[Federal Register Volume 65, Number 53 (Friday, March 17, 2000)]
[Rules and Regulations]
[Pages 14440-14442]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6502]


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FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-1063]


Bank Holding Companies and Change in Bank Control; Securities 
Underwriting, Dealing, and Market-Making Activities of Financial 
Holding Companies

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Interim rule with request for public comments.

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SUMMARY: Underwriting, dealing in, and making a market in securities 
are financial activities permissible for financial holding companies 
under the Gramm-Leach-Bliley Act. Bank holding companies may currently 
engage in these activities only to a limited extent through so-called 
section 20 subsidiaries. Under the Board's current rules, section 20 
subsidiaries are subject to eight operating standards imposed by the 
Board in order to address certain potential risks and conflicts 
associated with the affiliation of a bank and a securities firm.
    The Board is adopting this interim rule to impose two of these 
operating standards on financial holding companies engaged in 
securities underwriting, dealing or market-making activities. Under the 
interim rule, intra-day extensions of credit by a bank or thrift, or 
U.S. branch or agency of a foreign bank, to a securities affiliate 
engaged in securities underwriting, dealing, or market-making must be 
on market terms. In addition, foreign banks that are financial holding 
companies or that are treated as financial holding companies will be 
required to comply with certain affiliate transaction restrictions with 
respect to lending and securities purchase transactions between a U.S. 
branch or agency of a foreign bank and a securities affiliate engaged 
in securities underwriting, dealing, or market-making.

DATES: The interim rule is effective on March 11, 2000. Comments must 
be received by May 12, 2000.

ADDRESSES: Comments, which should refer to docket number R-1063, 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 or mailed electronically to 
[email protected]. Comments addressed to Ms. Johnson 
also may be delivered to the Board's mail room between the hours of 
8:45 a.m. and 5:15 p.m. and, outside of those hours, to the Board's 
security control room. Both the mail room and the security control room 
are accessible from the Eccles Building courtyard entrance, located on 
20th Street between Constitution Avenue and C Street, NW. Members of 
the public may inspect comments in Room MP-500 of the Martin Building 
between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Thomas Corsi, Managing Senior Counsel, 
Legal Division (202) 452-3275; Michael J. Schoenfeld, Senior 
Supervisory Financial Analyst, Division of Banking Supervision and 
Regulation

[[Page 14441]]

(202) 452-2836; for the hearing impaired only, Telecommunications 
Device for the Deaf (TDD), Janice Simms (202) 872-4984.

SUPPLEMENTARY INFORMATION: The Gramm-Leach-Bliley Act differs from 
prior regulatory and statutory schemes in the manner that it addresses 
potential risks to a depository institution associated with securities 
and other activities conducted by affiliates. The current section 20 
operating standards,\1\ like the bills to repeal the Glass-Steagall Act 
that were considered in the late 1980s and early 1990s contain detailed 
restrictions on relationships and transactions between depository 
institutions and securities affiliates. The Gramm-Leach-Bliley Act 
relies instead on requirements that each depository institution 
affiliated with a securities firm be and remain well capitalized and 
well managed. The Gramm-Leach-Bliley Act also relies on functional 
regulation of the securities firm by the SEC, full supervision of the 
depository institution by the appropriate federal banking agency, and 
umbrella supervision of the overall organization by the Board to 
identify and address potential risks to the depository institution 
associated with the securities and other activities in the 
organization.
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    \1\ 12 CFR 225.200. The operating standards would continue to 
apply to section 20 subsidiaries controlled by bank holding 
companies that do not qualify as financial holding companies.
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    The Gramm-Leach-Bliley Act grants the Board authority to impose 
restrictions or requirements on relationships or transactions between a 
depository institution and any affiliate. The Board may impose a 
prudential limitation if the Board finds that the limitation is 
appropriate to avoid a significant risk to the safety and soundness of 
the depository institution or the Federal deposit insurance funds, to 
avoid other adverse effects or to prevent evasions of the banking 
laws.\2\ The Board believes that most of the concerns that are raised 
by the affiliation of a securities firm with a financial holding 
company are addressed by the requirements of the Gramm-Leach-Bliley 
Act, other banking laws and regulations, and securities laws and 
regulations.
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    \2\ Pub. L. No. 106-102, 113 Stat. 1338, 1369-71 (1999).
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    Two concerns that the Board believes are not addressed by current 
law or regulation relate to intra-day extensions of credit to a 
securities firm by an affiliated depository insitution, and to 
transactions between a U.S. branch or agency of a foreign bank that 
elects to become or be treated as a financial holding company, and an 
affiliated securities firm.
    Intra-day extensions of credit:  One operating standard applicable 
to section 20 subsidiaries (``operating standard 5'') requires that 
intra-day extensions of credit to a section 20 subsidiary by an 
affiliated bank or thrift, or U.S. branch or agency of a foreign bank 
be on market terms consistent with section 23B of the Federal Reserve 
Act. In considering whether to apply this limitation to financial 
holding companies, the Board notes that the Gramm-Leach-Bliley Act 
requires the Board, within the next 18 months, to address how the 
restrictions in section 23A apply to intra-day extensions of credit to 
all affiliates. Until such time as that effort is complete, however, 
the Board believes that operating standard 5 remains important to 
ensure that intra-day extensions of credit by a depository institution 
to an affiliated securities firm for clearing or other purposes are not 
subsidizing the activities of the securities firm to the detriment of 
the depository institution affiliate. Accordingly, the Board is 
applying the limitations in operating standard 5 to financial holding 
companies and foreign banks treated as financial holding companies to 
cover intra-day extensions of credit to their subsidiary securities 
firms from their subsidiary banks or thrifts or U.S. branches or 
agencies at least until such time as the analysis regarding the 
application of section 23A to intra-day extensions of credit is 
complete.
    Transactions with U.S. branches and agencies of foreign banks: 
Another operating standard (``operating standard 8'') applicable to 
section 20 subsidiaries requires that a U.S. branch or agency of a 
foreign bank comply with sections 23A and 23B of the Federal Reserve 
Act \3\ when extending credit to a section 20 affiliate, or when 
purchasing securities for which a section 20 affiliate is a principal 
underwriter.\4\ A branch or agency also may not advertise or suggest 
that it is responsible for the obligations of a section 20 affiliate. 
Operating standard 8 permits a branch or agency of a foreign bank to 
engage in funding and securities purchase transactions with a section 
20 affiliate subject to the same restrictions applicable to a U.S. 
depository institution.
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    \3\ 12 U.S.C. 371c and 371c-1
    \4\ 12 CFR 225.200(b)(8).
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    The purpose of sections 23A and 23B of the Federal Reserve Act, 
which limit credit and other transactions between a bank and its 
affiliate, is to limit the possibility that the risks of activities 
conducted in a nonbank affiliate of a depository institution be 
transferred to the depository institution. The Board originally applied 
lending restrictions to transactions between U.S. branches and agencies 
of a foreign bank and a section 20 affiliate as a prudential 
limitation, recognizing that U.S. branches and agencies are part of the 
U.S. financial structure.\5\ In addition, the Board adopted operating 
standard 8 because sections 23A and 23B apply to U.S. banks and 
thrifts, and the operating standard ensures competitive equity between 
foreign banks and U.S. banking organizations in the funding of section 
20 affiliates. These are the types of concerns that section 114 of the 
Gramm-Leach-Bliley Act would require the Board to consider in imposing 
restrictions on foreign banks that become financial holding companies.
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    \5\ See Canadian Imperial Bank of Commerce, et al., 76 Federal 
Reserve Bulletin 158, 163 (1990).
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    Under the Gramm-Leach-Bliley Act, foreign banks, as well as U.S. 
bank holding companies, that become financial holding companies will be 
able to engage in a broader range of securities activities than is 
permitted now. In view of this, the prudential and competitive equity 
concerns that led the Board to adopt operating standard 8 would justify 
applying that prudential limit in the case of a foreign bank that 
becomes a financial holding company. This restriction would apply only 
to transactions between a securities affiliate that underwrites, deals 
in, or makes a market in securities, and a U.S. branch or agency of a 
foreign bank, and not to the foreign bank itself.
    Customer disclosures: The Board is not at this time imposing any 
customer disclosure requirements on financial holding companies with 
respect to the activities of a subsidiary securities firm engaged in 
securities underwriting, dealing, or market-making pursuant to section 
4(k)(4)(E) of the BHC Act. To the extent that the securities firm makes 
a sale to a customer on the premises of a depository institution, or 
through a depository institution employee, or as a result of a referral 
by a depository institution, it will be required to make the 
disclosures contained in the Interagency Statement on Retail Sales of 
Nondeposit Investment Products (Interagency Statement).
    Whether or not the activities of subsidiary securities firms of 
financial holding companies are covered by the Interagency Statement, 
the Board expects financial holding companies to take all necessary 
steps to ensure that customers are not confused about the nature of 
investment products they are purchasing. If the Board becomes aware

[[Page 14442]]

that customer confusion is occurring, or that action is necessary to 
prevent abuses, the Board may impose additional disclosure requirements 
on financial holding companies to address these issues.

Regulatory Flexibility Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601-
612), the Board must publish an initial regulatory flexibility analysis 
with this interim regulation. The purpose of the interim rule is to 
address concerns raised by the affiliation of a securities firm with a 
financial holding company that are not otherwise addressed by current 
law or regulation. The rule applies only to bank holding companies and 
foreign banks that voluntarily elect to become or be treated as 
financial holding companies under the Bank Holding Company Act as 
amended by the Gramm-Leach-Bliley Act, and also engage in certain 
securities activities. The interim rule applies to all financial 
holding companies regardless of size, and requires them to comply with 
certain restrictions that already apply to bank holding companies that 
control section 20 subsidiaries engaged in securities activities. The 
rule applies fewer restrictions to financial holding companies seeking 
to engage in securities activities than apply to bank holding companies 
that control section 20 subsidiaries and thus represents a reduction in 
the limitations on engaging in certain securities underwriting and 
dealing activities. The Board specifically seeks comment on the likely 
burden this interim rule will impose on small business entities and 
financial holding companies that seek to engage in securities 
activities.

Administrative Procedure Act

    The Board will make this interim rule effective on March 11, 2000 
without first reviewing public comments. Pursuant to 5 U.S.C. 553, the 
Board finds that it is impracticable to review public comments prior to 
the effective date of the interim rule, and that there is good cause to 
make the interim rule effective on March 11, 2000, due to the fact that 
the rule sets forth a requirement relating to activities that financial 
holding companies will be able to engage in on March 11, 2000, due to 
statutory changes that become effective on that date. The Board is 
seeking public comment on the interim rule and will amend the rule as 
appropriate after reviewing the comments.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the interim rule 
under the authority delegated to the Board by the Office of Management 
and Budget. No collections of information pursuant to the Paperwork 
Reduction Act are contained in the interim rule.

List of Subjects in CFR 12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

    For the reasons set out in the preamble, the Board amends 12 CFR 
part 225 as follows:

PART 225--BANK HOLDING COMPANY 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), 1831(i), 1831p-
1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, 
and 3909.

    2. Section 225.4 is amended by adding a new paragraph (g) to read 
as follows:


Sec. 225.4  Corporate practices.

* * * * *
    (g) Requirements for financial holding companies engaged in 
securities underwriting, dealing, or market-making activities. (1) Any 
intra-day extension of credit by a bank or thrift, or U.S. branch or 
agency of a foreign bank to an affiliated company engaged in 
underwriting, dealing in, or making a market in securities pursuant to 
section 4(k)(4)(E) of the Bank Holding Company Act (12 U.S.C. 
1843(k)(4)(E)) must be on market terms consistent with section 23B of 
the Federal Reserve Act. (12 U.S.C. 371c-1).
    (2) A foreign bank that is or is treated as a financial holding 
company under this part shall ensure that:
    (i) Any extension of credit by any U.S. branch or agency of such 
foreign bank to an affiliated company engaged in underwriting, dealing 
in, or making a market in securities pursuant to section 4(k)(4)(E) of 
the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(E)), conforms to 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 
371c-1) as if the branch or agency were a member bank;
    (ii) Any purchase by any U.S. branch or agency of such foreign 
bank, as principal or fiduciary, of securities for which a securities 
affiliate described in paragraph (g)(2)(i) of this section is a 
principal underwriter conforms to sections 23A and 23B of the Federal 
Reserve Act (12 U.S.C. 371c and 371c-1) as if the branch or agency were 
a member bank; and
    (iii) Its U.S. branches and agencies not advertise or suggest that 
they are responsible for the obligations of a securities affiliate 
described in paragraph (g)(2)(i) of this section, consistent with 
section 23B(c) of the Federal Reserve Act (12 U.S.C. 371c-1(c)) as if 
the branches or agencies were member banks.

    By order of the Board of Governors of the Federal Reserve 
System, March 10, 2000.
Robert deV. Frierson,
Associate Secretary of the Board.
[FR Doc. 00-6502 Filed 3-16-00; 8:45 am]
BILLING CODE 6210-01-P