[Federal Register Volume 65, Number 54 (Monday, March 20, 2000)]
[Rules and Regulations]
[Pages 14810-14816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6468]


=======================================================================
-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Regulation H; Docket No. R-1064]


Membership of State Banking Institutions in the Federal Reserve 
System

AGENCY:  Board of Governors of the Federal Reserve System.

ACTION:  Interim rule with request for public comments.

-----------------------------------------------------------------------

SUMMARY:  The Board is amending Regulation H to implement provisions of 
the Gramm-Leach-Bliley Act for state member banks. The Gramm-Leach-
Bliley Act authorizes state member banks to control, or hold an 
interest in, financial subsidiaries which may conduct certain 
activities that are financial in nature or incidental to a financial 
activity. The Board has promulgated this rule on an interim basis, 
effective on March 11, 2000, in order to allow state member banks that 
meet applicable criteria to acquire control of, or an interest in, a 
financial subsidiary as soon as possible following the effective date 
of the relevant provisions of the Gramm-Leach-Bliley Act.
    The Board solicits comments on all aspects of the interim rule and 
will amend the rule as appropriate in response to comments received.

DATES: This interim rule is effective on March 11, 2000. Comments must 
be submitted on or before May 12, 2000.

ADDRESSES: Comments, which should refer to Docket No. R-1064, may be 
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551 or mailed electronically to 
[email protected]. Comments addressed to Ms. Johnson 
also may be delivered to Room B-2222 of the Eccles Building between 
8:45 a.m. and 5:15 p.m., weekdays or delivered to the guard station in 
the Eccles Building Courtyard on 20th Street, N.W. (between 
Constitution Avenue and C Street, N.W.) at any time. Comments will be 
available for inspection and copying by any member of the public in the 
Freedom of Information Office, Room MP-500 of the Martin Building, 
between 9:00 a.m. and 5:00 p.m. weekdays, except as provided in 
Sec. 261.8 of the Board's Rules Regarding Availability of Information 
(12 CFR 261.8).

FOR FURTHER INFORMATION CONTACT:  Oliver Ireland, Associate General 
Counsel (202/452-3625), Kieran J. Fallon, Senior Counsel (202/452-
5270), Michael J. O'Rourke, Counsel (202/452-3288), Legal Division, 
Board of Governors of the Federal Reserve System. For the hearing 
impaired only, Telecommunications Device for the Deaf (TDD), contact 
Janice Simms (202/872-4984).

SUPPLEMENTARY INFORMATION:

Background

    The Board is amending Regulation H (Membership of State Banking 
Institutions in the Federal Reserve System) to implement section 121 of 
the Gramm-Leach-Bliley Act (GLB Act) (Pub. L. 106-102; 113 Stat. 1373-
82) as it applies to state member banks. The Comptroller of the 
Currency has recently issued a rule to implement those parts of section 
121 applicable to national banks (65 FR 12905, March 10, 2000). The 
Board's rule for state member

[[Page 14811]]

banks parallels that adopted by the Comptroller.
    The GLB Act permits qualifying state member banks to control, or 
hold an interest in, a new type of subsidiary, referred to as a 
``financial subsidiary.'' A financial subsidiary may engage in 
activities that have been determined to be financial in nature or 
incidental to financial activities under the GLB Act, including general 
insurance agency activities in any location and travel agency 
activities. In addition, a financial subsidiary may engage in 
underwriting, dealing in and making a market in all types of 
securities--activities previously prohibited for subsidiaries of state 
member banks by the Glass-Steagall Act. A financial subsidiary also may 
conduct any activity that the state member bank is permitted to conduct 
directly.
    The GLB Act prohibits financial subsidiaries from engaging in 
certain types of activities. As a general matter, a financial 
subsidiary may not engage as principal in underwriting insurance, 
providing or issuing annuities, real estate development or real estate 
investment, and merchant banking and insurance company investment 
activities.
    A financial subsidiary is defined as any company controlled by one 
or more insured depository institutions, but does not include (1) a 
subsidiary that the state member bank is specifically authorized to 
hold by the express terms of Federal law (other than section 9 of the 
Federal Reserve Act), such as an Edge Act subsidiary held under section 
25 of the Federal Reserve Act, or (2) a subsidiary that engages only in 
activities that the parent bank could conduct directly and that are 
conducted on the same terms and conditions that govern the conduct of 
the activity by the state member bank.
    The interim rule sets forth the criteria that state member banks 
must meet to own or control a financial subsidiary, the activities that 
financial subsidiaries may and may not engage in, and the procedures 
that will be applied to state member banks that own or control a 
financial subsidiary and that fail to continue to meet the Act's 
eligibility requirements. The interim rule also establishes a 
streamlined notice procedure for state member banks to receive the 
Federal Reserve's approval to acquire a financial subsidiary or engage 
in a newly authorized financial activity through an existing financial 
subsidiary.
    The authority for a state member bank to own or control a financial 
subsidiary is in addition to the existing authority of state member 
banks to establish so-called operations subsidiaries that engage in 
activities that the parent bank may conduct directly and that are 
conducted on the same terms and conditions that govern the conduct of 
these activities by the bank. See 12 CFR 250.141. Thus, state member 
banks may continue to retain and to establish new operations 
subsidiaries permitted under state law and the Board's interpretation 
without complying with the requirements of this subpart applicable to 
financial subsidiaries.

Description of the Interim Rule

Section 208.71--What Are the Requirements To Invest in or Control a 
Financial Subsidiary?

    Under the GLB Act, a state member bank may control, or hold an 
interest in, a financial subsidiary only if certain criteria are met. 
First, the state member bank and each of its depository institution 
affiliates must be well capitalized and well managed. An institution is 
well capitalized if it meets or exceeds the capital levels designated 
as ``well capitalized'' by the institution's appropriate Federal 
banking agency under section 38 of the Federal Deposit Insurance Act 
(12 U.S.C. 1831o). Well managed is defined by reference to the 
achievement of specific examination ratings.\1\ Second, the aggregate 
consolidated total assets of the bank's financial subsidiaries may not 
exceed the lesser of 45 percent of the bank's consolidated total assets 
or $50 billion. This dollar figure will be adjusted according to an 
indexing mechanism to be established jointly by the Board and the 
Secretary of the Treasury.
---------------------------------------------------------------------------

    \1\ See 12 C.F.R. 208.77(f). A depository institution that has 
not been examined will be considered well managed if its appropriate 
Federal banking agency determines that the institution's managerial 
resources are satisfactory.
---------------------------------------------------------------------------

    Third, if the state member bank is one of the largest 100 insured 
banks, the bank must have 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. Eligible debt refers to unsecured debt that has an 
initial maturity of more than 360 days. The debt must be issued and 
outstanding, may not be supported by any form of credit enhancement, 
and may not be held in whole or in any significant part by affiliates 
or insiders of the bank or by any other person acting on behalf of or 
with funds from the bank or an affiliate. If the state member bank is 
one of the second 50 largest insured banks, the bank may meet this debt 
rating requirement or an alternative criteria that the Board and the 
Secretary of the Treasury anticipate establishing by regulation in the 
near future. The debt rating and alternative criteria do not apply to a 
bank if its financial subsidiaries do not engage in any newly 
authorized financial activity as principal.
    Finally, the state member bank must obtain the Federal Reserve's 
approval to acquire control of, or an interest in, the financial 
subsidiary using the streamlined notice procedures set forth in 
Sec. 208.76 of the rule. The state member bank also must obtain any 
necessary approvals from its state supervisory authority.

Section 208.72--What activities may a financial subsidiary conduct?

    A financial subsidiary of a state member bank may conduct only 
three types of activities:
     Activities that have been determined to be financial in 
nature or incidental to financial activities and permissible for 
financial holding companies under section 4(k) of the Bank Holding 
Company Act of 1956. These activities are listed in Sec. 225.86 of the 
Board's Regulation Y; \2\
---------------------------------------------------------------------------

    \2\ On March 10, 2000, the Board adopted amendments to its 
Regulation Y, which include a new Sec. 225.86 that sets forth the 
activities that are financial in nature or incidental to financial 
activities under section 4(k) of the Bank Holding Company Act.
---------------------------------------------------------------------------

     Activities that the Secretary of the Treasury, in 
consultation with the Board, determines to be financial in nature or 
incidental to financial activities and permissible for financial 
subsidiaries of national banks pursuant to section 5136A(b) of the 
Revised Statutes of the United States (12 U.S.C. 24a(b)); and
     Activities that the state member bank is permitted to 
engage in directly, subject to the same terms and conditions that 
govern the conduct of the activity by the state member bank.
    As required by the GLB Act, the rule prohibits a financial 
subsidiary of a state member bank from engaging as principal in 
insurance underwriting (except to the extent permitted under state law 
and the GLB Act), providing or issuing annuities, real estate 
investment or development (except to the extent expressly authorized by 
applicable state and Federal law), and merchant banking and insurance 
company investment activities permitted for financial holding companies 
under sections 4(k)(4)(H) or (I) of the Bank Holding Company Act.

[[Page 14812]]

Section 208.73--What Additional Restrictions Are Applicable to State 
Member Banks With Financial Subsidiaries?

    The GLB Act requires that a state member bank that owns or controls 
a financial subsidiary comply with a number of prudential safeguards. 
Section 208.73 implements these requirements.
    For purposes of determining its compliance with all applicable 
regulatory capital standards, the state member bank must deduct its 
aggregate outstanding equity investment, including retained earnings, 
in all financial subsidiaries from its total assets and tangible equity 
and deduct such amount from its total risk-based capital, and ``de-
consolidate'' the assets and liabilities of the financial subsidiary 
from those of the bank. The capital deduction must be made equally from 
Tier 1 and Tier 2 capital. The bank must meet all applicable capital 
requirements--including the well capitalized requirement of Sec. 208.71 
and the capital levels established by the Board under section 38 of the 
Federal Deposit Insurance Act--after these adjustments.
    Subsection (b) requires that the state member bank establish 
policies and procedures to manage the financial and operational risks 
arising from its ownership of a financial subsidiary and preserve the 
bank's separate corporate identity. In addition, the rule specifies 
that a financial subsidiary of a state member bank is considered an 
affiliate (and not a subsidiary) of the bank for purposes of sections 
23A and 23B of the Federal Reserve Act, and a subsidiary of a bank 
holding company (and not a subsidiary of a bank) for purposes of the 
anti-tying prohibitions of the Bank Holding Company Act Amendments of 
1970.

Section 208.74--What Happens if the State Member Bank Fails to Continue 
To Meet Certain Requirements?

    The Board will give notice to a state member bank that owns or 
controls a financial subsidiary if the Board finds that the state 
member bank or any of its depository institution affiliates fails to 
continue to be well capitalized and well managed, that the assets of 
the bank's financial subsidiaries exceed 45 percent of the parent 
bank's consolidated assets, or that the state member bank has failed to 
comply with the operational safeguards required by the rule. To assist 
the Board in enforcing the requirements of the Act, the rule requires a 
state member bank to notify the Board if the bank learns that any of 
its depository institution affiliates has ceased to be well capitalized 
and well managed.
    If a state member bank receives a notice of noncompliance from the 
Board, the bank must execute an agreement with the Board to bring 
itself back into compliance with the rule's requirements. Any relevant 
depository institution affiliate also must execute an agreement with 
its appropriate Federal banking agency to restore itself to well 
capitalized and well managed status. The Board and the appropriate 
Federal banking agency may impose conditions on the direct or indirect 
activities of the state member bank or depository institution 
affiliate, respectively, until the institution restores its compliance 
with rule's requirements. If the deficiencies are not corrected within 
180 days (or such longer period as the Board may permit), the Board may 
require the state member bank to divest its financial subsidiaries.
    If a state member bank that is one of the largest 100 insured banks 
fails to continue to meet the debt rating requirement or alternative 
criteria of Sec. 208.71(b), if applicable, the state member bank may 
not acquire any additional equity capital (including debt qualifying as 
capital) of the financial subsidiary until the bank once again meets 
these requirements.

Section 208.75--What Happens if the State Member Bank or Any of Its 
Insured Depository Institution Affiliates Has Received Less Than a 
``Satisfactory'' CRA Rating?

    The GLB Act requires the Board to prohibit a state member bank from 
acquiring control of a financial subsidiary, or commencing any 
additional activity or acquiring control of any company through an 
existing financial subsidiary if the bank or any insured depository 
institution affiliate has received less than a ``satisfactory'' rating 
from its appropriate Federal banking agency at its most recent 
examination under the Community Reinvestment Act of 1977 (12 U.S.C. 
2901 et seq.) (CRA). Section 208.75 implements these prohibitions. The 
rule clarifies that, if this prohibition is in effect, the financial 
subsidiary may not acquire control of another company by acquiring 
substantially all of the assets of the company. These prohibitions are 
effective until the bank or relevant insured depository institution 
achieves at least a ``satisfactory'' rating in its next examination 
under the CRA. Subsection (b) clarifies that this section does not 
prohibit a financial subsidiary from engaging in any additional 
activity, or acquiring control of a company engaged only in activities, 
that the state member bank is permitted to engage in directly.
    The prohibition applies only if the state member bank or any of its 
insured depository institution affiliates has received a less than 
``satisfactory'' rating in meeting community credit needs at its most 
recent examination under the CRA. Accordingly, the CRA rating 
requirement does not apply to special purpose banks that are not 
subject to CRA examination under the Federal banking agencies' CRA 
regulations,\3\ or to de novo insured depository institutions that have 
not yet received (and are not the successor of an institution that has 
received) a CRA rating.
---------------------------------------------------------------------------

    \3\ See 12 C.F.R. 228.11(c)(3).
---------------------------------------------------------------------------

Section 208.76--What Federal Reserve Approvals Are Necessary for 
Financial Subsidiaries?

    The rule establishes a streamlined notice procedure for state 
member banks that seek to engage in newly authorized financial 
activities through a financial subsidiary. As a general matter, the 
notice must provide basic information on the financial subsidiary and 
its existing and proposed activities and include a certification that 
the state member bank and its depository institution affiliates meet 
the requirements of the GLB Act and the rule to own or control a 
financial subsidiary. If the notice relates to the initial affiliation 
of the state member bank with a company engaged in insurance 
activities, the notice also must describe the company's insurance 
activities and identify the states where the company holds an insurance 
license. This additional information will assist the Board in 
fulfilling its obligations to consult with the relevant state insurance 
authorities under section 307(c) of the GLB Act.
    A state member bank must file a notice with the appropriate Reserve 
Bank prior to acquiring control of, or an interest in, a financial 
subsidiary, or engaging in an additional financial activity through an 
existing financial subsidiary. A notice is not required for a financial 
subsidiary to engage in an additional activity that the parent state 
member bank is permitted to conduct directly. A notice will be deemed 
approved on the fifteenth day after receipt by the appropriate Reserve 
Bank of an informationally complete submission, unless the notice is 
disapproved or the bank is notified that additional time to review the 
notice is needed.

[[Page 14813]]

II. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires an 
agency to publish an initial regulatory flexibility analysis with this 
interim regulation. The interim rule implements the new investment 
powers granted to state member banks under authority of section 121 of 
the Gramm-Leach-Bliley Act. (Pub. L. 106-102; 113 Stat. 1373-82). As 
the rule authorizes expanded activities by state member banks, no 
additional burdens are being placed on the banks and, in fact, these 
new powers should enhance the overall efficiency and flexibility of the 
banks. The rule does not overlap with other federal rules, and enables 
state member banks to engage in an expanded range of activities using a 
streamlined notification procedure. The notice procedure described in 
this rule is voluntary, and the criteria set forth in the rule to 
control, or hold an interest in, a financial subsidiary, are those 
required by the Gramm-Leach-Bliley Act.
    The initial regulatory flexibility analysis also requires a 
description of and, where feasible, an estimate of the number of small 
entities to which the rule will apply. The interim rule will apply to 
all state member banks (which numbered 1011 as of December 31, 1999), 
regardless of size, and allows small banking organizations to take 
advantage of the expanded powers conferred by the Gramm-Leach-Bliley 
Act with minimal additional burdens. The Board specifically seeks 
comment on the likely burden that the interim rule may impose on banks 
that seek to control or hold an investment in financial subsidiaries.

III. Administrative Procedure Act

    The Board will make the 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. This is because the 
rule sets forth procedures to implement statutory changes that will 
become effective on March 11, 2000. The Board is seeking public comment 
on the interim rule and will amend the rule as appropriate after 
reviewing the comments.

IV. 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.
    The OMB control number for this interim rule is 7100-0292. The 
Federal Reserve may not conduct or sponsor, and an organization is not 
required to respond to, this information collection unless the Board 
has displayed a currently valid OMB control number.
    The collection of information requirements in this rulemaking are 
found in 12 CFR 208.76. This information is required to evidence 
compliance with section 121 of the Gramm-Leach-Bliley Act. The 
respondents are current and future state member banks.
    The notice cited in 12 CFR 225.76 provides that a state member bank 
may control, or hold an interest in, a financial subsidiary, or engage 
in an additional financial activity through an existing financial 
subsidiary, by filing a single written declaration with the appropriate 
Federal Reserve Bank. The notice must identify the financial subsidiary 
and its activities and certify that the bank meets the relevant 
statutory criteria to own or control a financial subsidiary. In 
addition, if the notice reflects the initial affiliation of a bank with 
a company engaged in permissible insurance activities, information 
regarding the nature, scope, and authority of such activities must be 
provided. There will be no reporting form for this information 
collection. The agency form number for this declaration will be the FR 
4017. The Board estimates that approximately 100 state member banks 
will file this notice during the first year and that it will take an 
average of 1 hour to complete this notice. This would result in an 
estimated annual burden of 100 hours. Based on a rate of $20 per hour, 
the annual cost to the public for this information collection is 
estimated to be $2,000.
    A bank may request confidentiality for the information contained in 
these information collections pursuant to section (b)(4) and (b)(6) of 
the Freedom of Information Act (5 U.S.C. 552(b)(4) and (b)(6)).
    Comments are invited on: (1) whether the collections of information 
are necessary for the proper performance of the Federal Reserve's 
functions, including whether the information has practical utility; (2) 
the accuracy of the Federal Reserve's estimate of the burden of the 
information collections, including the cost of compliance; (3) ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (4) ways to minimize the burden of information 
collection on respondents, including through the use of automated 
collection techniques or other forms of information technology. 
Comments on the collections of information should be sent to the Office 
of Management and Budget, Paperwork Reduction Project, Washington, DC 
20503, with copies of such comments to be sent to Mary M. West, Federal 
Reserve Clearance Officer, Mail Stop 97, Board of Governors of the 
Federal Reserve System, Washington, DC 20551.

V. Solicitation of Comments Regarding the Use of ``Plain Language''

    Section 722 of the GLB Act requires the Board to use ``plain 
language'' in all proposed and final rules published after January 1, 
2000. The Board invites comments about how to make the interim rule 
easier to understand, including answers to the following questions:
    (1) Is the material organized is an effective manner? If not, how 
could the material be better organized?
    (2) Are the terms of the rule clearly stated? If not, how could the 
terms be more clearly stated?
    (3) Does the rule contain technical language or jargon that is 
unclear? If not, which language requires clarification?
    (4) Would a different format (with respect to the grouping and 
order of sections and use of headings) make the rule easier to 
understand? If so, what changes to the format would make the rule 
easier to understand?
    (5) Would increasing the number of sections (and making each 
section shorter) clarify the rule? If so, which portions of the rule 
should be changed in this respect?
    (6) What additional changes would make the rule easier to 
understand?

List of Subjects in 12 CFR Part 208

    Accounting, Agriculture, Banks, Banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Mortgages, 
Reporting and recordkeeping requirements, Securities.

Authority and Issuance

    For the reasons set forth in the preamble, Title 12, Chapter II, 
Part 208 of the Code of Federal Regulations is amended as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for Part 208 continues to read as 
follows:

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),

[[Page 14814]]

1823(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1835a, 1882, 
2901-2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 
78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and 4128.

    2. The existing Subpart G--Interpretations is redesignated as 
Subpart H.
    3. A new Subpart G is added to read as follows:

Subpart G--Financial Subsidiaries of State Member Banks

208.71  What are the requirements to invest in or control a 
financial subsidiary?
208.72  What activities may a financial subsidiary conduct?
207.73  What additional provisions are applicable to state member 
banks with financial subsidiaries?
208.74  What happens if the state member bank fails to continue to 
meet certain requirements?
208.75  What happens if the state member bank or any of its insured 
depository institution affiliates has received a less than a 
``satisfactory'' CRA rating?
208.76  What Federal Reserve approvals are necessary for financial 
subsidiaries?
208.77  Definitions.

Subpart G--Financial Subsidiaries of State Member Banks


Sec. 208.71  What are the requirements to invest in or control a 
financial subsidiary?

    (a) In general. A state member bank may control, or hold an 
interest in, a financial subsidiary only if:
    (1) The state member bank and each depository institution affiliate 
of the state member bank are well capitalized and well managed;
    (2) The aggregate consolidated total assets of all financial 
subsidiaries of the state member bank do not exceed the lesser of:
    (i) 45 percent of the consolidated total assets of the parent bank; 
or
    (ii) $50,000,000,000, which dollar amount shall be adjusted 
according to an indexing mechanism jointly established by the Board and 
the Secretary of the Treasury;
    (3) The state member bank, if it is one of the largest 100 insured 
banks (based on consolidated total assets of the bank as of the end of 
each calendar year), meets the debt rating or alternative requirement 
of paragraph (b) of this section, if applicable; and
    (4) The Board or the appropriate Reserve Bank has approved the bank 
to acquire the interest in or control the financial subsidiary under 
Sec. 208.76.
    (b) Debt rating or alternative requirement for 100 largest insured 
banks--
    (1) General. A state member bank meets the debt rating or 
alternative requirement of this paragraph (b) if:
    (i) 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; or
    (ii) If the bank is one of the second 50 largest insured banks 
(based on consolidated total assets of the bank as of the end of each 
calendar year), the bank satisfies any alternative criteria jointly 
established by the Board and the Secretary of the Treasury.
    (2) Financial subsidiaries engaged only in financial agency 
activities. This paragraph (b) does not apply to a state member bank if 
the financial subsidiaries of the bank engage in financial activities 
described in Sec. 208.72(a)(1) and (2) only in an agency capacity.


Sec. 208.72  What activities may a financial subsidiary conduct?

    (a) Authorized activities. A financial subsidiary may engage in 
only the following activities:
    (1) Any activity listed in Sec. 225.86 of the Board's Regulation Y 
(12 CFR 225.86);
    (2) Any activity that has been determined to be financial in nature 
or incidental to a financial activity by the Secretary of the Treasury, 
in consultation with the Board, pursuant to Section 5136A(b) of the 
Revised Statutes of the United States (12 U.S.C. 24a(b)); and
    (3) Any activity that the state member bank is permitted to engage 
in directly (subject to the same terms and conditions that govern the 
conduct of the activity by the state member bank).
    (b) Impermissible activities. Notwithstanding paragraph (a) of this 
section, 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 (except to the extent permitted 
under applicable state law and sections 302 or 303(c) of the Gramm-
Leach-Bliley Act (Pub. L. 106-102, 113 Stat. 1407-1409, 15 U.S.C. 6712 
or 6713(c)), 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 applicable state and Federal law; and
    (3) Any activity permitted for financial holding companies by 
section 4(k)(4)(H) or (I) of the Bank Holding Company Act (12 U.S.C. 
1843(k)(4)(H) and (I)).


Sec. 208.73  What additional provisions are applicable to state member 
banks with financial subsidiaries?

    (a) Capital deduction.
    (1) Capital deduction required. For purposes of determining 
compliance with applicable regulatory capital standards (including the 
well capitalized standard of Sec. 208.71(a)(1)), a state member bank 
that controls or holds an interest in a financial subsidiary must:
    (i) Deduct the aggregate amount of the bank's outstanding equity 
investment, including retained earnings, in all 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) Not consolidate the assets and liabilities of any financial 
subsidiary with those of the bank.
    (2) Financial statement disclosure of capital deduction. Any 
published financial statement of a state member bank that controls or 
holds an interest in a financial subsidiary must, in addition to 
providing information prepared in accordance with generally accepted 
accounting principles, separately present financial information for the 
bank reflecting the capital deduction and adjustments required by 
paragraph (a)(1) of this section.
    (b) Safeguards for the bank. A state member bank that establishes, 
controls or holds an interest in a financial subsidiary must:
    (1) Establish procedures for identifying and managing financial and 
operational risks within the state member bank and the financial 
subsidiary that adequately protect the state member bank from such 
risks; and
    (2) Establish reasonable policies and procedures to preserve the 
separate corporate identity and limited liability of the state member 
bank and the financial subsidiaries of the state member bank.
    (c) Application of sections 23A and 23B of the Federal Reserve Act. 
For purposes of sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c, 371c-1):
    (1) A financial subsidiary of a state member bank shall be deemed 
an affiliate, and not a subsidiary, of the bank;
    (2) The restrictions contained in section 23A(a)(1)(A) of section 
23A shall not apply with respect to covered transactions between the 
bank and any

[[Page 14815]]

individual financial subsidiary of the bank;
    (3) The bank's investment in a financial subsidiary shall not 
include retained earnings of the financial subsidiary;
    (4) Any purchase of, or investment in, the securities of a 
financial subsidiary by an affiliate of the bank will be considered to 
be a purchase of, or investment in, such securities by the bank; and
    (5) Any extension of credit by an affiliate of the bank to a 
financial subsidiary of the bank will be considered to be an extension 
of credit by the bank to the financial subsidiary if the Board 
determines that such treatment is necessary or appropriate to prevent 
evasions of the Federal Reserve Act and the Gramm-Leach-Bliley Act.
    (d) Application of anti-tying prohibitions. A financial subsidiary 
of a state member bank shall be deemed a subsidiary of a bank holding 
company and not a subsidiary of the bank for purposes of the anti-tying 
prohibitions of section 106 of the Bank Holding Company Act Amendments 
of 1970 (12 U.S.C. 1971 et seq.).


Sec. 208.74  What happens if the state member bank fails to continue to 
meet certain requirements?

    (a) Qualifications and safeguards. The following procedures apply 
to a state member bank that controls or holds an interest in a 
financial subsidiary.
    (1) Notice by Board. If the Board finds that a state member bank or 
any of its depository institution affiliates fails to continue to be 
well capitalized and well managed or comply with the asset limitation 
set forth in Sec. 208.71(a)(2) or the safeguards set forth in 
Sec. 208.73(b), the Board will notify the state member bank in writing 
and identify the areas of noncompliance.
    (2) Notification by state member bank. A state member bank must 
promptly notify the Board if the bank becomes aware that any depository 
institution affiliate of the bank has ceased to be well capitalized and 
well managed.
    (3) Execution of agreement. Within 45 days after receiving a notice 
under paragraph (a)(1) of this section, or such additional period of 
time as the Board may permit, the:
    (i) State member bank must execute an agreement acceptable to the 
Board to comply with all applicable capital, management, asset and 
safeguard requirements; and
    (ii) Any relevant depository institution affiliate of the state 
member bank must execute an agreement acceptable to its appropriate 
Federal banking agency to comply with all applicable capital and 
management requirements.
    (4) Imposition of limits. Until the Board determines that the 
conditions described in the notice under paragraph (a)(1) of this 
section are corrected:
    (i) The Board may impose any limitations on the conduct or 
activities of the state member bank or any subsidiary of the bank as 
the Board determines to be appropriate under the circumstances and 
consistent with the purposes of section 121 of the Gramm-Leach-Bliley 
Act (12 U.S.C. 24a, 335, 371c, and 1971), including requiring the 
Board's prior approval for any financial subsidiary of the bank to 
acquire any company or engage in any additional activity; and
    (ii) The appropriate Federal banking agency for any relevant 
depository institution affiliate may impose any limitations on the 
conduct or activities of the depository institution or any subsidiary 
of that institution as the agency determines to be appropriate under 
the circumstances and consistent with the purposes of section 121 of 
the Gramm-Leach-Bliley Act (12 U.S.C. 24a, 335, 371c, and 1971).
    (5) Divestiture. The Board may require a state member bank to 
divest control of any financial subsidiary if the conditions described 
in a notice under paragraph (a)(1) of this section are not corrected 
within 180 days of receipt of the notice or such additional period of 
time as the Board may permit. Any divestiture must be completed in 
accordance with any terms and conditions established by the Board.
    (6) Consultation. The Board will consult with all relevant Federal 
and state regulatory authorities in taking any action under this 
subsection.
    (b) Debt rating or alternative requirement. If a state member bank 
does not continue to meet any applicable debt rating or alternative 
requirement of Sec. 208.71(b), the bank may not, directly or through a 
subsidiary, purchase or acquire any additional equity capital of any 
financial subsidiary until the bank restores its compliance with the 
requirements of that section. For purposes of this paragraph, 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.


Sec. 208.75  What happens if the state member bank or any of its 
insured depository institution affiliates has received less than a 
``satisfactory'' CRA rating?

    (a) Limits on establishment of financial subsidiaries and expansion 
of existing financial subsidiaries. If a state member bank, or any of 
its insured depository institution affiliates, has received less than a 
``satisfactory'' rating in meeting community credit needs in its most 
recent examination under the Community Reinvestment Act of 1977 (12 
U.S.C. 2901 et seq.):
    (1) The state member bank may not, directly or indirectly, acquire 
control of any financial subsidiary; and
    (2) Any financial subsidiary controlled by the state member bank 
may not commence any additional activity or acquire control, including 
all or substantially all of the assets, of any company.
    (b) Exception for certain activities. The prohibition in paragraph 
(a)(2) of this section does not apply to any activity, or to the 
acquisition of control of any company that is engaged only in 
activities, that the state member bank is permitted to conduct directly 
and that are conducted on the same terms and conditions that govern the 
conduct of the activity by the state member bank.
    (c) Duration of prohibitions. The prohibitions described in 
paragraph (a) of this section shall continue in effect until such time 
as the state member bank and each insured depository institution 
affiliate of the state member bank has achieved at least a 
``satisfactory'' rating in meeting community credit needs in its most 
recent examination under the Community Reinvestment Act.


Sec. 208.76  What Federal Reserve approvals are necessary for financial 
subsidiaries?

    (a) Notice requirements. (1) A state member bank may not acquire 
control of, or an interest in, a financial subsidiary unless it files a 
notice (in letter form, with enclosures) with the appropriate Reserve 
Bank.
    (2) A state member bank may not engage in any additional activity 
pursuant to Sec. 208.72(a)(1) or (2) through an existing financial 
subsidiary unless the state member bank files a notice (in letter form, 
with enclosures) with the appropriate Reserve Bank.
    (b) Contents of notice. Any notice required by paragraph (a) of 
this section must:
    (1) In the case of a notice filed under paragraph (a)(1) of this 
section, describe the transaction(s) through which the bank proposes to 
acquire control of or an interest in the financial subsidiary;
    (2) Provide the name and head office address of the subsidiary;

[[Page 14816]]

    (3) Provide a description of the current and proposed activities of 
the financial subsidiary and the specific authority permitting each 
activity;
    (4) Certify that the bank and each of its depository institution 
affiliates, was well capitalized at the close of the previous calendar 
quarter, and remains well capitalized as of the date the bank files its 
notice;
    (5) Certify that the bank and each of its depository institution 
affiliates is well managed as of the date the bank files its notice;
    (6) Certify that the bank meets the debt rating or alternative 
requirement of Sec. 208.71(b), if applicable; and
    (7) Certify that the bank and its financial subsidiaries are in 
compliance with the asset limit set forth in Sec. 208.71(a)(3) both 
before the proposal and on a pro forma basis.
    (c) Insurance activities. (1) If a notice filed under paragraph (a) 
of this section relates to the initial affiliation of the bank with a 
company engaged in insurance activities, the notice must describe the 
type of insurance activity that the company is engaged in or plans to 
conduct and identify each state where the company holds an insurance 
license and the state insurance regulatory authority that issued the 
license.
    (2) The appropriate Reserve Bank will send a copy of any notice 
described in this subsection to the appropriate state insurance 
regulatory authorities and provide such authorities with an opportunity 
to comment on the proposal.
    (d) Approval procedures. A notice filed with the appropriate 
Reserve Bank will be deemed approved on the fifteenth day after receipt 
of a complete notice by the appropriate Reserve Bank, unless prior to 
that date the Board or the appropriate Reserve Bank notifies the bank 
that the notice is approved, that the notice will require additional 
review, or that the bank does not meet the requirements of this 
subpart.


Sec. 208.77  Definitions.

    The following definitions shall apply to this subpart:
    (a) Affiliate, Company, Control, and Subsidiary. The terms 
``affiliate'', ``company'', ``control'', and ``subsidiary'' have the 
meanings given those terms in section 2 of the Bank Holding Company Act 
of 1956 (12 U.S.C. 1841).
    (b) Appropriate Federal Banking Agency, Depository Institution, 
Insured Bank and Insured Depository Institution. The terms 
``appropriate Federal banking agency'', ``depository institution'', 
``insured bank'' and ``insured depository institution'' have the 
meanings given those terms in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813).
    (c) Eligible Debt. The term ``eligible debt'' means unsecured debt 
with an initial maturity of more than 360 days that:
    (1) Is not supported by any form of credit enhancement, including a 
guarantee or standby letter of credit; and
    (2) Is 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.
    (d) Financial Subsidiary. The term ``financial subsidiary'' means 
any company that is controlled by one or more insured depository 
institutions other than:
    (1) A subsidiary that only engages in activities that the state 
member bank is permitted to engage in directly and that are conducted 
on the same terms and conditions that govern the conduct of the 
activities by the state member bank; or
    (2) A subsidiary that the state member bank is specifically 
authorized by the express terms of a Federal statute (other than 
section 9 of the Federal Reserve Act (12 U.S.C. 321 et seq.)), and not 
by implication or interpretation, to control, such as by section 25 or 
25A of the Federal Reserve Act (12 U.S.C. 601-604a or 12 U.S.C. 611-
631) or the Bank Service Company Act (12 U.S.C. 1861 et seq.).
    (e) Well Capitalized. The term ``well capitalized'' has the meaning 
given the term in section 38 of the Federal Deposit Insurance Act (12 
U.S.C. 1831.).
    (f) Well Managed. The term ``well managed'' means:
    (1) 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 
its most recent examination or subsequent review and at least a rating 
of 2 for management (if such rating is given); or
    (2) 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.

    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. 00-6468 Filed 3-17-00; 8:45 am]
BILLING CODE 6210-01-P