[Federal Register Volume 65, Number 54 (Monday, March 20, 2000)]
[Rules and Regulations]
[Pages 15050-15052]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6808]



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Part III





Federal Reserve System

Department of the Treasury





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12 CFR Parts 208 and 1501



Financial Subsidiaries; Interim Rule

  Federal Register / Vol. 65, No. 54 / Monday, March 20, 2000 / Rules 
and Regulations  

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FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Regulation H; Docket No. R-1066]

DEPARTMENT OF THE TREASURY

Office of the Under Secretary for Domestic Finance

12 CFR Part 1501

RIN 1505-AA77


Financial Subsidiaries

AGENCIES: The Department of the Treasury and the Board of Governors of 
the Federal Reserve System.

ACTION: Joint interim rule with request for comments.

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SUMMARY: The Department of the Treasury (Treasury) and the Board of 
Governors of the Federal Reserve System (Board) are jointly issuing 
this interim rule pursuant to section 121 of the Gramm-Leach-Bliley Act 
(GLBA). The GLBA permits a national bank or state member bank that is 
among the second 50 largest insured banks to own or control a financial 
subsidiary only if the bank meets either the eligible debt requirement 
set forth in section 121 of the Act or alternative criteria established 
jointly by Treasury and the Board. This interim rule establishes the 
alternative criteria and provides that a bank meets the criteria if it 
has a current long-term issuer credit rating from a nationally 
recognized statistical rating organization that is within the three 
highest investment grade rating categories used by the organization.

DATES: This interim rule is effective March 14, 2000. Written comments 
must be submitted on or before May 15, 2000.

ADDRESSES: Comments should refer to docket number R-1066 and should be 
sent both: to Comparable Ratings Regulation, Office of Financial 
Institutions Policy, U.S. Department of the Treasury, 1500 Pennsylvania 
Avenue, N.W., Room SC 37, Washington, D.C. 20220, and to Ms. Jennifer 
J. Johnson, Secretary, Board of Governors of the Federal Reserve 
System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 
20551. Comments addressed to the Treasury Department also may be mailed 
electronically to [email protected] or delivered to 
the Treasury Department mail room between the hours of 8:45 a.m. and 
5:15 p.m. at the 15th Street entrance to the Treasury Building. 
Comments addressed to Ms. Johnson also may be mailed electronically to 
[email protected] or 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 Board's 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, N.W. Members of the public may inspect comments in Room 
SC 37 of the Treasury Department and in Room MP-500 of the Martin 
Building between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT:
    Department of the Treasury: Joan Affleck-Smith, Director, Office of 
Financial Institutions Policy (202/622-2740); Matthew Green, Senior 
Financial Analyst (202/622-2740); or Gary W. Sutton, Senior Banking 
Counsel (202/622-1976).
    Board of Governors: Kieran J. Fallon, Senior Counsel, Legal 
Division (202/452-5270); or Mark S. Carey, Senior Economist, Division 
of Research & Statistics (202/452-2784). For the hearing impaired only, 
Telecommunications Device for the Deaf (TDD), Janice Simms (202/872-
4984).

SUPPLEMENTARY INFORMATION:

Background

    On November 12, 1999, the President signed the GLBA, Public Law 
106-102, 113 Stat. 1338, which comprehensively restructures the 
statutory framework that governs the financial services industry. 
Section 121 of the Act authorizes national banks and state member banks 
to acquire control of, or hold an interest in, a new type of subsidiary 
called a ``financial subsidiary.'' A financial subsidiary may, with 
certain exceptions, engage in activities that have been determined to 
be financial in nature or incidental to financial activities in 
accordance with the GLBA, and in other activities that the parent bank 
is permitted to conduct directly.
    In order for a national bank or state member bank to control, or 
hold an interest in, a financial subsidiary, the bank and each of its 
depository institution affiliates must be ``well-capitalized'' and 
``well-managed,'' as those terms are defined in the GLBA. The aggregate 
consolidated total assets of all financial subsidiaries of the bank 
also 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 in a 
separate regulation to be issued jointly by Treasury and the Board.) In 
addition, in order to acquire control of a financial subsidiary, the 
bank and each of its insured depository institution affiliates must 
have received a ``satisfactory'' or better rating at its most recent 
examination under the Community Reinvestment Act.
    In addition, if the bank is one of the 50 largest insured banks, as 
determined by the bank's consolidated total assets at the end of the 
most recent calendar year, the bank must have at least one issue of 
outstanding eligible debt that is rated in one of the three highest 
rating categories by a nationally recognized statistical rating 
organization (debt rating requirement). If the bank is one of the 
second 50 largest insured banks, the bank must meet either this debt 
rating requirement or such alternative criteria that the Secretary of 
the Treasury and the Board jointly determine by regulation to be 
comparable to and consistent with the purpose of the rating 
requirement.\1\ This interim rule establishes such alternative 
criteria.
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    \1\ A bank does not have to satisfy the debt rating requirement 
or the alternative criteria established by this rule if the bank's 
financial subsidiaries engage in the newly authorized financial 
activities solely as agent and not as principal.
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Description of the Interim Rule

    The interim rule provides that a national bank or state member bank 
within the second 50 largest insured banks satisfies the alternative 
criteria if the bank has a current long-term issuer credit rating from 
a nationally recognized statistical rating organization that is within 
the three highest investment grade rating categories used by the rating 
organization. A long-term issuer credit rating is one that assesses the 
bank's overall capacity and willingness to pay on a timely basis its 
unsecured financial obligations.\2\ Unlike debt ratings, an issuer 
credit rating does not assess the bank's ability and willingness to 
make payments on any individual class or issue of debt, nor does it 
reflect priority or preference in payment among financial obligations. 
Ratings organizations may issue long-term or short-term issuer credit 
ratings for the same bank and separate ratings for dollar-denominated 
and foreign currency-denominated obligations. Only long-term issuer 
credit ratings for dollar-denominated obligations satisfy the 
requirements of the rule. A long-term issuer credit rating is one that 
reflects the bank's ability over a period of not

[[Page 15051]]

less than one year to fulfill its financial obligations on a timely 
basis.
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    \2\ Issuer credit ratings that are assigned to a subsidiary or 
affiliate of the bank, such as a subsidiary engaged in derivatives 
activities, do not meet the rule's requirements.
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    Treasury and the Board believe that the long-term issuer credit 
rating required by the rule is comparable to, and consistent with the 
purposes of, the debt rating requirement applicable to the 50 largest 
insured banks. The long-term issuer credit rating assigned large banks 
generally is identical to the rating given the bank's senior long-term 
unsecured debt, where such rated debt exists. Furthermore, 
representatives of rating organizations have indicated that the rating 
given to a specific long-term unsecured financial obligation of an 
issuer is anchored to the issuer's long-term issuer credit rating 
because the latter rating exemplifies the issuer's fundamental 
creditworthiness over the long-term. For these reasons, Treasury and 
the Board believe that the long-term issuer credit rating is consistent 
with the purposes underlying the debt rating requirement.
    The interim rule requires that the parent bank have a long-term 
issuer credit rating in the top three investment grade rating 
categories from at least one nationally recognized statistical rating 
organization. Standard & Poor's top three investment grade categories 
for long-term issuer credit ratings are AAA, AA, or A, with AAA 
denoting the highest rating.\3\ Standard & Poor's may modify its AA or 
A ratings with the addition of a plus (+) or minus (-) sign to show 
relative standing within these rating categories. Any rating from A 
minus to AAA would satisfy the long-term issuer credit rating 
requirement; an A minus would constitute the lowest acceptable rating 
(in the case of Standard & Poor's). Moody's top three investment grade 
categories for long-term issuer credit ratings are Aaa, Aa, or A, with 
Aaa denoting the highest rating. Moody's likewise applies numerical 
modifiers of 1, 2 and 3 in the Aa and A rating categories, with 3 
denoting the lowest end of the letter-rating modifiers. Any rating from 
A-3 to Aaa would satisfy the long-term issuer credit rating 
requirement; a rating of A-3 would be the lowest acceptable rating (in 
the case of Moody's).
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    \3\ Standard & Poor's also issues counterparty credit ratings, 
which are a form of issuer credit rating.
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Interim Effectiveness of the Rule

    This interim rule is effective on March 14, 2000. Section 553 of 
the Administrative Procedure Act permits agencies to issue a rule 
without public notice and comment when the agency, for good cause, 
finds (and incorporates the finding and a brief statement of reasons 
therefor in the rule issued) that notice and public comment are 
impracticable, unnecessary, or contrary to the public interest. 5 
U.S.C. 553(b)(B). Section 553 also permits agencies to issue a rule 
without delaying its effectiveness for thirty days from publication if 
the agency finds good cause and publishes this finding with the rule. 5 
U.S.C. 553(d)(3). In addition, section 302 of the Riegle Community 
Development and Regulatory Improvement Act of 1994, 12 U.S.C. 4802(b), 
permits federal banking agencies to issue a regulation which takes 
effect before the first day of a calendar quarter beginning on or after 
the date on which the regulations are published in final form when the 
agency determines for good cause (published with the regulation) that 
the regulation should become effective before such time.
    For the reasons set forth below, Treasury and the Board find that 
there is good cause for issuing this interim rule without notice and 
public comment and without a delayed effective date. For the same 
reasons, Treasury and the Board find that there is good cause for the 
interim rule to become effective before the first day of a calendar 
quarter beginning on or after the date on which the regulations are 
published in final form.
    Section 121 of the GLBA becomes effective on March 11, 2000. A 
national bank or state member bank that is among the second 50 largest 
insured banks may control a financial subsidiary or hold an interest in 
a financial subsidiary only if the bank meets the debt rating 
requirement or the alternative criteria established by this rule. To 
prevent any bank from being denied the opportunity to control or hold 
an interest in a financial subsidiary, it is in the public interest to 
make this interim rule effective immediately. Treasury and the Board 
are soliciting comments on all aspects of the interim rule and will 
consider those comments before the rule is finalized.

Regulatory Flexibility Act Analysis

    Because no notice of proposed rulemaking is required for this 
interim final rule, the provisions of the Regulatory Flexibility Act (5 
U.S.C. 601 et. seq.) do not apply. In addition, the interim rule 
applies only to national banks and state member banks that are within 
the second 50 largest insured banks. Accordingly, the interim rule is 
not expected to have a significant economic impact on a substantial 
number of small entities.

Executive Order 12866 Determination

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

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

    Section 722 of the Gramm-Leach-Bliley 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 in 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

12 CFR Part 208

    Administrative practice and procedure, Federal Reserve System, 
Banks.

12 CFR Part 1501

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

Federal Reserve System

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the preamble, the Board of Governors 
of the Federal Reserve System amends part 208 of Chapter II, Title 12 
of the Code of Federal Regulations 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:


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    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), 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. Section 208.71 is amended by adding a new paragraph (c) to read 
as follows:


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

* * * * *
    (c) Alternative requirement. A state member bank satisfies the 
alternative criteria referenced in paragraph (b)(1)(ii) of this section 
if the bank has a current long-term issuer credit rating from at least 
one nationally recognized statistical rating organization that is 
within the three highest investment grade rating categories used by the 
organization.

    3. Section 208.77 is amended by redesignating paragraphs (e) and 
(f) as paragraphs (f) and (g), respectively, and adding a new paragraph 
(e) to read as follows:


Sec. 208.77  Definitions.

* * * * *
    (e) Long-term issuer credit rating. The term ``long-term issuer 
credit rating'' means a written opinion issued by a nationally 
recognized statistical rating organization of the bank's overall 
capacity and willingness to pay on a timely basis its unsecured, 
dollar-denominated financial obligations maturing in not less than one 
year.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, March 14, 2000.
Jennifer J. Johnson,
Secretary of the Board.

Department of the Treasury

12 CFR Chapter XV

Authority and Issuance

    For the reasons set forth in the preamble, the Department of the 
Treasury amends part 1501 of Chapter XV of Title 12 of the Code of 
Federal Regulations as follows:

PART 1501--FINANCIAL SUBSIDIARIES

    1. The authority citation for part 1501 continues to read as 
follows:

    Authority: Section 5136A of the Revised Statutes of the United 
States (12 U.S.C. 24a).


    2. A new Sec. 1501.2 is added to read as follows:


Sec. 1501.2  Comparable ratings requirement for national banks among 
the second 50 largest insured banks.

    (a) Scope and purpose. Section 5136A of the Revised Statutes 
permits a national bank that is within the second 50 largest insured 
banks to own or control a financial subsidiary only if, among other 
requirements, the bank satisfies the eligible debt requirement set 
forth in section 5136A or an alternative criteria jointly established 
by the Secretary of the Treasury and the Board of Governors of the 
Federal Reserve System. This section establishes the alternative 
criteria that national banks among the second 50 largest insured banks 
may meet, which criteria is comparable to and consistent with the 
purposes of the eligible debt requirement established by section 5136A.
    (b) Alternative criteria. A national bank satisfies the alternative 
criteria referenced in Section 5136A(a)(2)(E) of the Revised Statutes 
(12 U.S.C. 24a) and 12 CFR 5.39(g)(3) if the bank has a current long-
term issuer credit rating from at least one nationally recognized 
statistical rating organization that is within the three highest 
investment grade rating categories used by the organization.
    (c) Definition of long-term issuer credit rating. A `long-term 
issuer credit rating' is a written opinion issued by a nationally 
recognized statistical rating organization of the bank's overall 
capacity and willingness to pay on a timely basis its unsecured, 
dollar-denominated financial obligations maturing in not less than one 
year.

    Dated: March 14, 2000.
Gregory A. Baer,
Assistant Secretary for Financial Institutions, Department of the 
Treasury.
[FR Doc. 00-6808 Filed 3-17-00; 8:45 am]
BILLING CODE 6210-01-P and 4810-25-P