
    Under the first alternative, a national bank may file a ``Financial 
Subsidiary

[[Page 12907]]

Certification'' with the OCC listing the bank's depository institution 
affiliates and certifying that the bank and each of those affiliates is 
well capitalized and well managed. Thereafter, at such time as the bank 
seeks OCC approval to acquire control of, or hold an interest in, a new 
financial subsidiary, or commence an additional expanded financial 
activity in an existing financial subsidiary, the bank must file a 
written notice with the appropriate district office. The written notice 
must be labeled ``Financial Subsidiary Notice,'' must state that the 
bank's certification remains valid, and describe the activity or 
activities to be performed in the financial subsidiary as well as cite 
to the specific authority permitting the expanded financial activity to 
be conducted by a financial subsidiary. (Where the authority relied on 
is an agency order or interpretation under section 4(c)(8) or 4(c)(13), 
respectively, of the BHCA, a copy of the order or interpretation should 
be attached.) The written notice also must state that the aggregate 
consolidated total assets of all financial subsidiaries of the national 
bank do not exceed the lesser of 45 percent of the bank's consolidated 
total assets or $50 billion (or the increased level set by the indexing 
process), that the bank will remain well capitalized after making the 
necessary capital adjustments, and, if applicable, that the bank meets 
the eligible debt requirement.
    Alternatively, a bank may choose to seek approval by filing a 
combined certification and notification with the appropriate OCC 
district office at least five business days prior to acquiring control 
of, or an interest in, a financial subsidiary, or commencing a new 
expanded financial activity in an existing financial subsidiary. This 
type of notice would combine the information from the certification and 
notice described above, and should be labeled ``Financial Subsidiary 
Certification and Notice.''
    The OCC received 11 comments on the proposed procedures. The 
commenters generally supported the availability of alternative 
procedures citing the flexibility they will afford national banks that 
wish to conduct expanded financial activities through financial 
subsidiaries. Some commenters, however, suggested that the OCC revise 
the proposed procedures to require a national bank to provide notice to 
the OCC at least 15 business days prior to acquiring control of, or an 
interest in, a financial subsidiary to provide time for public input. 
Other commenters commended the use of an after-the-fact notice 
procedure to expedite approvals and to harmonize the OCC's procedures 
with those recently adopted by the Board in its interim rules 
implementing Title 1 of GLBA (65 FR 3785, Jan. 25, 2000).
    The OCC believes that the factors upon which OCC approval is based 
support the use of expedited time frames, and the final rule adopts the 
language in the proposal with minor changes.
    One of the changes to the procedures relates to section 307(c) of 
GLBA (15 U.S.C. 6716), which requires OCC consultation with the 
appropriate state insurance regulator in connection with initial and 
continuing affiliations between a depository institution and a company 
engaged in insurance activities. The OCC and the National Association 
of Insurance Commissioners have discussed this section and procedures 
for sharing appropriate information.\2\ Thus, the final rules for both 
operating subsidiaries and financial subsidiaries require that 
operating subsidiary and financial subsidiary filings pertaining to a 
company engaged in insurance activities contain in the notice or 
application a description of the type of insurance activity that such 
company is engaged in and has present plans to conduct. The bank must 
also list for each state the lines of business for which the company 
holds, or will hold, an insurance license, indicating the state where 
the company holds a resident license or charter, as applicable.\3\
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    \2\It should be noted that under section 5136A of the Revised 
Statutes the discretion of the OCC to deny approval of a proposed 
affiliation is limited to the statutory factors in that section.
    \3\The final rule also makes conforming changes to revised 
Sec. 5.35, ``Bank service companies,'' and revised Sec. 5.36, 
``Other equity investments.''
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    Consistent with the GLBA, the proposal also provides that the OCC 
prohibits a national bank from applying to commence any additional 
expanded financial activity, or to directly or indirectly acquire 
control of a company engaged in any such activity, if the bank or any 
of its insured depository institution affiliates received a Community 
Reinvestment Act (CRA) rating of less than ``satisfactory record of 
meeting community credit needs'' on its most recent CRA examination 
prior to when the bank files a notice under Sec. 5.39.
    Several commenters urged the OCC to allow public comment where the 
bank or its insured depository institution affiliates have ``low 
satisfactory'' ratings in an assessment area or in a lending test in an 
assessment area. These commenters also requested a regulatory revision 
that would permit the OCC to condition approvals in these situations.
    The OCC recognizes the concerns raised by these commenters but 
notes that the GLBA imports the bank's CRA rating as a factor to 
determine whether that rating prohibits the bank from commencing any 
expanded financial activity, or directly or indirectly acquiring 
control of a company engaged in any expanded financial activity. 
Moreover, section 5136A of the Revised Statutes directs the OCC to 
approve a national bank's acquiring control of, or an interest in, a 
financial subsidiary solely upon the factors set forth in section 
5136A; the statute does not provide a basis to deny an application or 
notice or to condition approvals based on public comment.
    Some commenters also asked the OCC to clarify the treatment of 
insured depository institution affiliates that do not have a CRA 
rating. For example, certain types of special purpose banks are not 
subject to CRA examination. The OCC believes that the provision in the 
proposal, which is derived directly from the GLBA provision, is 
sufficiently clear to conclude that the CRA rating requirement does not 
apply to de novo banks that have not yet received (or are not the 
successors of banks that have received) CRA ratings and to limited 
purpose banks that do not receive CRA ratings. Thus, the final rule 
adopts these provisions as proposed.
    The OCC also notes that the prohibition on commencing any new 
activity authorized under section 5136A(a)(2)(A)(i) of the Revised 
Statutes if the bank or any of its insured depository institution 
affiliates received a CRA rating of less than ``satisfactory record of 
meeting community credit needs'' incorporates the term ``new activity'' 
that is used in the GLBA to refer to the expanded financial activities 
newly authorized by section 5136A(a)(2)(A)(i) of the Revised Statutes. 
Thus, when a bank operates through a financial subsidiary, and the bank 
or one of its insured depository institution affiliates subsequently 
receives a CRA rating of less than ``satisfactory record of meeting 
community credit needs,'' the bank may not start up an additional 
financial activity that may only be conducted by a national bank 
through a financial subsidiary, nor may it acquire control of or 
establish an additional financial subsidiary or acquire all or 
substantially all of the assets of an additional company that is or 
would be a financial subsidiary, even if the financial subsidiary to be 
established or acquired is engaged in the same activities as the 
existing financial subsidiary.

[[Page 12908]]

Failure To Continue To Meet Certain Requirements (Sec. 5.39(j)
    The proposal states that a national bank and its affiliated 
depository institutions must continue to satisfy the well managed, well 
capitalized, and asset size requirements applicable to its financial 
subsidiaries and the conditions in proposed Sec. 5.39(h)(1), (2), (3), 
and (4) after the bank acquires control of, or an interest in, a 
financial subsidiary. A national bank that fails to continue to satisfy 
these requirements is subject to several procedural requirements and 
OCC remedies. For example, the OCC must give notice to the bank and, in 
the case of an affiliated depository institution to that depository 
institution's appropriate Federal banking agency, promptly upon 
determining that the bank, or, as applicable, its affiliated depository 
institution, does not continue to meet these requirements. Under the 
proposal, the bank is deemed to have received this notice three days 
after mailing of the letter by the OCC. Not later than 45 days after 
receipt of this notice, or any additional time as the OCC may permit, 
the bank must execute an agreement with the OCC to comply with these 
requirements.
    At any time until the conditions described in the notice are 
corrected, the OCC may impose limitations on the conduct or activities 
of the national bank or any subsidiary of the national bank that the 
OCC determines appropriate under the circumstances and consistent with 
the purposes of section 5136A of the Revised Statutes. The OCC also may 
require the bank to divest control of a financial subsidiary if the 
bank does not correct the conditions giving rise to the notice within 
180 days after its receipt of the notice.
    The GLBA provides that a national bank that does not continue to 
meet any applicable eligible debt requirement may not purchase, 
directly or through a subsidiary, any additional equity capital of a 
financial subsidiary. The term ``equity capital'' is defined in 
Sec. 5.39(j)(2), consistent with the GLBA, to include, in addition to 
any equity investment, any debt instrument issued by a financial 
subsidiary if the instrument qualifies as capital of the subsidiary 
under applicable Federal or State law, regulation, or interpretation. 
In response to a question posed by a commenter, the final rule 
clarifies that this limitation applies when the bank has a financial 
subsidiary where the eligible debt requirement is applicable, i.e. 
where the financial subsidiary is engaged in activities other than 
solely in an agency capacity, and with respect to additional equity 
capital of such a subsidiary.
    Finally, one commenter recommended adding clarifying language to 
Sec. 5.39 similar to the provision in Sec. 5.34 that recognizes the 
GLBA provisions relating to the functional regulation of certain types 
of bank subsidiaries and affiliates. The OCC agrees with this 
suggestion and the final rule adds a new Sec. 5.39(k), which provides 
that a financial subsidiary is subject to examination and supervision 
by the OCC, subject to the limitations and requirements of section 45 
of the Federal Deposit Insurance Act (12 U.S.C. 1831v) and section 115 
of the GLBA (12 U.S.C. 1820a).

Operating Subsidiaries (revised Sec. 5.34)

    Proposed Sec. 5.34 authorizes national banks to engage through 
operating subsidiaries in activities that are part of, or incidental 
to, the business of banking. The proposal makes several changes to 
Sec. 5.34 to be more consistent with the procedural requirements of 
proposed Sec. 5.39, to remove unnecessary regulatory burden, and to 
make other adjustments that are necessary in light of the GLBA.
    First, the proposal consolidates and moves activities formerly 
subject to an expedited application review into the more streamlined 
category which requires banks simply to file a notice with the 
appropriate OCC district office no later than 10 days after 
establishing or acquiring an operating subsidiary, or commencing a new 
activity in an existing operating subsidiary. Second, the proposal 
expands the list of notice activities to include other activities that 
the OCC has found to be part of, or incidental to, the business of 
banking\4\ and has approved on a regular basis for national bank 
operating subsidiaries. Finally, given the expansion of the notice 
category, a national bank using the notice procedure must be well 
capitalized and well managed as defined in Sec. 5.34(d).\5\
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    \4\This is not a complete list of activities that are part of, 
or incidental to, the business of banking. The OCC will review new 
proposals for activities that may be permissible under this section 
pursuant to the application procedures contained in Sec. 5.34 and in 
response to requests for legal opinions.
    \5\A corresponding change is made with respect to the expanded 
notice process available for bank service companies in 
Sec. 5.35(f)(2).
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    The final rule makes several changes to the list of activities 
eligible for a notice filing, and the OCC will periodically review and 
update this list as necessary. First, the OCC has added two new 
activities to the list of activities eligible for notice processing: 
(1) ``acting as a digital certification authority'' to the extent that 
activity is permitted by published OCC precedent and is conducted in 
accordance with the terms and conditions set forth in that precedent; 
and (2) ``providing or selling public transportation tickets, event and 
attraction tickets, gift certificates, prepaid phone cards, promotional 
and advertising material, postage stamps, and Electronic Benefits 
Transfer (EBT) script, and similar media,'' to the extent permitted by 
published OCC precedent, subject to the terms and conditions contained 
in that precedent. The OCC also has revised the notice provision 
relating to underwriting credit life insurance to include other types 
of credit related insurance the OCC has approved. Thus, the final rule 
refers to underwriting credit related insurance to the extent 
consistent with section 302 of GLBA. The final rule also clarifies that 
the notice provision relating to acting as an investment adviser 
(Sec. 5.34(e)(5)(v)(I)) includes acting as an investment adviser with 
discretion and revises the provision on providing check guaranty and 
verification services to clarify that it includes payment services. 
Finally, the final rule clarifies that real estate appraisal services 
for the subsidiary, parent bank, or other financial institutions are 
moved from the former list of activities eligible for expedited review 
to the notice list.
    One commenter requested that the OCC expand the language in 
Sec. 5.34(e)(5)(v) regarding finder activities because of the various 
opportunities created by the proliferation of electronic commerce. The 
OCC notes that it currently is soliciting comment on a broad range of 
issues through an advance notice of proposed rulemaking intended to 
identify changes to existing rules that would facilitate bank use of 
new technologies.\6\ The OCC will review this request in that context.
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    \6\65 FR 4895 (Feb. 2, 2000).
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    One commenter also urged the OCC to amend Sec. 5.34(e)(5)(v)(P), 
which is the notice activity for acting as an insurance agent or 
broker, to expressly limit that activity in any manner required by 12 
U.S.C. 92 or 12 U.S.C. 24 (Seventh). However, the OCC believes that 
additional language is unnecessary because the rule clearly states that 
operating subsidiaries may only engage in activities permissible for 
the parent bank to engage in directly, either as part of, or incidental 
to, the business of banking or otherwise under other statutory 
authority. This language would address any requirements in 12 U.S.C. 92 
or 12 U.S.C. 24 (Seventh) that are applicable.

[[Page 12909]]

    The proposal also clarifies that ``authorized products'' referenced 
in the GLBA are activities permissible for operating subsidiaries under 
Sec. 5.34. The final rule adopts the language in the proposal without 
changes.
    The proposal also revises Sec. 5.34 to conform to other changes 
made by the GLBA. First, the OCC proposed to remove former Sec. 5.34(f) 
because the GLBA makes clear that an operating subsidiary may engage 
only in activities that are permissible for the parent bank to engage 
in directly. The final rule makes clear that an operating subsidiary 
conducts its activities subject to the same authorization, terms, and 
conditions that apply to the conduct of those activities by its parent 
bank. Second, the proposal removes the former statement that ``each 
operating subsidiary is subject to examination and supervision by the 
OCC'' and clarifies that the OCC's authority to examine and take action 
against certain subsidiaries is subject to the limitations and 
requirements of new section 45 of the Federal Deposit Insurance Act (12 
U.S.C. 1831v) and section 115 of the GLBA (12 U.S.C. 1820a). The OCC 
did not receive any comments on these provisions, and the final rule 
adopts the language as proposed.

Non-Controlling Investments (revised Sec. 5.36)

    Several commenters suggested including non-controlling (or 
minority) investments on the list in Sec. 5.34(e)(5)(v), or otherwise 
providing an expedited notice process for non-controlling investments 
proposed to be made in the same types of companies eligible for an 
expedited operating subsidiary notice. Commenters recommended that the 
OCC establish expedited procedures to approve non-controlling 
investments made either by national banks directly or by their 
operating subsidiaries. Among other things, the commenters suggested 
that the availability of definite time frames would promote the rapid 
consummation of transactions and enhance the ability of national banks 
to compete effectively in areas such as electronic banking.\7\
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    \7\Currently, national banks making non-controlling investments 
directly submit requests for an OCC opinion regarding the 
permissibility of the investment.
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    The OCC previously has authorized national banks to own, either 
directly or indirectly through an operating subsidiary, a non-
controlling interest in an enterprise.\8\ This authorization, however, 
is subject to certain conditions that apply in the case of minority 
investments but do not apply to the other activities on the list in 
Sec. 5.34(e)(5)(v), and thus the Sec. 5.34(e)(5)(v) list format does 
not lend itself to a clear description of these conditions. 
Nevertheless, the OCC believes that prescribing streamlined procedures 
for national banks seeking to make certain types of minority 
investments, directly and by operating subsidiaries, is consistent with 
the new structural flexibility that the GLBA affords to national banks. 
For these reasons, we have concluded that it is preferable to revise 
Sec. 5.36, which governs non-controlling investments, rather than to 
include minority investments on the list of operating subsidiary 
activities eligible for notice.
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    \8\See, e.g., OCC Corporate Decision No. 97-54 (June 26, 1997); 
OCC Interpretive Letter No. 692, reprinted in [1995-1996 Transfer 
Binder] Fed. Banking L. Rep. (CCH) para.81,007 (Nov. 1, 1995); OCC 
Interpretive Letter No. 694, reprinted in [1995-1996 Transfer 
Binder] Fed. Banking L. Rep. (CCH) para.81,009 (Dec. 13, 1995); OCC 
Interpretive Letter No. 705, reprinted in [1995-1996 Transfer 
Binder] Fed. Banking L. Rep. (CCH) para.81,020 (Oct. 25, 1995); OCC 
Interpretive Letter No. 711, reprinted in [1995-1996 Transfer 
Binder] Fed. Banking L. Rep. (CCH) para.81-026 (Feb. 23, 1996).
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    Accordingly, the final rule amends current Sec. 5.36 to provide 
that a qualifying national bank may make certain non-controlling 
investments, directly or through its operating subsidiary, in an 
enterprise by filing a written notice with the appropriate OCC district 
office no later than 10 days after making the investment. The term 
``enterprise'' includes any corporation, limited liability company, 
partnership, trust, or similar business entity. The notice procedure 
applies if the activity conducted by the enterprise is on the list in 
Sec. 5.34(e)(5)(v), or if it is substantively the same as an activity 
that has been previously approved for a national bank (or its operating 
subsidiary) in published OCC precedent, and is conducted on the same 
terms and conditions that apply to the activity approved in that 
precedent.
    This procedure is available for national banks that are well 
capitalized and well managed (as those terms are defined in Sec. 5.34), 
that engage in the activities just described, and that submit a notice 
that contains the following information.
    First, the bank must provide a clear description of the activities 
conducted by the enterprise in which the bank invests. To the extent 
the notice relates to the affiliation of the bank with a company 
engaged in insurance activities, the bank should describe the type of 
insurance activity that the company is engaged in and has present plans 
to conduct. The bank must also list for each state the lines of 
business for which the company holds, or will hold, an insurance 
license, indicating the state where the company holds a resident 
license or charter, as applicable. Second, the bank must state that the 
enterprise engages in activities described in Sec. 5.34(e)(5)(v) or 
state, and describe how, the activities are substantively the same as 
those contained in published OCC precedent approving a non-controlling 
investment by a national bank or its operating subsidiary, and that 
those activities will be conducted in accordance with the same terms 
and conditions applicable to the activity covered by the precedent. The 
bank also must provide a citation to the applicable precedent. Third, 
the bank must certify that it is well capitalized and well managed.
    Finally, the bank's notice must demonstrate that it satisfies the 
requirements applicable to non-controlling investments, as described in 
the OCC's published decisions. These include: (1) describing how the 
bank has the ability to prevent the enterprise from engaging in 
activities that are not set forth in Sec. 5.34(e)(5)(v) or not 
contained in published OCC precedent approving a non-controlling 
investment by a national bank or its operating subsidiary, or how the 
bank otherwise has the ability to withdraw its investment; (2) 
certifying that the bank will account for its investment under the 
equity or cost method of accounting; (3) describing how the investment 
is convenient and useful to the bank in carrying out its business and 
not a mere passive investment unrelated to the bank's banking business; 
and (4) certifying that the enterprise in which the bank is investing 
agrees to be subject to OCC supervision and examination, subject to the 
limitations and requirements of section 45 of the Federal Deposit 
Insurance Act and section 115 of GLBA.
    The OCC will continue to address on a case-by-case basis situations 
where a national bank is not well managed or well capitalized but seeks 
to make a non-controlling investment directly or where a national bank 
wishes to invest in a company that engages in activities that are not 
eligible for the notice procedure.

Other Matters

Financial Subsidiaries and Operating Subsidiaries of Federal Branches 
and Agencies

    The proposal also invited comment on whether national treatment 
principles would be furthered if Federal branches and agencies of 
foreign banks are authorized to invest in financial and

[[Page 12910]]

operating subsidiaries, and, if so, how the OCC would apply the 
applicable qualification standards. The OCC received six comments on 
this issue. The commenters strongly supported permitting Federal 
branches and agencies to invest in and control financial subsidiaries 
and operating subsidiaries. The OCC agrees that Federal branches and 
agencies should be authorized to hold these subsidiaries and expects to 
issue a separate proposal to address the details of how that authority 
may be implemented in the near future.

Conforming Technical Changes

    Finally, the final rule makes conforming technical changes to 
Secs. 5.24 and 5.33. These changes clarify that separate notices under 
Sec. 5.39 to acquire control of, or an interest in, a financial 
subsidiary are not required where that information is supplied in 
connection with the conversion or merger application. In addition, the 
final rule revises Sec. 5.35, the OCC rule relating to bank service 
companies, to remove the provisions in that section relating to 
expedited application filings. This change was made to conform to 
similar changes made to Sec. 5.34. Section 5.35 refers to Sec. 5.34 to 
determine which activities are eligible for notice filing. Thus, the 
changes to Sec. 5.34 that consolidated and moved the activities 
formerly listed in the expedited processing list into the notice 
category will similarly affect Sec. 5.35.

Effective Date

    The Administrative Procedure Act provides that, subject to several 
exceptions, a final rule may not be made effective until 30 days after 
publication in the Federal Register. 5 U.S.C. 553(d). However, an 
agency may make a final rule immediately effective upon publication if 
the agency finds good cause for doing so and publishes its findings 
with the rule. Likewise, section 302 of the Riegle Community 
Development and Regulatory Improvement Act of 1994 (CDRI), Public Law 
103-325, authorizes a banking agency to issue a rule to be effective 
before the first day of the calendar quarter that begins on or after 
the date on which the regulations are published in final form if the 
agency finds good cause for an earlier effective date. 12 U.S.C. 
4802(b)(1).
    This final rule takes effect on March 11, 2000. The OCC finds good 
cause to dispense with the 30-day delayed effective date pursuant to 5 
U.S.C. 553(d)(3). The OCC also has determined that good cause exists to 
adopt an effective date that is before the first day of the calendar 
quarter that begins on or after the date on which the regulation is 
published, as would otherwise be required by section 102 of the CDRI 
(12 U.S.C. 4802(b)(1)). Unless the OCC has a final rule in place by 
March 11, 2000, national banks will be unable to exercise the GLBA 
financial subsidiary authority when it becomes available to them under 
the law. Moreover, as of March 11, 2000, certain portions of the OCC's 
current operating subsidiary rule will be superseded by the new law. 
Therefore, the final rule takes effect on March 11, 2000, in order to 
eliminate potential confusion or disruption for banks seeking to 
restructure their operations in accordance with the GLBA.

Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Comptroller of the Currency certifies that this final rule will not 
have a significant economic impact on a substantial number of small 
entities. The principal effect of this final rule is to provide 
procedures for implementing section 121 of the GLBA for national banks 
that wish to engage in activities through financial subsidiaries. The 
final rule also would require national banks making non-controlling 
investments in certain entities to file a notice with the OCC. The 
final rule also would reduce regulatory burden by increasing the number 
of activities that are subject to notice requirements rather than 
application requirements where a national bank intends to engage in 
activities through an operating subsidiary or to make a non-controlling 
investment in an enterprise through an operating subsidiary.

Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (Unfunded Mandates Act) requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
Federal mandate that may result in expenditure by State, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. If a budgetary impact statement is 
required, section 205 of the Unfunded Mandates Act also requires an 
agency to identify and consider a reasonable number of regulatory 
alternatives before promulgating a rule. The OCC has determined that 
this final rule will not result in expenditures by State, local, or 
tribal governments or by the private sector of $100 million or more. 
Accordingly, the OCC has not prepared a budgetary impact statement or 
specifically addressed the regulatory alternatives considered.

Executive Order 12866 Determination

    The Comptroller of the Currency has determined that this final rule 
does not constitute a ``significant regulatory action'' for the 
purposes of Executive Order 12866.

Paperwork Reduction Act

    The collection of information requirements in this final rule are 
found in Secs. 5.24(d)(2)(ii)(G), 5.33(e)(3)(i) and (ii), 5.34(b) and 
(e), 5.35(f), 5.36(e), and 5.39(b) and (i). These collection of 
information requirements have been reviewed and approved by the Office 
of Management and Budget in accordance with the emergency review 
procedures of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(j)) 
under OMB Control Number 1557-0215.

List of Subjects in 12 CFR Part 5

    Administrative practice and procedure, National banks, Reporting 
and recordkeeping requirements, Securities.

Authority and Issuance

    For the reasons set forth in the preamble, the OCC amends chapter I 
of title 12 of the Code of Federal Regulations as follows:

PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES

    1. The authority citation for part 5 is revised to read as follows:

    Authority: 12 U.S.C. 1 et seq., 93a; and section 5136A of the 
Revised Statutes (12 U.S.C. 24a).

    2. In Sec. 5.24, paragraph (d)(2)(ii)(G) is revised to read as 
follows:


Sec. 5.24  Conversion.

* * * * *
    (d) * * *
    (2) * * *
    (ii) * * *
    (G) Identify all subsidiaries that will be retained following the 
conversion, and provide the information and analysis of the 
subsidiaries' activities that would be required if the converting bank 
or savings association were a national bank establishing each 
subsidiary pursuant to Secs. 5.34 or 5.39; and
* * * * *

    3. In Sec. 5.33, paragraphs (e)(3)(i) and (e)(3)(ii) are revised to 
read as follows:


Sec. 5.33  Business combinations.

* * * * *

[[Page 12911]]

    (e) * * *
    (3) * * *
    (i) An applicant must identify any subsidiary to be acquired in a 
business combination and state the activities of each subsidiary. The 
OCC does not require a separate application under Sec. 5.34 or a 
separate notice under Sec. 5.39.
    (ii) An applicant proposing to acquire, through a business 
combination, a subsidiary of a depository institution other than a 
national bank must provide the same information and analysis of the 
subsidiary's activities that would be required if the applicant were 
establishing the subsidiary pursuant to Secs. 5.34 or 5.39.
* * * * *

    4. Section 5.34 is revised to read as follows:


Sec. 5.34  Operating subsidiaries.

    (a) Authority. 12 U.S.C. 24 (Seventh), 93a, and section 5136A of 
the Revised Statutes (12 U.S.C. 24a).
    (b) Licensing requirements. A national bank must file a notice or 
application as prescribed in this section to acquire or establish an 
operating subsidiary, or to commence a new activity in an existing 
operating subsidiary.
    (c) Scope. This section sets forth authorized activities and 
application or notice procedures for national banks engaging in 
activities through an operating subsidiary. The procedures in this 
section do not apply to financial subsidiaries authorized under 
Sec. 5.39.
    (d) Definitions. For purposes of this Sec. 5.34:
    (1) Authorized product means a product that would be defined as 
insurance under section 302(c) of the Gramm-Leach-Bliley Act (Public 
Law 106-102, 113 Stat. 1338, 1407) (GLBA) (15 U.S.C. 6712) that, as of 
January 1, 1999, the OCC had determined in writing that national banks 
may provide as principal or national banks were in fact lawfully 
providing the product as principal, and as of that date no court of 
relevant jurisdiction had, by final judgment, overturned a 
determination by the OCC that national banks may provide the product as 
principal. An authorized product does not include title insurance, or 
an annuity contract the income of which is subject to treatment under 
section 72 of the Internal Revenue Code of 1986 (26 U.S.C. 72).
    (2) Well capitalized means the capital level described in 12 CFR 
6.4(b)(1).
    (3) Well managed means, unless otherwise determined in writing by 
the OCC:
    (i) The national bank has received a composite rating of 1 or 2 
under the Uniform Financial Institutions Rating System in connection 
with its most recent examination; or
    (ii) In the case of any national bank that has not been examined, 
the existence and use of managerial resources that the OCC determines 
are satisfactory.
    (e) Standards and requirements--(1) Authorized activities. A 
national bank may conduct in an operating subsidiary activities that 
are permissible for a national bank to engage in directly either as 
part of, or incidental to, the business of banking, as determined by 
the OCC, or otherwise under other statutory authority, including:
    (i) Providing authorized products as principal; and
    (ii) Providing title insurance as principal if the national bank or 
subsidiary thereof was actively and lawfully underwriting title 
insurance before November 12, 1999, and no affiliate of the national 
bank (other than a subsidiary) provides insurance as principal. A 
subsidiary may not provide title insurance as principal if the state 
had in effect before November 12, 1999, a law which prohibits any 
person from underwriting title insurance with respect to real property 
in that state.
    (2) Qualifying subsidiaries. An operating subsidiary in which a 
national bank may invest includes a corporation, limited liability 
company, or similar entity if the parent bank owns more than 50 percent 
of the voting (or similar type of controlling) interest of the 
operating subsidiary; or the parent bank otherwise controls the 
operating subsidiary and no other party controls more than 50 percent 
of the voting (or similar type of controlling) interest of the 
operating subsidiary. However, the following subsidiaries are not 
operating subsidiaries subject to this section:
    (i) A subsidiary in which the bank's investment is made pursuant to 
specific authorization in a statute or OCC regulation (e.g., a bank 
service company under 12 U.S.C. 1861 et seq. or a financial subsidiary 
under section 5136A of the Revised Statutes (12 U.S.C. 24a)); and
    (ii) A subsidiary in which the bank has acquired, in good faith, 
shares through foreclosure on collateral, by way of compromise of a 
doubtful claim, or to avoid a loss in connection with a debt previously 
contracted.
    (3) Examination and supervision. An operating subsidiary conducts 
activities authorized under this section pursuant to the same 
authorization, terms and conditions that apply to the conduct of such 
activities by its parent national bank. If, upon examination, the OCC 
determines that the operating subsidiary is operating in violation of 
law, regulation, or written condition, or in an unsafe or unsound 
manner or otherwise threatens the safety or soundness of the bank, the 
OCC will direct the bank or operating subsidiary to take appropriate 
remedial action, which may include requiring the bank to divest or 
liquidate the operating subsidiary, or discontinue specified 
activities. OCC authority under this paragraph is subject to the 
limitations and requirements of section 45 of the Federal Deposit 
Insurance Act (12 U.S.C. 1831v) and section 115 of the Gramm-Leach-
Bliley Act (12 U.S.C. 1820a).
    (4) Consolidation of figures. Pertinent book figures of the parent 
bank and its operating subsidiary shall be combined for the purpose of 
applying statutory or regulatory limitations when combination is needed 
to effect the intent of the statute or regulation, e.g., for purposes 
of 12 U.S.C. 56, 60, 84, and 371d.
    (5) Procedures--(i) Application required. (A) Except as provided in 
paragraph (e)(5)(iv) or (e)(5)(vi) of this section, a national bank 
that intends to acquire or establish an operating subsidiary, or to 
perform a new activity in an existing operating subsidiary, must first 
submit an application to, and receive approval from, the OCC. The 
application must include a complete description of the bank's 
investment in the subsidiary, the proposed activities of the 
subsidiary, the organizational structure and management of the 
subsidiary, the relations between the bank and the subsidiary, and 
other information necessary to adequately describe the proposal. To the 
extent the application relates to the initial affiliation of the bank 
with a company engaged in insurance activities, the bank should 
describe the type of insurance activity that the company is engaged in 
and has present plans to conduct. The bank must also list for each 
state the lines of business for which the company holds, or will hold, 
an insurance license, indicating the state where the company holds a 
resident license or charter, as applicable. The application must state 
whether the operating subsidiary will conduct any activity at a 
location other than the main office or a previously approved branch of 
the bank. The OCC may require the applicant to submit a legal analysis 
if the proposal is novel, unusually complex, or raises substantial 
unresolved legal issues. In these cases, the OCC encourages applicants 
to have a pre-filing meeting with the OCC.
    (B) A national bank must file an application and obtain prior 
approval before acquiring or establishing an

[[Page 12912]]

operating subsidiary, or performing a new activity in an existing 
operating subsidiary, if the bank controls the subsidiary but owns 50 
percent or less of the voting (or similar type of controlling) interest 
of the subsidiary. These applications are not subject to the filing 
exemption in paragraph (e)(5)(vi) of this section and are not eligible 
for the notice procedures in paragraph (e)(5)(iv) of this section.
    (ii) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to this section. However, if the OCC 
concludes that an application presents significant and novel policy, 
supervisory, or legal issues, the OCC may determine that some or all 
provisions in Secs. 5.8, 5.10, and 5.11 apply.
    (iii) OCC review and approval. The OCC reviews a national bank's 
application to determine whether the proposed activities are legally 
permissible and to ensure that the proposal is consistent with safe and 
sound banking practices and OCC policy and does not endanger the safety 
or soundness of the parent national bank. As part of this process, the 
OCC may request additional information and analysis from the applicant.
    (iv) Notice process for certain activities. A national bank that is 
``well capitalized'' and ``well managed'' may acquire or establish an 
operating subsidiary, or perform a new activity in an existing 
operating subsidiary, by providing the appropriate district office 
written notice within 10 days after acquiring or establishing the 
subsidiary, or commencing the activity, if the activity is listed in 
paragraph (e)(5)(v) of this section. The written notice must include a 
complete description of the bank's investment in the subsidiary and of 
the activity conducted and a representation and undertaking that the 
activity will be conducted in accordance with OCC policies contained in 
guidance issued by the OCC regarding the activity. To the extent the 
notice relates to the initial affiliation of the bank with a company 
engaged in insurance activities, the bank should describe the type of 
insurance activity that the company is engaged in and has present plans 
to conduct. The bank must also list for each state the lines of 
business for which the company holds, or will hold, an insurance 
license, indicating the state where the company holds a resident 
license or charter, as applicable. Any bank receiving approval under 
this paragraph is deemed to have agreed that the subsidiary will 
conduct the activity in a manner consistent with published OCC 
guidance.
    (v) Activities eligible for notice. The following activities 
qualify for the notice procedures, provided the activity is conducted 
pursuant to the same terms and conditions as would be applicable if the 
activity were conducted directly by a national bank:
    (A) Holding and managing assets acquired by the parent bank, 
including investment assets and property acquired by the bank through 
foreclosure or otherwise in good faith to compromise a doubtful claim, 
or in the ordinary course of collecting a debt previously contracted;
    (B) Providing services to or for the bank or its affiliates, 
including accounting, auditing, appraising, advertising and public 
relations, and financial advice and consulting;
    (C) Making loans or other extensions of credit, and selling money 
orders, savings bonds, and travelers checks;
    (D) Purchasing, selling, servicing, or warehousing loans or other 
extensions of credit, or interests therein;
    (E) Providing courier services between financial institutions;
    (F) Providing management consulting, operational advice, and 
services for other financial institutions;
    (G) Providing check guaranty, verification and payment services;
    (H) Providing data processing, data warehousing and data 
transmission products, services, and related activities and facilities, 
including associated equipment and technology, for the bank or its 
affiliates;
    (I) Acting as investment adviser (including an adviser with 
investment discretion) or financial adviser or counselor to 
governmental entities or instrumentalities, businesses, or individuals, 
including advising registered investment companies and mortgage or real 
estate investment trusts, furnishing economic forecasts or other 
economic information, providing investment advice related to futures 
and options on futures, and providing consumer financial counseling;
    (J) Providing tax planning and preparation services;
    (K) Providing financial and transactional advice and assistance, 
including advice and assistance for customers in structuring, 
arranging, and executing mergers and acquisitions, divestitures, joint 
ventures, leveraged buyouts, swaps, foreign exchange, derivative 
transactions, coin and bullion, and capital restructurings;
    (L) Underwriting credit related insurance to the extent permitted 
under section 302 of the GLBA (15 U.S.C. 6712);
    (M) Leasing of personal property and acting as an agent or adviser 
in leases for others;
    (N) Providing securities brokerage or acting as a futures 
commission merchant, and providing related credit and other related 
services;
    (O) Underwriting and dealing, including making a market, in bank 
permissible securities and purchasing and selling as principal, asset 
backed obligations;
    (P) Acting as an insurance agent or broker, including title 
insurance to the extent permitted under section 303 of the GLBA (15 
U.S.C. 6713);
    (Q) Reinsuring mortgage insurance on loans originated, purchased, 
or serviced by the bank, its subsidiaries, or its affiliates, provided 
that if the subsidiary enters into a quota share agreement, the 
subsidiary assumes less than 50 percent of the aggregate insured risk 
covered by the quota share agreement. A ``quota share agreement'' is an 
agreement under which the reinsurer is liable to the primary insurance 
underwriter for an agreed upon percentage of every claim arising out of 
the covered book of business ceded by the primary insurance underwriter 
to the reinsurer;
    (R) Acting as a finder pursuant to 12 CFR 7.1002 to the extent 
permitted by published OCC precedent;\1\
---------------------------------------------------------------------------

    \1\See, e.g., the OCC's monthly publication ``Interpretations 
and Actions.'' Beginning with the May 1996 issue, the OCC's Web site 
provides access to electronic versions of ``Interpretations and 
Actions'' (www.occ.treas.gov).
---------------------------------------------------------------------------

    (S) Offering correspondent services to the extent permitted by 
published OCC precedent;
    (T) Acting as agent or broker in the sale of fixed or variable 
annuities;
    (U) Offering debt cancellation or debt suspension agreements;
    (V) Providing real estate settlement, closing, escrow, and related 
services; and real estate appraisal services for the subsidiary, parent 
bank, or other financial institutions;
    (W) Acting as a transfer or fiscal agent;
    (X) Acting as a digital certification authority to the extent 
permitted by published OCC precedent, subject to the terms and 
conditions contained in that precedent; and
    (Y) Providing or selling public transportation tickets, event and 
attraction tickets, gift certificates, prepaid phone cards, promotional 
and advertising material, postage stamps, and Electronic Benefits 
Transfer (EBT) script, and similar media, to the extent permitted by 
published OCC precedent, subject to the terms and conditions contained 
in that precedent.

[[Page 12913]]

    (vi) No application or notice required. A national bank may acquire 
or establish an operating subsidiary without filing an application or 
providing notice to the OCC, if the bank is adequately capitalized or 
well capitalized and the:
    (A) Activities of the new subsidiary are limited to those 
activities previously reported by the bank in connection with the 
establishment or acquisition of a prior operating subsidiary;
    (B) Activities in which the new subsidiary will engage continue to 
be legally permissible for the subsidiary; and
    (C) Activities of the new subsidiary will be conducted in 
accordance with any conditions imposed by the OCC in approving the 
conduct of these activities for any prior operating subsidiary of the 
bank.
    (vii) Fiduciary powers. If an operating subsidiary proposes to 
exercise investment discretion on behalf of customers or provide 
investment advice for a fee, the national bank must have prior OCC 
approval to exercise fiduciary powers pursuant to Sec. 5.26.

    5. Section 5.35 is amended by:
    A. Revising paragraph (e);
    B. Revising paragraphs (f)(1) and (f)(2);
    C. Removing paragraph (f)(3);
    D. Redesignating paragraphs (f)(4) through (f)(6) as paragraphs 
(f)(3) through (f)(5); and
    E. Revising paragraphs (g)(2), (h), and (i)(2) to read as follows:


Sec. 5.35  Bank service companies.

* * * * *
    (e) Standards and requirements. A national bank may invest in a 
bank service company that conducts activities described in paragraphs 
(f)(3) and (f)(4) of this section, and activities (other than taking 
deposits) permissible for the national bank and other state and 
national bank shareholders or members in the bank service company.
    (f) Procedures--(1) OCC notice and approval required. Except as 
provided in paragraphs (f)(2) and (f)(4) of this section, a national 
bank that intends to make an investment in a bank service company, or 
to perform new activities in an existing bank service company, must 
submit a notice to and receive prior approval from the OCC. The OCC 
approves or denies a proposed investment within 60 days after the 
filing is received by the OCC, unless the OCC notifies the bank prior 
to that date that the filing presents a significant supervisory or 
compliance concern, or raises a significant legal or policy issue. The 
notice must include the information required by paragraph (g) of this 
section.
    (2) Notice process only for certain activities. A national bank 
that is ``well capitalized'' and ``well managed'' as defined in 
Sec. 5.34(d) may invest in a bank service company, or perform a new 
activity in an existing bank service company, by providing the 
appropriate district office written notice within 10 days after the 
investment, if the bank service company engages only in the activities 
listed in Sec. 5.34(e)(5)(v). No prior OCC approval is required. The 
written notice must include a complete description of the bank's 
investment in the bank service company and of the activity conducted 
and a representation and undertaking that the activity will be 
conducted in accordance with OCC guidance. To the extent the notice 
relates to the initial affiliation of the bank with a company engaged 
in insurance activities, the bank should describe the type of insurance 
activity that the company is engaged in and has present plans to 
conduct. The bank must also list for each state the lines of business 
for which the company holds, or will hold, an insurance license, 
indicating the state where the company holds a resident license or 
charter, as applicable. Any bank receiving approval under this 
paragraph is deemed to have agreed that the bank service company will 
conduct the activity in a manner consistent with the published OCC 
guidance.
* * * * *
    (g)* * *
    (2) A complete description of the activities the bank service 
company will conduct. To the extent the notice relates to the initial 
affiliation of the bank with a company engaged in insurance activities, 
the bank should describe the type of insurance activity that the 
company is engaged in and has present plans to conduct. The bank must 
also list for each state the lines of business for which the company 
holds, or will hold, an insurance license, indicating the state where 
the company holds a resident license or charter, as applicable;
* * * * *
    (h) Examination and supervision. Each bank service company in which 
a national bank is the principal investor is subject to examination and 
supervision by the OCC in the same manner and to the same extent as 
that national bank. OCC authority under this paragraph is subject to 
the limitations and requirements of section 45 of the Federal Deposit 
Insurance Act (12 U.S.C. 1831v) and section 115 of the Gramm-Leach-
Bliley Act (12 U.S.C. 1820a).
    (i) * * *
    (2) Other limitations. Except as provided in paragraph (f)(4) of 
this section, a bank service company shall only conduct activities that 
the national bank could conduct directly. If the bank service company 
has both national and state bank shareholders or members, the 
activities conducted must also be permissible for the state bank 
shareholders or members.

    6. Section 5.36 is amended by:
    A. Redesignating paragraphs (c) and (d) as paragraphs (d) and (f) 
respectively, and
    B. Adding new paragraphs (c) and (e) to read as follows:


Sec. 5.36  Other equity investments.

* * * * *
    (c) Definitions. For purposes of this Sec. 5.36:
    (1) Enterprise means any corporation, limited liability company, 
partnership, trust, or similar business entity.
    (2) Well capitalized means the capital level described in 12 CFR 
6.4(b)(1).
    (3) Well managed has the meaning set forth in Sec. 5.34(d)(3).
* * * * *
    (e) Non-controlling investments. A national bank may make a non-
controlling investment, directly or through its operating subsidiary, 
in an enterprise that engages in the activities described in paragraph 
(e)(2) of this section by filing a written notice. The written notice 
must be filed with the appropriate district office no later than 10 
days after making the investment and must:
    (1) Describe the structure of the investment and the activity or 
activities conducted by the enterprise in which the bank is investing. 
To the extent the notice relates to the initial affiliation of the bank 
with a company engaged in insurance activities, the bank should 
describe the type of insurance activity that the company is engaged in 
and has present plans to conduct. The bank must also list for each 
state the lines of business for which the company holds, or will hold, 
an insurance license, indicating the state where the company holds a 
resident license or charter, as applicable;
    (2) State which paragraphs of Sec. 5.34(e)(5)(v) describe the 
activity or activities, or state that, and describe how, the activity 
is substantively the same as that contained in published OCC precedent 
approving a non-controlling investment by a national bank or its 
operating subsidiary, state that the activity will be conducted in 
accordance with the same terms and conditions applicable to the 
activity covered by the precedent, and provide the citation to the 
applicable precedent;

[[Page 12914]]

    (3) Certify that the bank is well managed and well capitalized at 
the time of the investment;
    (4) Describe how the bank has the ability to prevent the enterprise 
from engaging in activities that are not set forth in 
Sec. 5.34(e)(5)(v) or not contained in published OCC precedent 
approving a non-controlling investment by a national bank or its 
operating subsidiary, or how the bank otherwise has the ability to 
withdraw its investment;
    (5) Certify that the bank will account for its investment under 
this section under the equity or cost method of accounting;
    (6) Describe how the investment is convenient and useful to the 
bank in carrying out its business and not a mere passive investment 
unrelated to the bank's banking business; and
    (7) Certify that the enterprise in which the bank is investing 
agrees to be subject to OCC supervision and examination, subject to the 
limitations and requirements of section 45 of the Federal Deposit 
Insurance Act (12 U.S.C. 1831v) and section 115 of the Gramm-Leach-
Bliley Act (12 U.S.C. 1820a).
* * * * *
    7. A new Sec. 5.39 is added to subpart C to read as follows:


Sec. 5.39  Financial subsidiaries.

    (a) Authority. 12 U.S.C. 93a and section 121 of Public Law 106-102, 
113 Stat. 1338, 1373.
    (b) Approval requirements. A national bank must file a notice as 
prescribed in this section prior to acquiring a financial subsidiary or 
engaging in activities authorized pursuant to section 5136A(a)(2)(A)(i) 
of the Revised Statutes (12 U.S.C. 24a) through a financial subsidiary. 
When a financial subsidiary proposes to conduct a new activity 
permitted under Sec. 5.34, the bank shall follow the procedures in 
Sec. 5.34(e)(5) instead of paragraph (i) of this section.
    (c) Scope. This section sets forth authorized activities, approval 
procedures, and, where applicable, conditions for national banks 
engaging in activities through a financial subsidiary.
    (d) Definitions. For purposes of this Sec. 5.39:
    (1) Affiliate has the meaning set forth in section 2 of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841), except that the term 
``affiliate'' for purposes of paragraph (h)(5) of this section shall 
have the meaning set forth in sections 23A or 23B of the Federal 
Reserve Act (12 U.S.C. 371c and 371c-1), as applicable.
    (2) Appropriate Federal banking agency has the meaning set forth in 
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
    (3) Company has the meaning set forth in section 2 of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841), and includes a limited 
liability company (LLC).
    (4) Control has the meaning set forth in section 2 of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841).
    (5) Eligible debt means unsecured long-term debt that is:
    (i) Not supported by any form of credit enhancement, including a 
guaranty or standby letter of credit; and
    (ii) Not held in whole or in any significant part by any affiliate, 
officer, director, principal shareholder, or employee of the bank or 
any other person acting on behalf of or with funds from the bank or an 
affiliate of the bank.
    (6) Financial subsidiary means any company that is controlled by 
one or more insured depository institutions, other than a subsidiary 
that:
    (i) Engages solely in activities that national banks may engage in 
directly and that are conducted subject to the same terms and 
conditions that govern the conduct of these activities by national 
banks; or
    (ii) A national bank is specifically authorized to control by the 
express terms of a Federal statute (other than section 5136A of the 
Revised Statutes), and not by implication or interpretation, such as by 
section 25 of the Federal Reserve Act (12 U.S.C. 601-604a), section 25A 
of the Federal Reserve Act (12 U.S.C. 611-631), or the Bank Service 
Company Act (12 U.S.C. 1861 et seq.)
    (7) Insured depository institution has the meaning set forth in 
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
    (8) Long term debt means any debt obligation with an initial 
maturity of 360 days or more.
    (9) Subsidiary has the meaning set forth in section 2 of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841).
    (10) Tangible equity has the meaning set forth in 12 CFR 6.2(g).
    (11) Well capitalized with respect to a depository institution 
means the capital level designated as ``well capitalized'' by the 
institution's appropriate Federal banking agency pursuant to section 38 
of the Federal Deposit Insurance Act (12 U.S.C. 1831o).
    (12) Well managed means:
    (i) Unless otherwise determined in writing by the appropriate 
Federal banking agency, the institution has received a composite rating 
of 1 or 2 under the Uniform Financial Institutions Rating System (or an 
equivalent rating under an equivalent rating system) in connection with 
the most recent examination or subsequent review of the depository 
institution and, at least a rating of 2 for management, if such a 
rating is given; or
    (ii) In the case of any depository institution that has not been 
examined by its appropriate Federal banking agency, the existence and 
use of managerial resources that the appropriate Federal banking agency 
determines are satisfactory.
    (e) Authorized activities. A financial subsidiary may engage only 
in the following activities:
    (1) Activities that are financial in nature and activities 
incidental to a financial activity, authorized pursuant to 
5136A(a)(2)(A)(i) of the Revised Statutes (12 U.S.C. 24a) (to the 
extent not otherwise permitted under paragraph (e)(2) of this section), 
including:
    (i) Lending, exchanging, transferring, investing for others, or 
safeguarding money or securities;
    (ii) Engaging as agent or broker in any state for purposes of 
insuring, guaranteeing, or indemnifying against loss, harm, damage, 
illness, disability, death, defects in title, or providing annuities as 
agent or broker;
    (iii) Providing financial, investment, or economic advisory 
services, including advising an investment company as defined in 
section 3 of the Investment Company Act (15 U.S.C. 80a-3);
    (iv) Issuing or selling instruments representing interests in pools 
of assets permissible for a bank to hold directly;
    (v) Underwriting, dealing in, or making a market in securities;
    (vi) Engaging in any activity that the Board of Governors of the 
Federal Reserve System has determined, by order or regulation in effect 
on November 12, 1999, to be so closely related to banking or managing 
or controlling banks as to be a proper incident thereto (subject to the 
same terms and conditions contained in the order or regulation, unless 
the order or regulation is modified by the Board of Governors of the 
Federal Reserve System);
    (vii) Engaging, in the United States, in any activity that a bank 
holding company may engage in outside the United States and the Board 
of Governors of the Federal Reserve System has determined, under 
regulations prescribed or interpretations issued pursuant to section 
4(c)(13) of the Bank Holding Company Act of 1956 (12 U.S.C. 
1843(c)(13)) as in effect on November 11, 1999, to be usual in

[[Page 12915]]

connection with the transaction of banking or other financial 
operations abroad; and
    (viii) Activities that the Secretary of the Treasury in 
consultation with the Board of Governors of the Federal Reserve System, 
as provided in section 5136A of the Revised Statutes, determines to be 
financial in nature or incidental to a financial activity; and
    (2) Activities that may be conducted by an operating subsidiary 
pursuant to Sec. 5.34.
    (f) Impermissible activities. A financial subsidiary may not engage 
as principal in the following activities:
    (1) Insuring, guaranteeing, or indemnifying against loss, harm, 
damage, illness, disability or death, or defects in title (except to 
the extent permitted under sections 302 or 303(c) of the Gramm-Leach-
Bliley Act (GLBA)), 113 Stat. 1407-1409, (15 U.S.C. 6712 or 15 U.S.C. 
6713) or providing or issuing annuities the income of which is subject 
to tax treatment under section 72 of the Internal Revenue Code (26 
U.S.C. 72);
    (2) Real estate development or real estate investment, unless 
otherwise expressly authorized by law; and
    (3) Activities authorized for bank holding companies by section 
4(k)(4)(H) or (I) (12 U.S.C. 1843) of the Bank Holding Company Act, 
except activities authorized under section 4(k)(4)(H) that may be 
permitted in accordance with section 122 of the GLBA, 113 Stat. 1381.
    (g) Qualifications. A national bank may, directly or indirectly, 
control a financial subsidiary or hold an interest in a financial 
subsidiary only if:
    (1) The national bank and each depository institution affiliate of 
the national bank are well capitalized and well managed;
    (2) The aggregate consolidated total assets of all financial 
subsidiaries of the national bank do not exceed the lesser of 45 
percent of the consolidated total assets of the parent bank or $50 
billion (or such greater amount as is determined according to an 
indexing mechanism jointly established by regulation by the Secretary 
of the Treasury and the Board of Governors of the Federal Reserve 
System); and
    (3) If the national bank is one of the 100 largest insured banks, 
determined on the basis of the bank's consolidated total assets at the 
end of the calendar year, the bank has at least one issue of 
outstanding eligible debt that is currently rated in one of the three 
highest investment grade rating categories by a nationally recognized 
statistical rating organization. If the national bank is one of the 
second 50 largest insured banks, it may either satisfy this requirement 
or satisfy alternative criteria the Secretary of the Treasury and the 
Board of Governors of the Federal Reserve System establish jointly by 
regulation. This paragraph (g)(3) does not apply if the financial 
subsidiary is engaged solely in activities in an agency capacity.
    (h) Safeguards. The following safeguards apply to a national bank 
that establishes or maintains a financial subsidiary:
    (1) For purposes of determining regulatory capital:
    (i) The national bank must deduct the aggregate amount of its 
outstanding equity investment, including retained earnings, in its 
financial subsidiaries from its total assets and tangible equity and 
deduct such investment from its total risk-based capital (this 
deduction shall be made equally from Tier 1 and Tier 2 capital); and
    (ii) The national bank may not consolidate the assets and 
liabilities of a financial subsidiary with those of the bank;
    (2) Any published financial statement of the national bank shall, 
in addition to providing information prepared in accordance with 
generally accepted accounting principles, separately present financial 
information for the bank in the manner provided in paragraph (h)(1) of 
this section;
    (3) The national bank must have reasonable policies and procedures 
to preserve the separate corporate identity and limited liability of 
the bank and the financial subsidiaries of the bank;
    (4) The national bank must have procedures for identifying and 
managing financial and operational risks within the bank and the 
financial subsidiary that adequately protect the national bank from 
such risks;
    (5) Sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c 
and 371c-1) apply to transactions involving a financial subsidiary in 
the following manner:
    (i) A financial subsidiary shall be deemed to be an affiliate of 
the bank and shall not be deemed to be a subsidiary of the bank;
    (ii) The restrictions contained in section 23A(a)(1)(A) of the 
Federal Reserve Act shall not apply with respect to covered 
transactions between a bank and any individual financial subsidiary of 
the bank;
    (iii) The bank's investment in the financial subsidiary shall not 
include retained earnings of the financial subsidiary;
    (iv) Any purchase of, or investment in, the securities of a 
financial subsidiary of a bank by an affiliate of the bank will be 
considered to be a purchase of or investment in such securities by the 
bank; and
    (v) Any extension of credit by an affiliate of a bank to a 
financial subsidiary of the bank may be considered an extension of 
credit by the bank to the financial subsidiary if the Board of 
Governors of the Federal Reserve System determines that such treatment 
is necessary or appropriate to prevent evasions of the Federal Reserve 
Act and the GLBA.
    (6) A financial subsidiary shall be deemed a subsidiary of a bank 
holding company and not a subsidiary of the bank for purposes of the 
anti-tying prohibitions set forth in 12 U.S.C. 1971 et seq.
    (i) Procedures to engage in activities through a financial 
subsidiary. A national bank that intends, directly or indirectly, to 
acquire control of, or hold an interest in, a financial subsidiary, or 
to commence a new activity in an existing financial subsidiary, must 
obtain OCC approval through the procedures set forth in paragraph 
(i)(1) or (i)(2) of this section.
    (1) Certification with subsequent notice. (i) At any time, a 
national bank may file a ``Financial Subsidiary Certification'' with 
the appropriate district office listing the bank's depository 
institution affiliates and certifying that the bank and each of those 
affiliates is well capitalized and well managed.
    (ii) Thereafter, at such time as the bank seeks OCC approval to 
acquire control of, or hold an interest in, a new financial subsidiary, 
or commence a new activity authorized under section 5136A(a)(2)(A)(i) 
of the Revised Statutes (12 U.S.C. 24a) in an existing subsidiary, the 
bank may file a written notice with the appropriate district office at 
the time of acquiring control of, or holding an interest in, a 
financial subsidiary, or commencing such activity in an existing 
subsidiary. The written notice must be labeled ``Financial Subsidiary 
Notice'' and must:
    (A) State that the bank's Certification remains valid;
    (B) Describe the activity or activities conducted by the financial 
subsidiary. To the extent the notice relates to the initial affiliation 
of the bank with a company engaged in insurance activities, the bank 
should describe the type of insurance activity that the company is 
engaged in and has present plans to conduct. The bank must also list 
for each state the lines of business for which the company holds, or 
will hold, an insurance license, indicating the state where the company 
holds a resident license or charter, as applicable;

[[Page 12916]]

    (C) Cite the specific authority permitting the activity to be 
conducted by the financial subsidiary. (Where the authority relied on 
is an agency order or interpretation under section 4(c)(8) or 4(c)(13), 
respectively, of the Bank Holding Company Act of 1956, a copy of the 
order or interpretation should be attached);
    (D) Certify that the bank will be well capitalized after making 
adjustments required by paragraph (h)(1) of this section;
    (E) Demonstrate the aggregate consolidated total assets of all 
financial subsidiaries of the national bank do not exceed the lesser of 
45 percent of the bank's consolidated total assets or $50 billion (or 
the increased level established by the indexing mechanism); and
    (F) If applicable, certify that the bank meets the eligible debt 
requirement in paragraph (g)(3) of this section.
    (2) Combined certification and notice. A national bank may file a 
combined certification and notice with the appropriate district office 
at least five business days prior to acquiring control of, or holding 
an interest in, a financial subsidiary, or commencing a new activity 
authorized pursuant to section 5136A(a)(2)(A)(i) of the Revised 
Statutes in an existing subsidiary. The written notice must be labeled 
``Financial Subsidiary Certification and Notice'' and must:
    (i) List the bank's depository institution affiliates and certify 
that the bank and each depository institution affiliate of the bank is 
well capitalized and well managed;
    (ii) Describe the activity or activities to be conducted in the 
financial subsidiary. To the extent the notice relates to the initial 
affiliation of the bank with a company engaged in insurance activities, 
the bank should describe the type of insurance activity that the 
company is engaged in and has present plans to conduct. The bank must 
also list for each state the lines of business for which the company 
holds, or will hold, an insurance license, indicating the state where 
the company holds a resident license or charter, as applicable;
    (iii) Cite the specific authority permitting the activity to be 
conducted by the financial subsidiary. (Where the authority relied on 
is an agency order or interpretation under section 4(c)(8) or 4(c)(13), 
respectively, of the Bank Holding Company Act of 1956, a copy of the 
order or interpretation should be attached);
    (iv) Certify that the bank will remain well capitalized after 
making the adjustments required by paragraph (h)(1) of this section;
    (v) Demonstrate the aggregate consolidated total assets of all 
financial subsidiaries of the national bank do not exceed the lesser of 
45% of the bank's consolidated total assets or $50 billion (or the 
increased level established by the indexing mechanism); and
    (vi) If applicable, certify that the bank meets the eligible debt 
requirement in paragraph (g)(3) of this section.
    (3) Exceptions to rules of general applicability. Sections 5.8, 
5.10, 5.11, and 5.13 do not apply to activities authorized under this 
section.
    (4) Community Reinvestment Act (CRA). A national bank may not apply 
under this paragraph (i) to commence a new activity authorized under 
section 5136A(a)(2)(A)(i) of the Revised Statutes (12 U.S.C. 24a), or 
directly or indirectly acquire control of a company engaged in any such 
activity, if the bank or any of its insured depository institution 
affiliates received a CRA rating of less than ``satisfactory record of 
meeting community credit needs'' on its most recent CRA examination 
prior to when the bank would file a notice under this section.
    (j) Failure to continue to meet certain qualification 
requirements--(1) Qualifications and safeguards. A national bank, or, 
as applicable, its affiliated depository institutions, must continue to 
satisfy the qualification requirements set forth in paragraphs (g)(1) 
and (2) of this section and the safeguards in paragraphs (h)(1), (2), 
(3) and (4) of this section following its acquisition of control of, or 
an interest in, a financial subsidiary. A national bank that fails to 
continue to satisfy these requirements will be subject to the following 
procedures and requirements:
    (i) The OCC shall give notice to the national bank and, in the case 
of an affiliated depository institution to that depository 
institution's appropriate Federal banking agency, promptly upon 
determining that the national bank, or, as applicable, its affiliated 
depository institution, does not continue to meet the requirements in 
paragraph (g)(1) or (2) of this section or the safeguards in paragraph 
(h)(1), (2), (3), or (4) of this section. The bank shall be deemed to 
have received such notice three business days after mailing of the 
letter by the OCC;
    (ii) Not later than 45 days after receipt of the notice under 
paragraph (j)(1)(i) of this section, or any additional time as the OCC 
may permit, the national bank shall execute an agreement with the OCC 
to comply with the requirements in paragraphs (g)(1) and (2) and 
(h)(1), (2), (3), and (4) of this section;
    (iii) The OCC may impose limitations on the conduct or activities 
of the national bank or any subsidiary of the national bank as the OCC 
determines appropriate under the circumstances and consistent with the 
purposes of section 5136A of the Revised Statutes; and
    (iv) The OCC may require a national bank to divest control of a 
financial subsidiary if the national bank does not correct the 
conditions giving rise to the notice within 180 days after receipt of 
the notice provided under paragraph (j)(1)(i) of this section.
    (2) Eligible debt rating requirement. A national bank that does not 
continue to meet the qualification requirement set forth in paragraph 
(g)(3) of this section, applicable where the bank's financial 
subsidiary is engaged in activities other than solely in an agency 
capacity, may not directly or through a subsidiary, purchase or acquire 
any additional equity capital of any such financial subsidiary until 
the bank meets the requirement in paragraph (g)(3) of this section. For 
purposes of this paragraph (j)(2), the term ``equity capital'' 
includes, in addition to any equity investment, any debt instrument 
issued by the financial subsidiary if the instrument qualifies as 
capital of the subsidiary under federal or state law, regulation, or 
interpretation applicable to the subsidiary.
    (k) Examination and supervision. A financial subsidiary is subject 
to examination and supervision by the OCC, subject to the limitations 
and requirements of section 45 of the Federal Deposit Insurance Act (12 
U.S.C. 1831v) and section 115 of the GLBA (12 U.S.C. 1820a).

    Dated: March 3, 2000
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 00-5830 Filed 3-9-00; 8:45 am]
BILLING CODE 4810-33-P