[Federal Register Volume 66, Number 2 (Wednesday, January 3, 2001)]
[Rules and Regulations]
[Pages 400-422]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-34]



[[Page 399]]

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Part II





Federal Reserve System





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12 CFR Part 225



Regulation Y; Docket Nos. R-1057 and 
R-1062; Bank Holding Companies and Change in Bank Control; Final Rule

  Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / 
Rules and Regulations  

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FEDERAL RESERVE SYSTEM

12 CFR Part 225


Regulation Y; Docket Nos. R-1057 and R-1062; Bank Holding 
Companies and Change in Bank Control

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board of Governors of the Federal Reserve System has 
adopted a final rule that implements the financial holding company 
provisions of the Gramm-Leach-Bliley Act. This final rule replaces the 
interim rules governing financial holding companies that the Board 
adopted previously. The final rule describes the procedures a domestic 
bank holding company and a foreign banking organization must follow and 
the capital, management, and Community Reinvestment Act requirements 
they must meet in order to qualify as a financial holding company. The 
final rule also contains provisions that apply to a financial holding 
company that subsequently ceases to meet the applicable requirements.
    In addition, the final rule lists the activities that the Gramm-
Leach-Bliley Act defines as financial in nature and thereby authorizes 
a FHC to conduct. The final rule contains procedures that apply to a 
financial holding company that conducts those activities, a procedure 
that allows any interested party to request that the Board determine, 
in consultation with the Secretary of the Treasury, that additional 
activities are financial in nature or incidental to a financial 
activity and thus permissible for a financial holding company, and a 
procedure that allows a financial holding company to request the 
Board's prior approval to conduct an activity that is complementary to 
a financial activity.
    The final rule also amends Regulation Y to define the term 
``depository institution'' and to revise the existing definitions of 
the terms ``well capitalized'' and ``well managed,'' and makes 
conforming and other technical changes.

DATES: The final rule is effective February 2, 2001.

FOR FURTHER INFORMATION CONTACT: Scott G. Alvarez, Associate General 
Counsel (202/452-3583), Kathleen M. O'Day, Associate General Counsel 
(202/452-3786), Ann E. Misback, Assistant General Counsel (202/452-
3788); Christopher W. Clubb, Senior Counsel (202/452-3904); Kieran J. 
Fallon, Senior Counsel (202/452-5270), or Adrianne G. Threatt, Senior 
Attorney (202/452-3554), Legal Division; or Betsy Cross, Deputy 
Associate Director (202/452-2574), Division of Banking Supervision and 
Regulation; Board of Governors of the Federal Reserve System, 20th 
Street and Constitution Avenue, NW., Washington, DC, 20551. For users 
of Telecommunications Device for the Deaf (``TDD''), contact Janice 
Simms at 202/452-4984.

SUPPLEMENTARY INFORMATION:

Background and Summary of Final Rule

    The Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 Stat. 1338 (1999)) 
(``GLB Act'') amended the Bank Holding Company Act (12 U.S.C. 1841 et 
seq.) (``BHC Act'') to allow a bank holding company that elects to 
become a FHC (a ``FHC'') and a foreign banking organization that elects 
to be treated as a FHC to engage in a broad range of financial 
activities, including securities underwriting, insurance sales and 
underwriting, and merchant banking. On January 18, 2000, the Board 
approved an interim rule implementing these provisions and detailing 
the procedures that allow a bank holding company and foreign banking 
organization to qualify for and maintain FHC status (65 FR 3786 
(January 25, 2000)). This interim rule also enumerated the capital, 
management, and Community Reinvestment Act (12 U.S.C. 2901 et seq.) 
(``CRA'') requirements that must be satisfied in order to establish and 
maintain FHC status. On March 15, 2000, the Board amended the 
management criterion and certain provisions concerning the FHC election 
process applicable to foreign banking organizations. (65 FR 15053 
(March 21, 2000)).
    On March 10, 2000, the Board approved an additional interim rule 
containing a list of the financial activities that are permissible for 
a FHC to conduct. This interim rule also set forth the procedures a FHC 
must follow to engage in a financial activity; the process for 
requesting a Board determination that an additional activity is 
financial in nature or incidental thereto; and a procedure for 
requesting the Board's prior approval to engage in an activity that is 
complementary to a financial activity (65 FR 14433 (March 17, 2000)).
    The interim rules on elections and activities both became effective 
on March 11, 2000, the effective date of the GLB Act, so that 
qualifying companies immediately could take advantage of the expanded 
powers granted by the statute. The vast majority of the provisions of 
the interim rules were included in a new subpart I of Regulation Y, 
entitled ``Financial Holding Companies.''
    The Board solicited comment on the interim rules and received a 
total of 59 public comments on these rules. The commenters included 
bank holding companies and foreign banking organizations; state bank 
supervisory officials; trade associations representing the banking, 
insurance, and securities industries; foreign central banks and 
governmental officials; law firms; community groups; and individuals.
    Many commenters supported the Board's interim rules and commended 
the Board for issuing the rules swiftly and using an easily 
comprehensible format. Commenters representing the interests of foreign 
banking organizations urged the Board to amend the FHC election 
procedures and requirements applicable to those organizations, 
including use of the leverage ratio in assessing comparability of 
capital, while domestic organizations asked the Board to hold foreign 
banking organizations to the same requirements that apply to U.S. bank 
holding companies. Commenters also were divided as to whether the Board 
should retain sections of the interim rules that reserved the Board's 
supervisory authority to impose restrictions on a bank holding company 
that met the statutory criteria to become a FHC but about which the 
Board nonetheless had supervisory concerns. Most comments regarding 
this section asserted that the Board did not have a statutory basis for 
imposing a requirement on a company that met the GLB Act's criteria to 
become a FHC. Several commenters also suggested that the Board should 
not require bank holding companies to submit supporting information 
with their FHC elections and that the Board should amend the definition 
of the term ``well managed.''
    Commenters asked for guidance about the application of various 
aspects of the rule, including the interplay between Regulation Y and 
Regulation K with respect to activities conducted abroad by a FHC and 
the procedures for requesting to become a FHC as part of a section 3 
proposal to become a bank holding company. A number of commenters 
suggested that the Board allow public comment on FHC declarations and 
condition the effectiveness of a FHC election on compliance with CRA-
related requirements not enumerated in the GLB Act.
    After carefully reviewing the public comments, the Board has 
adopted a final rule that largely incorporates the framework contained 
in the interim rules. The Board has made a number of

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revisions in response to the public comments as well as revisions based 
on the experience of the Federal Reserve System in administering the 
interim rules since March 11, 2000. The suggestions made by commenters, 
the Board's responses thereto, and the Board's revisions are discussed 
in greater detail below.

Explanation of Final Rule

Section 225.81--What Is a FHC?

    Consistent with the GLB Act, the interim rules defined a FHC as a 
bank holding company that meets the following requirements: (1) The 
company has made an effective election to become a FHC, and (2) all 
depository institutions controlled by the bank holding company are at 
the time of election and remain both well managed and well 
capitalized.\1\ One commenter suggested that the Board allow a bank 
holding company that controls multiple banks to become a FHC if a 
depository institution representing a small percentage of the company's 
assets was not well managed. However, the GLB Act explicitly provides 
that a bank holding company may become a FHC only if each depository 
institution controlled by the company is well managed, and the Board 
cannot alter this requirement by regulation. Accordingly, the Board has 
adopted Sec. 225.81 of the interim rule without amendment.
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    \1\ Section 225.81 also sets forth the provisions that apply to 
a foreign bank that controls a depository institution in the United 
States, as well as U.S. bank holding companies that control a 
foreign bank with U.S. operations. These provisions are described in 
more detail below in the discussion of Secs. 225.90 to 225.93.
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Definitions of Well Capitalized and Well Managed

    As noted above, a bank holding company may become a FHC only if 
each of its subsidiary depository institutions is both well capitalized 
and well managed. The final rule, like the interim rule, provides that 
an uninsured depository institution is considered well capitalized if 
it meets or exceeds the capital ratios that its appropriate Federal 
banking agency has established under section 38 of the Federal Deposit 
Insurance Act (12 U.S.C. 1831o) (``FDI Act'') for insured depository 
institutions.\2\
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    \2\ The final rule also defines the term ``depository 
institution'' at Sec. 225.2(t) using the definition provided at 
section 2 of the BHC Act as amended by the GLB Act. For purposes of 
Regulation Y, the term ``depository institution'' has the same 
meaning as in section 3(c) of the Federal Deposit Insurance Act (12 
U.S.C. 1813(c)).
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    The final rule also amends and simplifies the existing definition 
of ``well managed'' in Regulation Y so that it can be used both for 
purposes of determining whether expedited processing of a bank holding 
company's application is appropriate and for determining whether a bank 
holding company qualifies to be a FHC. The final rule eliminates the 
requirement that a depository institution receive at least a 
satisfactory compliance rating to be deemed well managed, because the 
compliance criterion applies only to the availability of the expedited 
application process and not to an organization's status as a FHC. The 
rule amends the expedited processing procedures to adjust for these 
changes and to provide that a bank holding company's depository 
institutions must satisfy a compliance requirement for the bank holding 
company to qualify for expedited processing.\3\ This revision does not 
change in any substantive way the application of the previous well 
managed criteria.
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    \3\ See 12 CFR 225.14 and 225.23, as amended by this rule.
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    The FDI Act allows the appropriate Federal banking agency for a 
depository institution to use an examination conducted by a state 
banking agency in lieu of a Federal examination, provided the state 
examination meets the criteria at section 10(d) of the FDI Act (see 12 
U.S.C. 1820(d)). To reflect this, the final rule allows the Board to 
rely on examinations conducted by the appropriate state agency where 
applicable in determining whether an institution is well managed.
    Where a depository institution has not yet been examined, the final 
rule retains the provision of the interim rule that allows the Board to 
determine that the institution is well managed after reviewing the 
institution's managerial and other resources and consulting with the 
appropriate Federal banking agency for the institution. Moreover, the 
final rule provides that a depository institution resulting from the 
merger of two or more well managed depository institutions would be 
considered well managed unless the Board determined otherwise after 
consulting with the appropriate Federal banking agency. Commenters 
supported both these provisions.
    Commenters requested additional guidance on whether a depository 
institution would remain well managed if it merged with an institution 
that was not well managed. In these circumstances, the Board believes 
that the managerial status of the combined institution likely would 
depend on the particular facts and circumstances. Accordingly, the 
final rule provides that an institution resulting from the merger of a 
well managed institution with an institution that is not well managed 
or that has not been examined will be considered well managed if the 
Board determines, after a review of managerial and other resources and 
after consulting the appropriate Federal banking agency, that the 
resulting institution is well managed.

Section 225.82--How Does a Bank Holding Company Elect to Become a FHC?

    Section 225.82 sets forth the procedures that a bank holding 
company must follow to elect to become a FHC and describes when an 
election will and will not become effective. The rule allows a bank 
holding company to elect to become a FHC by filing a simple declaration 
with the appropriate Federal Reserve Bank. The declaration must contain 
a statement that the bank holding company elects to be a FHC; provide 
the name and head office addresses of the company and each of the 
depository institutions it controls; certify that each depository 
institution controlled by the company is well capitalized as of the 
date the company submits its declaration; provide the capital ratios as 
of the close of the previous quarter for each depository institution 
controlled by the company; and certify that each depository institution 
controlled by the company is well managed as of the date the company 
submits its declaration. In light of its experience with declarations 
under the interim rule, the Board has amended Sec. 225.82 to clarify 
that a declaration is not deemed complete and the 30-day processing 
period for the declaration does not commence until the declaration 
contains all of the information required by Sec. 225.82(b).
    Several commenters requested that the Board eliminate the 
requirement that a declaration include capital ratio information 
because the Board already has access to capital data about depository 
institutions. However, the Board has retained this requirement for 
several reasons. The Board's experience administering the interim rule 
indicated that the capital data received from bank holding companies at 
times is different than the capital data otherwise available to the 
Board, particularly in the weeks immediately following the end of a 
quarter. In several cases, the capital information provided by a bank 
holding company was more favorable than the data otherwise available to 
the Board and thus resulted in an effective FHC election that the 
Board's data alone would not have supported. Moreover, the Board's 
experience suggests that

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requiring a bank holding company to submit the capital data may improve 
the quality of declarations submitted to the Board because it aids the 
company in determining whether it can in fact certify that all of its 
subsidiary depository institutions are well capitalized.
    Section 225.82(f) of the final rule provides that a bank holding 
company's election to become a FHC becomes effective on the 31st day 
after the date that the declaration was received unless the Board 
notifies the company prior to that time the election is ineffective. 
The rule also provides that the Board or the appropriate Federal 
Reserve Bank affirmatively may notify a company that its election is 
effective prior to the expiration of the 30-day review period.

CRA Requirement

    For a bank holding company's FHC election to be effective, the 
final rule requires the Board to determine that each insured depository 
institution controlled by the bank holding company has achieved a 
rating of at least ``satisfactory record of meeting community credit 
needs'' at its most recent examination under the CRA. Consistent with 
the GLB Act, the final rule also allows the Board, when evaluating the 
CRA criterion, to exclude an insured depository institution that a bank 
holding company acquired in the 12 months prior to submitting its FHC 
declaration. To qualify for this exclusion, the company must submit and 
the appropriate Federal banking agency for the insured depository 
institution must accept a plan to restore the institution's CRA rating 
to a satisfactory level.
    Commenters asked for clarification about how the Board in practice 
would apply the CRA requirement. In particular, commenters requested 
guidance on whether a bank holding company that controls an institution 
that has not been examined may make an effective FHC election. The GLB 
Act states that the Board must find a FHC election to be ineffective if 
not all of the subsidiary insured depository institutions of the 
company have achieved at least a satisfactory CRA rating at its ``most 
recent examination.'' In light of this statutory language, the final 
rule allows a bank holding company to qualify as a FHC if it controls 
an institution that has not been examined for CRA compliance and thus 
has not yet achieved any CRA rating, provided that the company meets 
all other applicable criteria. As with any other insured depository 
institution, if an unrated institution does not achieve at least a 
satisfactory rating at its next CRA examination, the FHC would be 
subject to the limitations that apply under Sec. 225.84.
    A number of commenters requested the Board, when determining 
whether the insured depository institutions controlled by a bank 
holding company have met the CRA requirement, to (1) publish FHC 
declarations for comment, particularly when the Board excludes a 
recently acquired institution; (2) take into account additional facts 
related to the CRA record of a bank holding company and the insured 
depository institutions it controls; and (3) condition the 
effectiveness of a FHC election on a company's compliance with various 
CRA-related criteria not mentioned in the GLB Act.
    The GLB Act establishes the requirements that a bank holding 
company must meet to become a FHC and sets forth a detailed framework 
that limits the Board's evaluation of the CRA criterion. The GLB Act 
provides that the Board must find a bank holding company's election to 
be ineffective only if all of the insured depository institutions 
controlled by the company, except for an institution that qualifies for 
the limited exclusion discussed above, have not achieved an overall CRA 
rating that was at least satisfactory.\4\ The GLB Act specifically ties 
the CRA requirement to the CRA examination rating of each insured 
depository institution and neither provides for public comment on FHC 
elections nor authorizes the Board to condition the effectiveness of an 
election based on the CRA criterion. The Board therefore believes that 
incorporating the suggestions mentioned above would be inconsistent 
with the terms of the GLB Act and, accordingly, has not amended the 
rule as suggested.
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    \4\ The Board notes that it cannot exclude a recently acquired 
institution with a poor CRA rating unless the appropriate Federal 
banking agency for the institution has accepted an affirmative 
correction plan to restore the institution's CRA rating to at least 
a satisfactory level. Thus, the company's CRA correction plan for 
the institution must be reviewed carefully by both the institution's 
primary Federal regulator and the Board.
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Proposals To Become a Bank Holding Company and a FHC

    The final rule allows a company that is not a bank holding company 
to submit simultaneously an application under section 3(a)(1) of the 
BHC Act to become a bank holding company and a request to become a FHC 
on consummation of that transaction. The process applicable to 
simultaneous filings to become both a bank holding company and a FHC is 
included in a new Sec. 225.82(f). The FHC request must (1) state that 
the company seeks to become a FHC on consummation of its section 3 
proposal to become a bank holding company and (2) certify that each 
depository institution that would be controlled by the company on 
consummation of the section 3 proposal will be both well capitalized 
and well managed on the date of consummation.
    In order to coordinate action on these two requests, the final rule 
delays the official acceptance of the FHC declaration to the date the 
company consummates its section 3 proposal and becomes a lawful bank 
holding company. The Board generally will find this declaration 
effective on the date the company becomes a bank holding company 
through consummation of its section 3 proposal to become a bank holding 
company. However, the rule provides that a declaration will not be 
effective if the Board determines that (1) a depository institution 
that would be controlled by the company on consummation of its section 
3 proposal is not both well capitalized and well managed; or (2) any 
insured depository institution to be controlled by the company on 
consummation did not achieve at least a satisfactory rating at its most 
recent CRA examination. The Board may make this determination at any 
time prior to the date the company becomes a bank holding company. 
Unless the Board determines otherwise based on the specific facts of 
the case, a company that becomes a bank holding company by acquiring an 
insured depository institution with a poor CRA rating cannot attain an 
effective FHC election until the acquired institution achieves at least 
a satisfactory CRA rating.

The Board's Ability To Take Supervisory Action

    Section 225.82(d) of the interim rule on elections noted that the 
Board retained authority to take supervisory actions against a bank 
holding company that had made an effective election to become a FHC. 
These actions could, for example, include imposing supervisory limits 
on the activities and acquisitions of a FHC. Although one commenter 
supported this provision, several commenters asserted that the Board 
did not have statutory authority to limit the operations of a FHC that 
met the applicable statutory criteria.
    Section 8 of the BHC Act, section 8 of the Federal Deposit 
Insurance Act, and other applicable statutes long have given the Board 
supervisory authority to restrict the conduct of bank holding companies 
where necessary or appropriate to protect the safety and

[[Page 403]]

soundness of depository institutions or otherwise further the purpose 
of Federal banking laws. Although the GLB Act amended several of these 
provisions, it did not limit the general applicability of the Board's 
supervisory power over bank holding companies that become financial 
holding companies. Therefore, the final rule continues to provide that 
the Board may take appropriate supervisory action against a FHC if the 
Board believes that the company does not have the appropriate financial 
and managerial resources to commence or conduct an activity, make an 
acquisition, or retain ownership of a company, or the Board believes 
such action is appropriate to enforce applicable Federal law.

Section 225.83--What Are the Consequences of Failing to Continue To 
Meet Applicable Capital and Management Requirements?

    Under the GLB Act, a FHC is subject to special corrective action 
requirements if any depository institution controlled by the company 
ceases to be both well capitalized and well managed. Section 225.83 of 
the rule implements these provisions.
    The Board received comments about a variety of aspects of 
Sec. 225.83. Several commenters requested that the Board clarify when 
and under what circumstances a company must provide notice to the Board 
of a change in the capital or management status of a subsidiary 
depository institution. Some commenters questioned the Board's 
authority and decision to require a company that it is subject to a 
corrective action agreement to obtain the Board's prior approval to 
engage in an additional activity or acquires shares of any company 
under section 4(k). Other commenters suggested that a FHC should be 
allowed to acquire an institution that is less than well managed 
without thereafter being subject to the prior approval requirement.
    After carefully considering these comments and the Board's 
experience in administering the interim rule, the Board has adopted a 
final rule that retains the substantive provisions of Sec. 225.83. This 
final rule contains the following modifications.
    First, because a FHC may have access to capital and managerial data 
on its subsidiaries before the Board does, the final rule requires that 
a FHC notify the Board within 15 days of becoming aware that any of its 
subsidiary depository institutions has ceased to be well capitalized or 
well managed. The Board has amended Sec. 225.83(b) to provide that a 
company becomes aware that a subsidiary depository institution is not 
well capitalized upon the occurrence of any material event that would 
change the capital category assigned to the institution for purposes of 
section 38 of the FDI Act (12 U.S.C. 1831o). These are the same events 
that would trigger a depository institution to provide notice to its 
appropriate Federal banking agency under the prompt corrective action 
rules (see, e.g., 12 CFR 208.42(b) and (c)). A company is deemed to 
become aware that a subsidiary depository institution is no longer well 
managed at the time the depository institution receives written notice 
from its appropriate Federal banking agency that either the 
institution's composite rating or management rating is not at least 
satisfactory. The final rule also provides that this notice may come 
from the state banking agency in an examination conducted in accordance 
with section 10(d) of the FDI Act.
    As noted above, the GLB Act specifically authorizes the Board to 
impose limitations on the conduct or activities of a company that is 
subject to a corrective action agreement if the Board believes that 
such limitations are appropriate under the circumstances and consistent 
with the purposes of the BHC Act. The Board believes it is appropriate 
and consistent with the purposes of the BHC Act to require a FHC that 
ceases to meet applicable capital and management standards to obtain 
the Board's approval prior to conducting any of the activities that are 
newly authorized for FHCs by the GLB Act. This allows the Board to 
assure that the FHC is not inappropriately diverting resources from 
improving the condition of its subsidiary depository institutions. It 
also recognizes that the new powers and streamlined review process 
contained in the GLB Act were intended to be available only to 
companies that maintain strong capital and management at their 
subsidiary depository institutions. For these reasons, the final rule 
retains the prior approval requirement for companies subject to a 
corrective action agreement.
    The Board may determine to grant approval to engage in additional 
activities on a general basis or only on a transaction-by-transaction 
basis as appropriate, given the circumstances that caused the FHC to 
fail to meet the well capitalized and well managed requirements. For 
example, the Board has given general approval to a FHC that controlled 
only well capitalized and well managed institutions and then acquired a 
relatively small troubled institution and immediately developed a plan 
to improve the condition of the troubled institution.
    The final rule retains the requirement that a company that received 
notice from the Board that one or more of its subsidiary depository 
institutions is not both well capitalized and well managed execute an 
agreement with the Board to comply with the capital and management 
requirements applicable to financial holding companies (a ``corrective 
action agreement''). This corrective action agreement must be executed 
within 45 days of the company's receipt of the notice or such 
additional time as the Board may allow if a company requests an 
extension of time, must explain the actions the company will take to 
correct all areas of noncompliance and the time frame within which each 
action will be take, must provide any other information the Board may 
require, and must be acceptable to the Board.
    If a company subject to a corrective action agreement does not 
cause all of its subsidiary depository institutions to be well 
capitalized and well managed within 180 days (or such other time as the 
Board may permit) of receiving notice of a deficiency from the Board, 
the Board may order the company to divest ownership or control of any 
depository institution the company owns or controls. The GLB Act and 
the final rule state that a company may comply with a Board order to 
divest by ceasing to engage in any activity that may be conducted only 
under sections 4(k), 4(n), or 4(o) of the BHC Act.\5\
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    \5\ The interim rule provided that a company could choose to 
comply with an order to divest by ceasing to engage in any activity 
that would not be permissible for a bank holding company under 
section 4(c)(8) of the BHC Act. The Board has changed the statutory 
reference in order to clarify that a company that complies with a 
divestiture order by ceasing to engage in certain activities may 
continue to engage in any conduct permissible for a bank holding 
company under section 4(c), not just the conduct permitted by 
section 4(c)(8).
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Section 225.84--What Are the Consequences of Failing To Maintain a 
Satisfactory or Better Rating Under the Community Reinvestment Act at 
All Insured Depository Institution Subsidiaries?

    The GLB Act requires the Board to prohibit a FHC from engaging in 
or acquiring control of a company engaged in any new activity under 
sections 4(k) and 4(n) of the BHC Act if any insured depository 
institution controlled by the FHC has received a rating of less than 
``satisfactory record of meeting community credit needs'' in its most 
recent CRA examination. Section 225.84 implements this provision by 
providing that the statutory prohibitions apply

[[Page 404]]

upon receipt by the FHC of notice that any subsidiary insured 
depository institution has received a less-than-satisfactory CRA 
rating.
    Section 225.84 provides that a FHC receives notice of a less-than-
satisfactory CRA rating when (1) an insured depository institution 
controlled by the FHC receives written notice from its appropriate 
Federal banking agency that the institution has received a less-than-
satisfactory CRA performance rating at its most recent examination; or 
(2) the FHC receives written notice from the Board that an insured 
depository institution it controls has received such a rating. The 
prohibitions imposed by Sec. 225.84 remain in effect until each insured 
depository institution controlled by the FHC has received at least a 
satisfactory CRA rating at its most recent examination.
    The Board also has considered the applicability of the CRA 
provisions to the situation in which a FHC acquires an insured 
depository institution with a poor CRA rating. The terms of the GLB Act 
require that the Board apply the prohibitions if ``any insured 
depository institution subsidiary of such FHC * * * has received in its 
most recent examination under the CRA a rating of less than 
`satisfactory record of meeting community credit needs.' '' The Board 
believes that this language is best read to apply only when an insured 
depository institution receives a less-than-satisfactory CRA rating 
while it is under the control of the FHC.\6\ A FHC is responsible for 
the CRA rating of an insured depository institution only if the FHC 
controlled the institution during the period that the examination 
occurs. Moreover, it would discourage FHCs with well rated institutions 
from acquiring and correcting poorly rated institutions if a penalty 
were imposed on the FHC immediately upon acquiring the poorly rated 
institution. The Board believes that there are strong public benefits 
in allowing a bank holding company with a proven CRA performance record 
at its existing insured depository institutions to acquire a poorly 
rated insured depository institution.
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    \6\ Moreover, although the GLB Act requires the Board to impose 
prohibitions on the activities and acquisitions of a FHC if an 
insured depository institution of the FHC has received a less-than-
satisfactory rating at its most recent CRA examination, the statute 
does not enumerate a specific procedure or time frame within which 
the Board must implement this requirement.
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    Accordingly, the final rule retains the provisions of the interim 
rule that provide that the CRA prohibitions apply to a FHC when an 
insured depository institution that is controlled by the FHC receives 
notice from the appropriate Federal banking agency that the insured 
depository institution has received a less-than-satisfactory CRA 
rating. This notice typically will occur, if at all, at the first CRA 
examination after the poorly rated insured depository institution is 
acquired by the FHC. If the institution does not achieve at least a 
satisfactory CRA rating at its first CRA examination following the 
acquisition, the prohibitions would apply to the FHC. This 
interpretation is consistent with the provision of the GLB Act that 
allows the Board when evaluating a FHC election to exclude the poor 
rating of any institution acquired by the company within the preceding 
12 months.
    The Board will monitor the FHC's progress in addressing the CRA 
performance of any recently acquired insured depository institution and 
reserves the right also to provide notice that the CRA prohibitions 
apply if the FHC is not taking appropriate action to improve the 
insured depository institution's CRA performance.
    The rule states that a FHC's ability to engage in certain 
activities is not affected while the prohibitions are in effect. First, 
consistent with the GLB Act, a FHC that notified the Board it was 
engaged in merchant banking or insurance company investment activities 
prior to the time one of its subsidiary insured depository institutions 
received a less-than-satisfactory CRA rating may continue to make 
investments in the ordinary course of conducting such investment 
activities. Second, a FHC may engage in activities and make 
acquisitions under section 4(c)(8) of the BHC Act, subject to the 
applicable notice and approval requirements.

Section 225.85--Is Notice To or Approval From the Board Required Prior 
to Engaging in a Financial Activity?

    Section 225.85 of the final rule generally permits a FHC to 
commence any financial activity or acquire control of a company engaged 
exclusively in one or more financial activities without the Board's 
prior approval.\7\ The final rule specifically provides that a FHC may 
conduct any financial activity either in the United States or abroad, 
subject to the laws of the jurisdiction in which the activity is 
conducted.
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    \7\ The term ``financial activities'' refers to activities that 
have been determined to be financial in nature or incidental to a 
financial activity either by the GLB Act or by the Board in 
consultation with the Secretary of the Treasury. A list of financial 
activities is included at Sec. 225.86 of the rule.
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    Consistent with the GLB Act, Sec. 225.85 of the final rule provides 
that a FHC must obtain prior Board approval to acquire more than 5 
percent of the shares of a savings association. In addition, for the 
reasons explained above, the rule notes that the Board, in the exercise 
of its supervisory authority, may require a FHC to obtain prior Board 
approval to engage in or acquire a company engaged in a financial 
activity. In each of these cases, the final rule adopts the provisions 
of the interim rule with only minor, technical revisions.\8\
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    \8\ For example, the rule clarifies that a FHC must obtain prior 
Board approval to acquire control or more than 5 percent of the 
shares of a company that owns, operates, or controls a savings 
association.
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    Section 225.85(a)(3) of the interim rule also allowed a FHC to 
control or acquire more than 5 percent of the voting shares of a 
financial company that engaged in limited nonfinancial activities if 
certain conditions were met, including the condition that the acquired 
company be substantially engaged in activities that are permissible for 
a FHC. The Board has revised this provision in several respects in 
light of its experience administering the interim rule. First, the 
Board has clarified that the acquired must be substantially engaged in 
activities that are financial in nature, incidental to a financial 
activity, or otherwise permissible for a FHC under section 4(c) of the 
BHC Act.\9\ The final rule provides that a company generally is 
considered to be ``substantially engaged'' in permissible activities if 
at least 85 percent of the company's consolidated total annual gross 
revenues and 85 percent of the company's consolidated total assets are 
attributable to the conduct of financial and incidental activities and 
other activities that are permissible under section 4(c) of the BHC 
Act.
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    \9\ Complementary activities are subject to prior approval on a 
case-by-case basis under section 4(j) of the BHC Act and, therefore, 
a company engaged in complementary activities generally could not be 
acquired using the post-transaction notice procedure. Consequently, 
complementary activities have not been included for the purpose of 
determining whether a company with mixed activities meets the 
requirement that it be substantially engaged in permissible 
activities for FHCs.
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    Although a FHC may acquire any percentage of shares or control of a 
company engaged in limited impermissible activities, the FHC need only 
provide a post-transaction notice under Sec. 225.87 if such an 
acquisition results in control of the company. The final rule continues 
to require that the FHC conform, terminate, or divest all of

[[Page 405]]

the acquired companies impermissible activities within two years of the 
acquisition. A commitment to terminate impermissible activities is 
unnecessary, because, under the final rule as written, an acquisition 
would be unauthorized if the activities of the company are not 
conformed to Regulation Y within two years of the acquisition.

Section 225.86--What Activities Are Permissible for a FHC?

    Section 225.86 of the rule provides a list of the activities that 
the GLB Act defines as financial in nature and thus permissible for a 
FHC to conduct directly or indirectly.

Activities Previously Determined To Be Closely Related to Banking

    Subsection (a)(1) permits a FHC to conduct any activity that the 
Board had determined by regulation or order prior to November 12, 1999, 
to be so closely related to banking as to be a proper incident thereto 
under section 4(c)(8) of the BHC Act. These activities are listed in 
Sec. 225.28 of Regulation Y, and the rule incorporates these activities 
through a cross-reference to that section.
    Subsection (a)(2) specifically lists each of the activities the 
Board approved by order as closely related to banking prior to November 
12, 1999, and provides a citation to the most recent or the most 
comprehensive Board order concerning the activity. These activities 
are: Providing administrative and other services to mutual funds; 
owning shares of a securities exchange; providing employment histories 
to third parties; check cashing and wire transmissions services; 
providing notary public services, selling postage stamps and postage-
paid envelopes; providing vehicle registration services, and selling 
public transportation tickets and tokens in connection with offering 
banking services; and real estate title abstracting. The interim rule 
on activities also authorized financial holding companies to act as a 
certification authority for digital signatures. The final rule 
clarifies that this activity includes authenticating the identity of 
persons conducting financial and nonfinancial transactions abroad, 
which is consistent with the scope of activities approved by the 
relevant Board order (See Bayerische Hypo-und Vereinsbank AG, et al., 
86 Federal Reserve Bulletin 56 (2000)).
    Financial holding companies that engage in any activity pursuant to 
paragraph (a) must conduct the activity in accordance with the terms 
and conditions contained in Regulation Y and the Board's orders 
authorizing the activity, unless such terms and conditions are modified 
by the Board.\10\ Some commenters requested that the Board amend the 
rule to include a description of the conditions and limitations 
governing the conduct of each activity listed in subsection (a). The 
Board notes that the conditions and limits governing the activities 
listed in subsection (a) are set forth in Sec. 225.28 of Regulation Y 
or in the orders referenced in Sec. 225.28(a)(2), and the Board 
believes that adding a list of conditions and limitations to the rule 
would lengthen the rule without significantly facilitating compliance 
with it. Where companies have questions concerning the conditions or 
limitations applicable to an activity, the company may contact the 
Board or appropriate Reserve Bank.
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    \10\ The Board by order has authorized bank holding companies 
under section 4(c)(8) to underwrite and deal in bank-ineligible 
securities provided that the company does not derive more than 25 
percent of its revenues from such activities. See J.P. Morgan & Co., 
Incorporated, 75 Federal Reserve Bulletin 192 (1989). The list in 
subsection (a)(2) does not include underwriting and dealing in bank-
ineligible securities, however, because financial holding companies 
may conduct these activities under section 4(k)(4)(E) of the BHC Act 
without regard to the 25-percent revenue limit. Some commenters 
requested that the Board also remove the 25-percent revenue limit 
applicable to the conduct of securities underwriting and dealing 
activities by bank holding companies under section 4(c)(8) of the 
BHC Act. In the GLB Act, Congress authorized only those bank holding 
companies that meet the capital, management and CRA standards 
applicable to financial holding companies to engage in expanded 
securities activities. The Board does not believe at this time that 
it would be appropriate to allow bank holding companies that do not 
meet these standards to engage in expanded securities activities.
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Activities Usual in Connection With the Transaction of Banking Abroad

    The GLB Act also defined as financial in nature any activity that 
the Board had determined by regulation in effect on November 11, 1999, 
to be usual in connection with the transaction of banking or other 
financial operations abroad (see 12 CFR 211.5(d)). Subsection (b) lists 
the three activities that the Board had determined to be usual in 
connection with the transaction of banking abroad that are not 
otherwise defined as financial in nature by other provisions of the GLB 
Act. These activities are management consulting (beyond that which is 
allowed under Sec. 225.28 and incorporated by reference at section 
225.86(a)(1)); operating a travel agency in connection with the 
offering of financial services; and organizing and sponsoring a mutual 
fund.\11\ These activities must be conducted in accordance with the 
limitations set forth in Regulation K regarding the scope and conduct 
of the activity.\12\
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    \11\ Section 4(k)(4)(G) and the rule do not authorize a FHC to 
engage in activities that the Board authorized a bank holding 
company to provide in individual orders issued under section 
4(c)(13) of the BHC Act.
    \12\ As discussed more thoroughly below, the notice procedures 
in Regulation K do not apply to activities that are conducted under 
section 4(k)(4) of the BHC Act and Regulation Y.
---------------------------------------------------------------------------

    The GLB Act authorizes financial holding companies to conduct the 
activities listed at Sec. 211.5(d) of Regulation K that, prior to the 
GLB Act, a bank holding company could conduct abroad. One commenter 
stated that the activity list at Sec. 225.86(b) should include 
``commercial and other banking activities,'' which is the activity 
described at Sec. 211.5(d)(1) of Regulation K. As a general matter, the 
GLB Act was intended to expand the range of nonbanking activities that 
a FHC could conduct and was not meant to affect the provisions of the 
BHC Act relating to the conduct of banking activities. Specifically, 
the GLB did not amend the prior approval requirement at section 3 of 
the BHC Act that governs the acquisition by a bank holding company, 
including a FHC, of a domestic bank. The Board therefore believes that 
the GLB Act did not authorize a FHC to conduct commercial and other 
banking activities in the United States by using the post-transaction 
notice procedure. In addition, the Board believes that a FHC's 
acquisition of a foreign bank should continue to be subject to the 
procedures set forth in Regulation K in order to ensure that the Board 
fulfills its responsibilities as home country supervisor in relation to 
international expansion of U.S. banking organizations, consistent with 
the standards established by the Basel Committee on Banking Supervision 
(Basel Committee). Accordingly, the Board has not included commercial 
and other banking activities on the activities list at Sec. 225.86 that 
may be conducted by using the post-transaction notice procedure.

Other Activities Defined as Financial in Nature by the GLB Act

    In addition to authorizing activities that the Board previously has 
authorized a bank holding company to conduct, the GLB defines several 
other activities as financial in nature. These activities, which are 
listed at sections 4(k)(4)(A)-(E), (H), and (I) of the BHC Act, include 
acting as principal, agent or broker in the sale of insurance products 
(including annuities and reinsurance products); underwriting, dealing 
in, and making a market in securities without any limitation on 
revenues that can be derived from bank ineligible securities; and 
merchant banking an insurance

[[Page 406]]

company investment activities. Subsection 225.86(c) provides that a FHC 
may engage in any activity set forth in the above-referenced sections 
of the BHC Act. These activities must be conducted in accordance with 
applicable restrictions and limitations contained in the GLB Act and 
any implementing regulations or supervisory guidance adopted by the 
Board.\13\
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    \13\ For example, the Board, in conjunction with the Secretary 
of the Treasury, adopted and requested public comment on an interim 
rule implementing the merchant banking investment provisions of the 
GLB Act. See 65 FR 16460 (March 28, 2000).
---------------------------------------------------------------------------

    Several commenters on the interim rule requested that the Board 
amend section 225.86 to eliminate cross references to the GLB Act and 
other sections of Regulation Y and to provide a complete description of 
each activity permissible for a FHC, including the conditions and 
limitations applicable to that activity. The Board believes the 
activities incorporated in the rule by reference are easily located 
elsewhere in the Board's Regulation Y and the BHC Act, and that 
including the requested provisions in the rule would lengthen the rule 
without adding a commensurate level of convenience. Accordingly, the 
Board has not included the requested provisions in the final rule. The 
Board has, however, prepared a single list of all activities permitted 
under section 225.86 that may be obtained from the Reserve Banks.
    The GLB Act directs the Board, by regulation or order, to define 
the extent to which three activities listed in section 4(k)(5) are 
financial in nature or incidental to a financial activity. The Board 
anticipates proposing a rule to implement section 4(k)(5) in the near 
future.
    The GLB Act also permits the Board, in consultation with the 
Secretary of the Treasury, to determine that additional activities not 
listed in section 225.86 are financial in nature of incidental thereto. 
In this regard, the Board recently determined by rule that acting as a 
finder is an activity that is incidental to a financial activity (see 
65 FR 80735 (December 22, 2000)). The Board also has requested comment 
on a proposal to allow FHCs, as an activity that is complementary to a 
financial activity, to invest in companies engaged in certain data 
processing and Internet-related activities (see 65 FR 80384 (December 
21, 2000)).

Interplay Between Sec. 225.86 and Other Authorities

    Although the Board is not listing each limitation and condition 
that applies to the activities described at Sec. 225.86, the Board 
believes that some general guidance on the how the limitations apply is 
warranted in light of a number of public comments and informal 
inquiries received by Board staff on this subject. As the Board 
previously has indicated in connection with issuing the interim rules, 
the various sections that authorize activities for bank holding 
companies and financial holding companies, most notably sections 
4(c)(8), 4(c)(13), and 4(k), remain separate sources of authority under 
which a FHC may engage in various activities. If an activity is listed 
in more than one provision of section 4, the FHC may choose to conduct 
the activity under any applicable provision, subject only to the 
procedures and limitations that the chosen source of authority imposes 
on the activity.
    For example, a FHC that wishes to engage in securities underwriting 
could choose to conduct that activity under section 4(c)(8). If it 
chose that source of authority, the FHC would be required to obtain 
prior Board approval under subpart C of Regulation Y and would be 
required to conduct the underwriting activity subject to the revenue 
restrictions and other limitations applicable to securities 
underwriting activities conducted under section 4(c)(8). Alternatively, 
a FHC could engage in securities underwriting under section 4(k)(4)(E), 
in which case only a post-transaction notice would be required and the 
limitations of section 4(c)(8) would not apply to the activity.
    As discussed above, the final rule states that a FHC may conduct 
any activity listed at Sec. 225.86 either in the United States or 
abroad using the post-transaction notice procedure.\14\ As with the 
conduct of financial activities in the United States, the limitations 
that apply to an activity conducted abroad by a FHC depend on the legal 
authority under which the FHC conducts the activity. If the FHC 
conducts an activity abroad under section 4(c)(13) of the BHC Act as 
implemented by Sec. 211.5(d) of Regulation K, all the requirements and 
investment limitations described in Sec. 211.5 would apply. If, 
however, a FHC conducts an activity listed at 4(c)(13) abroad using 
section 4(k)(4)(G) of the BHC Act, which incorporates by reference the 
activities authorized by the Board under section 4(c)(13), the 
Regulation K general consent procedures and investment limitations do 
not apply.
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    \14\ The GLB Act states that a FHC may conduct in the United 
States those activities previously authorized by the Board at 
Sec. 211.5(d) of Regulation K (emphasis added). The Board has 
received several inquiries as to whether a FHC also may conduct 
these activities outside the United States using the post-
transaction notice. The GLB Act generally intended to authorize FHCs 
to conduct all of the activities it defined as financial in nature 
in the United and abroad using the streamlined procedure. Moreover, 
all but the three Regulation K activities listed separately at 
Sec. 225.86(b) have been authorized in the same form under 
Regulation Y. The preexisting Regulation Y activities authorized for 
FHCs do not have the ``in the United States'' reference and may be 
conducted abroad using the streamlined procedure. The Board has 
determined, as reflected in this final rule, that no regulatory 
purpose would be served by requiring a FHC to follow the more 
restrictive Regulation K procedures to conduct the remaining three 
listed activities abroad. An FHC therefore may conduct all 
activities listed at Sec. 225.86 either in the United States or 
abroad using the post-transaction notice procedure.
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Section 225.87--Is Notice to the Board Required After Engaging in a 
Financial Activity?

    Section 225.87(a) of the final rule describes when a FHC must 
provide notice to the Board after commencing or acquiring a company 
engaged in a permissible financial activity. As a general matter, the 
final rule states that a FHC may engage in any activity listed in 
Sec. 225.86 by providing the appropriate Reserve Bank with a notice 
within 30 days of commencing the activity or acquiring control of a 
company engaged in the activity. The interim rule provided that this 
notice could take the form of a letter that contained information about 
the activity commenced and the company that conducts it. In response to 
public comments and to ensure that the post-transaction notices contain 
the basic information necessary for the Board to monitor a FHC's 
activities, the Board has designated forms that domestic and foreign 
financial holding companies must use to satisfy the post-transaction 
notice requirement.\15\ The authorized form requires limited 
information about the activity commenced or the company acquired, as 
well as information about the location of the company conducting the 
activity and its status within the FHC's organization structure. The 
appropriate form for submitting the post-transaction notice may be 
obtained from any Federal Reserve Bank or from the Board.
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    \15\ Domestic financial holding companies should use the FR Y-
6A, which soon will be replaced by the FR Y-10, and foreign banking 
organizations should use the FR Y-7A, which soon will be replaced by 
the FR Y-10F.
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    Section 225.87(b) of the final rule outlines the exceptions under 
which post-transaction notice is not required to engage in an activity 
or make an acquisition. Consistent with the GLB Act, no notice is 
required in connection with the acquisition of shares of a company if 
the FHC would not control

[[Page 407]]

the company after the acquisition. The final rule retains this 
provision.
    The rule also provides that a FHC that properly has notified the 
appropriate Federal Reserve Bank that the FHC is engaged in securities 
underwriting and dealing, merchant banking, or insurance company 
investment activities generally is not required to provide an 
additional post-transaction notice when the FHC makes particular 
investments in the ordinary of course of conducting those activities. 
Notwithstanding this exception for individual investments, investments 
in more than 5 percent of the shares, assets, or other ownership 
interests of a company that have a cost that exceeds the lesser of 5 
percent of the FHC's Tier I capital or $200 million must be reported 
under Sec. 225.87. In response to comments that the provisions of the 
interim rule on activities related to merchant banking investments were 
difficult to understand, the Board has restructured those provisions to 
explain more succinctly when notice is and is not required for 
individual merchant banking investments.
    The final rule also adds a new exception at Sec. 225.87(b)(2) to 
the general post-transaction notice requirement. This new section 
provides that a FHC that has submitted a post-transaction notice in 
connection with a particular financial activity is not required to 
submit an additional notice under this section to commence the activity 
de novo through any other authorized subsidiary of the FHC without 
providing additional notice under Sec. 225.87(a).\16\ This exception 
applies only if the FHC already controls the company through which the 
activity will be commenced, and, thus, the acquisition by a FHC of 
control of a company engaged in a listed activity does not qualify for 
this exception. In addition, this new exception is not available if the 
Board, in the exercise of its supervisory authority, informs the FHC 
that notice is required for the commencement de novo of a financial 
activity.
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    \16\ One commenter stated that a FHC should be allowed to 
commence the same financial activity in different subsidiaries using 
different sources of authority. As discussed above, some activities 
are authorized by more than one source of authority. A FHC therefore 
may commence the same activity in different subsidiaries using 
different sources of authority in accordance with the procedures 
applicable to the chosen authority.
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Section 225.88--How To Request the Board To Determine That an Activity 
Is Financial in Nature or Incidental to a Financial Activity?

    Under the GLB Act, the Board, in consultation with the Secretary of 
the Treasury, may expand the list of activities that are permissible 
for a FHC by determining that an additional activity is financial in 
nature or incidental to a financial activity. Section 225.88 permits a 
FHC or other interested party to request such a determination.
    The rule provides that a request for a determination that an 
activity is financial in nature or incidental to a financial activity 
must identify and define the activity for which a determination is 
sought, explain in detail why the activity should be considered 
financial in nature or incidental, and provide information supporting 
the requested determination and any other information requested by the 
Board. The rule requires the Board to provide the Secretary of the 
Treasury a copy of the request and consult with the Secretary in 
accordance with section 4(k)(4)(2) of the BHC Act. The rule also allows 
the Board, after consultation with the Secretary, to publish a 
description of the proposal in the Federal Register with a request for 
public comment. The Board will attempt to make a final decision on a 
request filed under Sec. 225.88 within 60 days of completion of both 
the consultative process and the public comment period, if any.
    Like the interim rule, Sec. 225.88 of the final rule also allows a 
FHC to request an advisory opinion from the Board regarding the scope 
an activity already determined to be financial and listed in 
Sec. 225.86. Such a request must be in writing and provide a detailed 
description of the activity, product, or service about which the 
company is inquiring, an explanation supporting an interpretation 
regarding the scope of the permissible financial activity, and any 
other information required by the Board. The Board will respond to a 
requester within 45 days of receiving a complete written request.
    Several commenters suggested that the Board, without waiting for a 
specific request, evaluate whether an activity is financial in nature 
or incidental to a financial activity if another Federal banking agency 
has authorized or authorizes depository institutions under its 
supervision to conduct the activity. The GLB Act allows the Board at 
its own initiative to propose authorizing an additional activity. In 
this regard, the Board anticipates monitoring developments in the 
banking and financial services industries in order to identify new 
activities that might be considered financial in nature or incidental 
thereto. However, the Board does not believe it is appropriate to 
propose as financial in nature or incidental all activities that 
another Federal banking agency may have authorized. The standards the 
Board must consider when authorizing a financial activity under the GLB 
Act may differ from the standards governing the authorization of new 
activities under other Federal banking laws. In light of these 
differences, the requirement that the Board consult with the Secretary 
of the Treasury in connection with financial activities, and the 
potential impact of new activities on the depository institution 
subsidiaries of financial holding companies, the Board believes that it 
is important to evaluate each activity authorized by another Federal 
banking agency on a case-by-case basis before proposing that the 
financial holding companies be allowed to conduct the activity.

Section 225.89--How To Request Approval To Engage in an Activity That 
Is Complementary to a Financial Activity?

    The Board has adopted without amendment Sec. 225.89 as originally 
proposed. This section includes a procedure for a FHC to obtain the 
Board's prior approval to engage in activity that the company believes 
is complementary to a financial activity in which the company is 
engaged. Generally, such a request must identify the proposed 
complementary activity and specifically discuss how it would be 
conducted; identify the financial activity for which the proposed 
activity would be complementary and provide information to support why 
the proposed activity should be considered complementary to the 
identified financial activity; describe the scope and relative size of 
the proposed activity; discuss the risks that conducting the activity 
reasonably may be expected to post to the safety and soundness of the 
company's subsidiary depository institutions and the financial system 
generally; describe the potential adverse effects and potential public 
benefits that could result from conducting the activity; and provide 
any additional information requested by the Board.
    In acting on a proposal to engage in a complementary activity, the 
Board will consider whether the activity is complementary to the 
identified financial activity, whether the proposed activity would pose 
a substantial risk to the safety or soundness of depository 
institutions or the financial system generally, and whether the 
proposal could be expected to produce benefits to the public that 
outweigh possible adverse effects. The Board will act on a request for 
prior approval to engage in a complementary activity within the

[[Page 408]]

time period described at section 4(j) of the BHC Act.

Section 225.90--What Are the Requirements for a Foreign Bank To Be 
Treated as a Financial Holding Company?

    A foreign bank that is a bank holding company because it owns a 
subsidiary bank in the United States must comply with the same 
requirements as any other bank holding company that elects to be a 
financial holding company under the GLB Act. Most foreign banks, 
however, do not own subsidiary banks in the United States; instead, 
they operate U.S. branches that are part of the foreign bank 
itself.\17\ Such foreign banks may, like U.S. bank holding companies, 
also elect to be treated as financial holding companies and thereby be 
able to engage in the new financial activities. For purposes of a 
foreign bank with a U.S. branch qualifying to be treated as a FHC, the 
Act requires the Board to apply capital and management standards to the 
foreign bank that are comparable to the standards applied to a U.S. 
bank owned by a FHC, giving due regard to the principle of national 
treatment and equality of competitive opportunity.
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    \17\ A foreign bank that operates a branch, agency, or 
commercial lending company subsidiary in the United States is 
subject to the BHC Act as if it were a bank holding company. In this 
portion of the preamble, the term ``branch'' is used to include all 
three of these forms of operation unless otherwise noted.
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Well Capitalized Standards

    Under the interim rule, a foreign bank with a U.S. branch could be 
considered well capitalized if either: (i) Its home country supervisor 
had adopted capital standards consistent with the Basel Capital Accord, 
the foreign bank maintained capital ratios generally equivalent to 
those required for a well capitalized U.S. bank (Tier 1 capital to 
total risk-based assets ratio of 6 percent and total capital to total 
risk-based assets ratio of 10 percent and a Tier 1 capital to total 
assets leverage ratio of at least 3 percent), and the Board determined 
that the foreign bank's capital was comparable to the capital required 
for a well capitalized U.S. bank; or (ii) the foreign bank had obtained 
a determination from the Board under Sec. 225.91(c) that the bank's 
capital is otherwise comparable to the capital required of a well 
capitalized U.S. bank (the ``pre-clearance process'').
    Most commenters criticized the use of a leverage ratio in assessing 
the capital of foreign banks. Some of the arguments made against 
imposing a leverage ratio on foreign banks were that: (i) It is 
contrary to the internationally accepted Basel Capital Accord and 
counterproductive to the work of the Basel Committee on Banking 
Supervision (the ``Basel Committee''); (ii) the imposition of a 
leverage ratio on foreign banks is inequitable due to the different 
composition of their balance sheets and the amount of nonbanking assets 
commonly held by foreign banks; and (iii) a leverage ratio requirement 
would require foreign banks to manage their worldwide capital accounts 
to meet a specific U.S. requirement, which is contrary to the principle 
of comprehensive consolidated home country supervision. One foreign 
bank supervisory authority, however, stated that it did not agree that 
the Basel Capital Accord was the only possible capital adequacy measure 
for a national regulator and could see how a Tier 1 leverage test could 
supplement the Basel Capital Accord in a meaningful way. Some domestic 
commenters expressed support for the imposition of a leverage ratio 
requirement on foreign bank FHCs. One commenter stated that requiring 
foreign banks to meet a leverage ratio of only 3 percent favors foreign 
institutions contrary to the provisions of the GLB Act and that, to 
ensure consistency, the lower capital requirement should be available 
to foreign banks only if they can demonstrate in their declaration and 
certification that they have implemented the market risk guidelines.
    As the Board has previously noted, the numerical screening levels 
for capital are not the only determining factors in whether a foreign 
bank may be considered comparably capitalized. The pre-clearance 
process established by the interim rule allows a foreign bank that does 
not meet one or more of the screening levels to request a determination 
that it is nevertheless comparably well capitalized. Consequently, 
meeting the leverage ratio set out in the regulation has not been a 
prerequisite for FHC status, and a number of foreign banks have been 
found to meet FHC requirements despite not having met the leverage 
screening level.
    The foreign bank FHC elections processed to date indicate that the 
application of a leverage ratio screen to non-U.S. banks may have 
limited value as a general rule in the assessment of comparability for 
FHC purposes because of the significant differences between U.S. and 
foreign banking balance sheets. The home country supervisors of most 
foreign banks do not require a bank to meet or manage toward any 
specific leverage ratio and generally do not take it into account in 
the consolidated supervision of the bank. In light of the comments 
received and the Board's experience to date in assessing foreign bank 
capital in FHC cases, the Board has determined to make several changes 
in the final regulation. The leverage ratio has been removed from the 
screening test in the definition of well capitalized in 
Sec. 225.90(b)(1)(iii) in the final rule. The screening test will now 
reference a foreign bank's Tier 1 and total risk-based capital levels 
calculated under the Basel Accord. Accordingly, foreign banks from 
countries that follow Basel capital rules may submit declarations to be 
treated as FHCs without reference to any particular leverage ratio. For 
those countries that do not follow the Basel Accord, capital will 
continue to be assessed in the pre-clearance process.
    The Board also believes, however, review of a non-U.S. bank's 
leverage ratio in particular cases may serve as an indicator that the 
bank's capital should receive further scrutiny in determining whether 
the bank has capital comparable to a well capitalized U.S. bank. 
Consequently, a foreign bank's leverage ratio will be considered by the 
Board as one of the factors that can be taken into account for purposes 
of the comparability review under Sec. 225.92(e) and has been added to 
the list of factors in that section. Under this approach, the Board may 
consider whether the level of a foreign bank's leverage ratio is such 
that it indicates that additional analysis should be undertaken in 
assessing comparability.\18\ Such assessments would in all cases be 
based on all relevant factors, and not merely on the leverage ratio. 
Thus, the Board would retain any benefits associated with reviewing the 
leverage ratio, but the foreign bank's qualification for FHC status 
would not be dependent upon it. Instead, qualification would depend on 
the overall capital strength of the foreign bank.
---------------------------------------------------------------------------

    \18\ The financial information necessary for System staff to 
compute a foreign bank's leverage ratio will be required as part of 
the certification process and ongoing reporting required of foreign 
FHCs.
---------------------------------------------------------------------------

    The Board intends that such reviews would be carried out within the 
31-day processing period in cases where a certification has been filed 
and as expeditiously as possible in other cases. The Board also expects 
that staff would consult with the foreign bank's home country 
supervisor on issues relating to capital.

Well Managed Standards

    Under the interim rule, a foreign bank was considered well managed 
if: (i) Each of the foreign bank's U.S. offices had received at least a 
satisfactory

[[Page 409]]

composite rating at its most recent assessment; (ii) the foreign bank's 
home country supervisor considered the overall operations of the 
foreign bank to be satisfactory or better; and (iii) the management of 
the foreign bank met standards comparable to those required of a well 
managed U.S. bank.
    Several commenters criticized the interim rule's requirement that 
each individual U.S. office of a foreign bank must have received at 
least a satisfactory composite rating at its most recent assessment in 
order for the foreign bank to certify that it is well managed. Some 
commenters argued that branches and agencies are not properly equated 
to domestic bank subsidiaries because many are small offices that do 
not function as independent financial institutions, but rather as 
marketing or relationship outposts of large, centralized regional 
headquarters. In addition, some commenters argued that a problem in one 
such office that can affect the rating of that office may, in fact, 
have an insignificant impact on the FBO's consolidated banking 
operations in the United States. Moreover, some commenters have noted 
that a U.S. bank may have a single branch in less than satisfactory 
condition and still be given a satisfactory rating overall.
    In the final rule, the Board has revised this provision to require 
that each foreign bank be evaluated on the basis of a composite rating 
of all of its direct U.S. banking offices, while continuing to evaluate 
each U.S. depository institution subsidiary of the foreign bank 
separately. Although the Federal Reserve has traditionally tracked each 
branch or agency of a foreign bank as a separate entity, in order to 
make a comparison between U.S. and foreign banks for purposes of the 
FHC election, the Board has determined that each foreign bank should be 
evaluated for FHC purposes on the basis of a consolidated rating of all 
of its direct U.S. banking operations. Thus, in order to achieve 
comparable treatment, the well managed standard applicable to foreign 
bank FHCs has been revised in the final rule to require that a foreign 
bank have a satisfactory rating for its U.S. branches, agencies, and 
commercial lending company subsidiaries on a composite basis.
    The Federal Reserve's foreign bank examination process has been 
amended to include assignment of a combined assessment of a foreign 
banking organization's U.S. branch, agency, and commercial lending 
company operations through the regular examination cycle.\19\ Until 
this amendment is applied throughout the regular examination cycle, 
such combined U.S. banking assessments will be determined by the Board 
on a case by case basis based on the most recent individual office 
ratings. If a foreign bank that wishes to obtain FHC status has not 
been assigned a combined U.S. banking assessment as part of the regular 
examination cycle, the foreign bank should contact its responsible 
Federal Reserve Bank or utilize the pre-clearance process. A combined 
U.S. banking assessment may be assigned to a foreign bank as part of 
the FHC pre-clearance process. If a foreign banking group contains more 
than one foreign bank with U.S. banking offices, each such foreign bank 
in the group must have a satisfactory combined U.S. banking assessment 
in order for the foreign banking group or any of its subsidiaries to 
obtain FHC status.\20\
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    \19\ See SR Letter No. 00-14 (SUP) (Oct. 23, 2000). The 
``combined ROCA rating'' encompasses a foreign bank's U.S. branches, 
agencies, and commercial lending companies, but not its U.S. 
nonbanking subsidiaries. The combined ROCA rating will be factored 
into the foreign banking organization's overall Combined U.S. 
Operations Rating, which will continue to be a single composite 
rating that reflects the U.S. supervisors' collective assessment of 
all operations (i.e., banking and nonbanking) of the foreign banking 
organization in the United States.
    \20\ Each U.S. depository institution subsidiary of a foreign 
bank would continue to be required to meet the well capitalized and 
well managed standards on an individual basis for the foreign bank 
or company to obtain FHC status in the same manner as required for 
U.S. bank holding companies.
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    Several commenters also criticized the interim rule's requirement 
that the foreign bank's home country supervisor consider the overall 
operations of the foreign bank to be satisfactory or better. Commenters 
claimed that this requirement was vague, provided very little guidance 
to the home country supervisors, and would result in unwarranted delays 
and expense in FHC processing. Some commenters also claimed that this 
requirement was an extra-territorial expansion of the Board's 
jurisdiction and the Board, as a host country supervisor, should not 
require a foreign bank to satisfy a U.S. management standard in its 
operations outside the United States. Some commenters also incorrectly 
interpreted this provision as requiring a foreign bank's home country 
supervisors to evaluate the bank's global management according to the 
U.S. regulatory definition of ``satisfactory.''
    The final rule amends this requirement to clarify that a foreign 
bank's home country supervisor must confirm that it consents to the 
proposed expansion of the foreign bank's U.S. operations. This 
formulation is based on guidelines issued by the Basel Committee. The 
Basel Committee has recognized the need for host country supervisors to 
seek the views of the home country supervisor prior to issuing a 
license to a foreign bank for new business in the host country. In its 
Core Principles for Effective Banking Supervision, the Basel Committee 
indicates that a key component of consolidated supervision is 
establishing contact and information exchange with the various other 
supervisors involved and that this contact ``should commence at the 
authorisation stage when the host supervisor should seek the approval 
from the home supervisor before issuing a license.\21\ Moreover, the 
Basel Committee has indicated that a host country supervisor should 
consent to expansion of a foreign banking organization's activities 
within its jurisdiction only after the home country supervisor has 
given its consent to the expansion.\22\ The final rule's requirement 
that the home country supervisor consent to the foreign bank's 
expansion of its U.S. operations under the GLB Act is well within the 
parameters of these guidelines. In accordance with Basel Committee 
guidelines, the home country supervisor should consider the foreign 
banking organization's consolidated capital and management before 
providing its consent to the expansion. In those situations in which 
there is no formal consent process in the home country, the Board will 
consult with the home country supervisor to assure itself that the 
supervisor considers the capital and management of the bank to satisfy 
its home country standards and that the supervisor has no objections to 
the expansion.
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    \21\ The Core Principles also indicate that the home country 
supervisor's responsibility extends to a bank's foreign subsidiaries 
as well as its branches, and supervisors should determine that a 
bank has the expertise needed to conduct its foreign activities, 
which may be fundamentally different from the bank's domestic 
operations, in a safe and sound manner. Basel Committee on Banking 
Supervision, ``Core Principles for Effective Banking Supervision'' 
pp. 40-41 (1997).
    \22\ Basel Committee on Banking Supervision, ``Minimum Standards 
for the Supervision of International Banking Groups and Their Cross-
Border Establishments'' Sec. II.2 (1992). In reviewing proposals for 
inward and outward expansion, the Basel Committee states that host 
country and home country authorities should, at a minimum, give 
weight to (a) the strength of the bank's and banking group's capital 
and (b) the appropriateness of the bank's and banking group's 
organization and operating procedures for the effective management 
of risks on a local and consolidated basis respectively.

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[[Page 410]]

Comparability of Capital and Management

    In order for a foreign bank to qualify as a FHC under the interim 
rule, the Board must make affirmative findings that the foreign bank's 
capital and management are comparable to that required for a U.S. bank 
owned by a FHC. The interim rule lists discretionary factors that the 
Board may take into account in making this determination, such as the 
composition of capital, accounting standards, long-term debt ratings, 
reliance on government support to meet capital requirements, and the 
extent to which the foreign bank is subject to comprehensive 
consolidated supervision by its home country supervisor.
    Some commenters objected to the inclusion of a Board comparability 
determination in the definitions of well capitalized and well managed, 
claiming that it is too vague and provides too much discretion to the 
Board. They also argue that the range of factors that can be taken into 
account in the comparability analysis and the required consultation 
with home country supervisors will significantly increase the 
likelihood that the 31-day processing period will be extended in the 
case of foreign banks. Some commenters argue that the final rule should 
not retain the Board's right to reject foreign banks' FHC elections if 
they fulfill the required capital ratios as calculated under the home 
country standard that is consistent with the Basel Capital Accord.
    The final rule essentially retains the provisions contained in the 
interim rule that relate to the factors the Board may consider in 
making a comparability finding. The Board does not believe that these 
factors are either vague or overbroad. Rather, they are factors that 
allow a decision on comparability of capital and management to be made. 
All U.S. banks are subject to essentially the same regulatory 
framework, which includes frequent examinations and extensive quarterly 
reporting. Foreign banks, on the other hand, operate under supervisory 
and accounting systems that can differ significantly from U.S. systems 
and do not (and should not) report to U.S. authorities as extensively 
as U.S. banks. Under these circumstances, it is reasonable for the 
Board to retain the ability to evaluate these differences in deciding 
whether a foreign bank's capital and management meet the requirements 
of the FHC regulations.
    One commenter specifically questioned whether the Board should take 
into account a foreign bank's reliance on government support to meet 
capital requirements in determining whether the foreign bank is well 
capitalized. The commenter argued that the Basel Capital Accord does 
not consider this factor in determining capital adequacy. The final 
rule retains this factor in the list of factors for determinations of 
capital and management comparability. In order to assure equality of 
competitive opportunity with U.S. banking organizations, the Board must 
be able to consider the impact of any assistance a foreign banking 
organizations receives from its home country for purposes of meeting 
capital requirements.

Comprehensive Consolidated Supervision

    The interim rule included the ``extent to which'' a foreign bank is 
subject to comprehensive supervision on a consolidated basis by its 
home country supervisor in the list of factors the Board may take into 
account in determining whether a foreign bank is well capitalized and 
well managed. The interim rule also stated that a foreign bank 
chartered in a country where no other bank from that country has been 
reviewed by the Board for comprehensive consolidated supervision under 
the BHC Act or the International Banking Act is encouraged to use the 
pre-clearance process.
    In the preamble to the January 19, 2000, interim rule, the Board 
stated that it expects that most foreign banks that elect to be treated 
as financial holding companies will be subject to comprehensive 
consolidated supervision, and that an election by a foreign bank that 
is not subject to comprehensive consolidated supervision will receive a 
more detailed review. The preamble to the Board's March 15, 2000, 
amendments to the interim rule specifically requested public comment on 
whether a foreign bank should be required to be subject to 
comprehensive consolidated supervision in order to obtain FHC status.
    Two commenters addressed whether the final rule should include a 
comprehensive consolidated supervision requirement for foreign banks to 
obtain FHC status. One commenter argued that a foreign bank's 
eligibility to be treated as a FHC should not be conditioned on a 
comprehensive consolidated supervision standard. The commenter 
recognized, however, that it may be appropriate for the Board, when 
warranted by the circumstances of a particular case, to take into 
account the extent to which a foreign bank with a U.S. branch or agency 
is subject to comprehensive consolidated supervision as a factor that 
is relevant to its determination of whether the bank is well 
capitalized and well managed for purposes of the GLB Act. Another 
commenter encouraged the Board to require foreign banks to meet a 
comprehensive consolidated supervision standard, or follow the pre-
clearance process, as a means of insuring that the foreign banks meet 
standards comparable to those required of U.S. banks.
    The Board believes that, as a general rule, the top tier foreign 
bank in a foreign banking group should be subject to comprehensive 
consolidated supervision by its home country supervisor in order for 
the foreign banking group to obtain FHC status.\23\ The fact that a 
foreign bank is subject to comprehensive consolidated supervision 
provides a host country supervisor, such as the Board for foreign FHCs, 
with a higher level of confidence that the capital and management 
information being submitted by the applicant is accurate and 
reliable.\24\ Accordingly, the final rule adopts the position that, as 
a general matter, a foreign bank may not be considered to be well 
capitalized and well managed if the foreign bank is not subject to 
comprehensive consolidated supervision. The pre-clearance provision has 
been amended to clarify that a foreign bank that has not been 
determined to be subject to comprehensive consolidated supervision by 
the Board, and is chartered in a country where no other bank from that 
country has been determined by the Board to be subject to comprehensive 
consolidated supervision, is required (not merely encouraged) to use 
the pre-clearance process, even if it otherwise meets the objective 
screening criteria. The Board may review the home country supervision 
of a foreign bank through the pre-clearance process and make a

[[Page 411]]

comprehensive consolidated supervision determination in that context. 
If the Board makes an affirmative comprehensive consolidated 
supervision determination through the FHC pre-clearance process, the 
determination will be relied upon for the foreign bank to establish 
additional branches and agencies under the Foreign Bank Supervision 
Enhancement Act.
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    \23\ Assuming that a top tier foreign bank in a foreign banking 
group is determined to be subject to comprehensive consolidated 
supervision, subsidiary foreign banks of the group should be 
incorporated into the supervisory framework of the home country 
supervisor of the top tier foreign bank and, thus, should be subject 
to comprehensive consolidated supervision even if the subsidiary 
foreign bank is not subject to comprehensive consolidated 
supervision by its own home country supervisor.
    \24\ The Basel Committee has stated that, as part of 
comprehensive consolidated supervision, a bank's home country 
supervisor should confirm to its own satisfaction the reliability of 
the consolidated financial and prudential information supplied by 
the bank on its global operations. Basel Committee on Banking 
Supervision, ``Minimum Standards for the Supervision of 
International Banking Groups and Their Cross-Border Establishments'' 
Sec. II(1) (1992).
---------------------------------------------------------------------------

    The Board also believes, however, that there may be limited 
situations in which an exceptionally strong bank from a country that 
has not yet fully implemented comprehensive consolidated supervision 
should be able to be considered for FHC status. Accordingly, the 
regulation has been revised to allow a foreign bank that cannot be 
determined to be subject fully to comprehensive consolidated 
supervision to qualify for FHC status if certain factors are present. 
Such factors are: (i) That the home country supervisor has made 
significant progress in adopting and implementing arrangements for the 
consolidated supervision of its banks; and (ii) the foreign bank itself 
demonstrates significant financial strength, such as through high 
levels of capital or exceptional asset quality. A foreign bank that is 
not subject to comprehensive consolidated supervision may use the pre-
clearance process to explain to the Board why it should be granted FHC 
status even in the absence of the supporting comprehensive consolidated 
supervision framework. The Board, however, anticipates granting FHC 
status to foreign banks that are not subject to comprehensive 
consolidated supervision only in rare instances.

Section 225.91--How May a Foreign Bank Elect To Be Treated as a 
Financial Holding Company?

    Section 225.91 sets out the procedures to be followed by a foreign 
bank that operates a U.S. branch, or a company that owns or controls 
such a foreign bank in order to elect to be treated as a FHC. In order 
to be treated as a FHC, a foreign bank must file a written declaration 
with the appropriate Federal Reserve Bank. Generally, the declaration 
must: (i) State that the foreign bank or company elects to be treated 
as a FHC; (ii) provide the appropriate capital information on the 
foreign bank, any foreign bank that maintains a U.S. branch and is 
controlled by the foreign bank or company certificant, and any U.S. 
depository institution subsidiary of the foreign bank or company 
certificant; (iii) certify that the foreign bank, any foreign bank that 
maintains a U.S. branch and is controlled by the foreign bank or 
company certificant, and all U.S. depository institutions controlled by 
the foreign bank or company certificant are well capitalized and well 
managed as of the date the foreign bank or company files its election. 
This provision also provides for a pre-clearance process whereby a 
foreign bank or company may request a review of its qualifications to 
be treated as a FHC for the purposes of making the required 
certifications in the declaration prior to submitting its declaration.
    The interim rule required that all foreign banks with direct U.S. 
operations that are controlled by a foreign bank or company seeking FHC 
status be well capitalized and well managed in order for the foreign 
banking group to be treated as a FHC. Commenters raised two distinct 
issues regarding this requirement. As an initial issue, some commenters 
suggested that a foreign bank with a U.S. branch that is controlled by 
another foreign bank should not be required to meet the well 
capitalized and well managed standards if the controlling foreign bank 
does not intend for the subsidiary foreign bank to exercise any of the 
expanded powers authorized by the GLB Act. One commenter stated that, 
if a foreign bank FHC has a subsidiary foreign bank, but the subsidiary 
foreign bank does not intend to engage in the expanded FHC activities 
in the United States, the GLB Act does not require that the subsidiary 
foreign bank be made subject to the capital and management standards. 
The commenter suggested that the Board should assess the capital and 
management of the controlling foreign bank both separately and on a 
consolidated basis after taking account of the subsidiary foreign bank, 
but should not apply the well capitalized and well managed standards 
separately to such subsidiary foreign bank.
    The final rule retains the requirement that each foreign bank that 
maintains a U.S. branch and is controlled by a foreign bank or company 
electing to be treated as a FHC must meet capital and management 
standards comparable to those required of U.S. banks owned by FHCs. 
Under the GLB Act, all of the depository institution subsidiaries of a 
bank holding company must be well capitalized and well managed in order 
for the bank holding company to qualify for FHC status, regardless of 
where in the corporate structure the expanded activities are to be 
located. Permitting a foreign bank to evade a similar requirement 
merely by placing the expanded activities in a particular location in 
its organization could provide foreign banks with a competitive 
advantage over U.S. bank holding companies. If a foreign bank competes 
directly against U.S. banks in the U.S. banking market, the Board 
believes it should meet capital and management standards comparable to 
the standards applied to U.S. banks.
    As a second issue, some commenters claim that this requirement 
could greatly impact the ability of a foreign bank electing FHC status 
to align itself with other non-U.S. banks through strategic minority 
investments of greater than 25 percent of voting shares. Commenters 
argue that the electing foreign bank or company can have statutory 
``control'' over another foreign bank for purposes of U.S. banking law 
when the electing foreign bank does not have majority control over the 
other foreign bank. If the other foreign bank does not meet the well 
capitalized and well managed standards, the electing foreign bank may 
not have the ability to direct the other foreign bank to improve its 
capital and management in order to meet the FHC standards or, 
alternatively, to close or divest its U.S. offices. In such instance, 
the electing foreign bank would be required to either divest its 
investment in the other foreign bank or forgo the opportunity to engage 
in the expanded activities in the United States.
    The final rule retains as a general rule the requirement that each 
foreign bank within a banking group that maintains U.S. offices must 
meet the comparable capital and management standards. There may be 
limited situations involving strategic minority investments between 
foreign banks where some relief from this requirement may be justified. 
A foreign bank or company in this type of situation may utilize the 
pre-clearance process to request a determination that it should not be 
held accountable for another foreign bank with U.S. offices that does 
not meet the capital and management standards. The Board anticipates, 
however, that any relief from this requirement would be granted only in 
limited circumstances where the foreign bank can clearly demonstrate 
that it has no ability to control the other foreign bank.

Section 225.92--How Does an Election by a Foreign Bank Become 
Effective?

    Section 225.92 describes the procedures and timing under which a 
foreign bank's FHC election will be effective and the situations under 
which the Board will find that the election is ineffective. Generally, 
an election will be effective on the 31st day after the date the 
election was received by the appropriate Federal Reserve Bank, unless 
the Board notifies the foreign bank or company prior to that time that

[[Page 412]]

the Board has found that the election is ineffective or the period is 
extended with the consent of the foreign bank or company. The election 
may become effective prior to the 31st day after the date it was 
received if the foreign bank or company is so notified by the Board or 
the appropriate Federal Reserve Bank.
    An election may be found by the Board to be ineffective if the 
Board finds that the foreign bank electing FHC status, any other 
foreign bank with U.S. offices that is controlled by the foreign bank 
or company electing FHC status, or any U.S. depository institution 
controlled by the electing foreign bank or company does not meet the 
applicable standards for capital or management. In addition, the Board 
may find an election ineffective if the Board determines that it does 
not have sufficient information to assess whether the foreign bank or 
company making the election meets the requirements of this subpart.
    Some commenters criticized the processing provisions of the interim 
rule. As it was initially issued on January 19, 2000, Sec. 225.92 
stated that an election filed by a foreign bank or company would not be 
effective until the Board made an affirmative finding that the foreign 
bank was well capitalized and well managed. In its March 15, 2000, 
amendments to the interim rule, based on the Board's experience in 
reviewing and acting on foreign bank FHC elections during that period 
and to accommodate concerns expressed by commenters regarding the 
difference in process applicable to foreign banks, the Board revised 
the processing provision to make an election filed by a foreign bank 
that met the interim rule's quantitative capital requirements and the 
well managed standards effective on the 31st day after filing. The 
interim rule was amended at that time, however, to allow the Board to 
find an election ineffective if the Board did not have sufficient 
information to assess whether the foreign bank meets the capital and 
management standards.
    One commenter argued that the separate election processing track 
for foreign banks may be in conflict with the Board's longstanding 
principle of providing national treatment for foreign banks. The 
commenter also claimed that the likelihood that the 31-day processing 
period for foreign banks will be extended is significantly increased 
because of the range of factors that the Board may, in its discretion, 
evaluate with respect to foreign banks and that this additional 
discretion also may cause the Board to determine that it does not have 
sufficient information to declare the FHC election effective. Another 
commenter argued that if a foreign bank certified that it met the 
applicable capital and management standards in its FHC election, it 
must be permitted to engage in expanded financial activities on the 
31st day after the date the election is received.
    The final rule retains the processing provision in the amended 
interim rule. The Board has found that this provision does not lead to 
delays in dealing with certifications filed by foreign banks, all of 
which have been processed within 31 days. Similarly, a number of pre-
clearance requests have been processed in the same time frame. The 
Board notes that it has ready access to all relevant information for 
U.S. banks and, thus, is assured of being able to make the appropriate 
judgments within the statutory timeframes. The Board does not similarly 
have ready access to all relevant information for foreign banks. The 
GLB Act requires the Board to apply comparable capital and management 
standards to foreign banks. There may be situations where foreign banks 
must submit additional information in order for the Board to be able to 
make a judgment on the qualifications of the foreign bank under the 
regulation. The limited discretion provided by the processing 
provisions of the final rule should ensure that the Board is not forced 
to deny a FHC election of a foreign bank because the foreign bank has 
not supplied additional information requested by the Board on a timely 
basis.\25\
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    \25\ The Basel Committee has recognized the need for a banking 
authority to have the right to reject a license application ``if it 
cannot be satisfied that the criteria set are met.'' Basel Committee 
on Banking Supervision, ``Core Principles for Effective Banking 
Supervision'' p.16 (1997).
---------------------------------------------------------------------------

Section 225.93--What Are the Consequences of a Foreign Bank Failing To 
Continue To Meet Applicable Capital and Management Requirements?

    Section 225.93 establishes the procedures to be followed when the 
Board finds that a foreign bank FHC no longer complies with the FHC 
standards. This section parallels Sec. 225.83, with appropriate 
modifications. It sets out the procedures to be followed in the event 
that a foreign bank that is treated as a FHC ceases to meet the 
applicable capital and management requirements. It provides for the 
execution of an agreement designed to bring the foreign bank or company 
back into compliance with the requirements of the regulation and 
permits the Board to impose certain limitations on the U.S. activities 
of such a foreign bank or company during any period of noncompliance. 
Finally, the section sets forth the consequences of a failure to 
correct the noncompliance within a period of 180 days. Such 
consequences could include termination of the foreign bank's U.S. 
branches and agencies and divestiture of its commercial lending company 
subsidiaries or ceasing to engage in the expanded activities permitted 
for financial holding companies.
    The interim rule stated that, in taking any action under this 
provision, the Board would consult with the relevant Federal and state 
regulatory authorities. Some commenters noted that the section did not 
also expressly state that the Board would consult with the foreign 
bank's home country supervisor. Several commenters argued that 
consultations between the Board and the foreign banks' home country 
supervisors must take place in the case of non-compliance of a foreign 
bank with the FHC requirements. One commenter also stated that the 
interim rule's section provides for the active intervention of the 
Board in the management of the parent company of a foreign FHC which 
ceases to meet applicable capital and management standards and this 
authority harbors potentially serious extra-territorial implications.
    As the U.S. supervisor responsible for the operations of foreign 
banks in the United States and of FHCs generally, the Board has 
supervisory responsibility to ensure that foreign banks and companies 
treated as FHCs engage in the expanded activities permitted by the GLB 
Act in the United States in a safe and sound manner.\26\ This section 
relates only to the U.S. activities of a foreign bank or company FHC 
and does not involve extra-territorial extension of the Board's 
authority as host country supervisor. In accordance with Basel 
Committee guidelines, the Board generally informs a foreign bank's home 
country supervisor regarding any area of the foreign bank's U.S. 
business that raises a significant level of supervisory concern for the 
Board, including whether the foreign bank or its affiliates are in 
compliance with U.S. law and

[[Page 413]]

regulation.\27\ For the avoidance of doubt, the final rule expressly 
states that the Board will consult with the relevant home country 
supervisor of a foreign bank in taking any action under this section.
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    \26\ Under the IBA, the Board has the authority to take 
supervisory action against the U.S. offices of foreign bank if the 
Board determines that the foreign bank, or any affiliate of the 
foreign bank, has committed a violation of law or engaged in any 
unsafe or unsound banking practice in the United States. 12 U.S.C. 
3105(e). In addition, the IBA expressly makes foreign banks with 
U.S. branches subject to the provisions of the BHC Act in the same 
manner and to the same extent that bank holding companies are 
subject to such provisions. 12 U.S.C. 3106(a).
    \27\ Working group of the Basel Committee on Banking Supervision 
and the Offshore Group of Banking Supervisors, ``The Supervision of 
Cross-Border Banking'' section III(b) para. 14 (Oct. 1996).
---------------------------------------------------------------------------

    The final rule also adopts provisions that generally parallel the 
amendments made to Sec. 225.83 with respect to triggering events for 
notifying the Board that the foreign bank has ceased to be well 
capitalized or well managed under the regulation.

Regulatory Flexibility Act

    The Board has reviewed the final rule in accordance with the 
Regulatory Flexibility Act. This final rule implements provisions of 
Title I of the Gramm-Leach-Bliley Act that allow entities that qualify 
as FHCs to engage in a broad range of securities, insurance, and other 
financial activities by providing the Board with a simple, post-
transaction notice. The rule should enable bank holding companies and 
foreign banks that qualify as financial holding companies to engage in 
an expanded range of activities by, in most cases, submitting a simple 
form to the appropriate Federal Reserve Bank describing the relevant 
activity.
    The FHC election procedures described in this rule are voluntary, 
and the criteria set forth in the rule for an effective election filing 
are those established by the GLB Act. The rule implements this part of 
the GLB Act by requiring a simple, one-time procedure involving minimum 
paperwork to fulfill the statutory election requirement. In addition, 
the new powers described in the GLB Act and implemented by this rule 
should enhance the overall efficiency of bank holding companies and the 
other financial companies that seek to affiliate with them. The rule 
applies to all companies that attempt to qualify as financial holding 
companies, regardless of their size, and allows small organizations to 
take advantage of the broad new powers conferred by the GLB Act with 
minimal additional burden.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the rule under 
the authority delegated to the Board by the Office of Management and 
Budget. The Federal Reserve may not conduct or sponsor, and an 
organization is not required to respond to, this information collection 
unless it displays a currently valid OMB control number. The OMB 
control number is 7100-0292.
    The collection of information requirements in this final rulemaking 
are found in 12 CFR 225.82 (a) and (b), 225.83 (b) and (c), 225.91 (a), 
225.93 (b) and (c); and 225.87, 225.88, and 225.89. This information is 
required to evidence compliance with the requirements of Title I of the 
Gramm-Leach-Bliley Act (Pub. L. 106-103, 113 Stat. 1338 (1999)) which 
amends section 4 of the Bank Holding Company Act (12 U.S.C. 1843). The 
respondents are current and future bank holding companies and foreign 
banking organizations; and financial holding companies, respectively.
    The notice cited in 12 CFR 225.82(a) provides that a bank holding 
company may elect to become a financial holding company by filing a 
simple written declaration with the Federal Reserve. The declaration 
must include information identifying the company's subsidiary 
depository institutions and their capital ratios, and a certification 
that each depository institution is well capitalized and well managed 
(for specific details, see 12 CFR 225.82 (b)). There will be no 
reporting form for this information collection. The agency form number 
for this declaration will be the FR 4010. The Board estimates that 
approximately 500 bank holding companies will file this declaration 
during the first year and that it will take approximately 15 minutes to 
complete this information. This would result in estimated annual burden 
of 125 hours. Based on a rate of $20 per hour, the annual cost to the 
public for this information collection is estimated to be $2,500.
    The notice cited in 12 CFR 225.91(a) provides that a foreign bank 
that operates a branch or agency or owns or controls a commercial 
lending company in the United States, or a company that owns or 
controls such a foreign bank, may elect to be treated as a financial 
holding company by filing a written declaration with the appropriate 
Reserve Bank. The declaration must state that they intend to be treated 
as an FHC; include their risk-based capital ratios, amount of Tier 1 
capital, and total assets; certify that they are well capitalized and 
well managed; certify that all U.S. depository institution subsidiaries 
of the foreign bank or company are well capitalized and well managed; 
and provide the capital ratios for each U.S. depository institution 
subsidiaries of the foreign bank or company (for specific details, see 
12 CFR 225.91(b)). There will be no reporting form for this information 
collection. The agency form number for this declaration will be the FR 
4010. The Board estimates that approximately 15 foreign banks will file 
this declaration during the first year and that it will take 
approximately 30 minutes to complete this information. This would 
result in estimated annual burden of 7.5 hours. Based on a rate of $20 
per hour, the annual cost to the public for this information collection 
is estimated to be $150.
    The notice cited in 12 CFR 225.83(b) provides that a financial 
holding company with subsidiary depository institutions that cease to 
be well managed or capitalized, must notify the Federal Reserve and 
execute an agreement acceptable to the Federal Reserve within 45 days. 
Similarly, the notice cited in 12 CFR 225.93(b) provides that if a 
foreign bank, any foreign bank that maintains a U.S. branch, agency, or 
commercial lending company and is controlled by the foreign bank or 
company, or any U.S. depository institution subsidiary of the foreign 
bank or company that cease to be well capitalized or well managed, the 
foreign bank or parent company must notify the Federal Reserve and 
execute an agreement acceptable to the Federal Reserve within 45 days. 
If the financial holding company or foreign bank would like to request 
additional time they must provide an explanation of why an extension is 
necessary. For specific details about what should be included in this 
agreement, see 12 CFR 225.83(c)(3) and 225.93(c)(3), respectively. 
There will be no reporting form for this information collection. The 
agency form number will be the FR 4012. The Federal Reserve estimates 
that due to the new incentives, only 10 subsidiary depository 
institutions of financial holding companies and only 1 subsidiary of a 
foreign bank will fall into this category per year and that it would 
take approximately 10 hours to complete this information. This would 
result in estimated annual burden of 110 hours. Based on a rate of $20 
per hour, the annual cost to the public for this information collection 
would be $2,200.
    The post-transaction notice cited in 12 CFR 225.87(a) provides that 
a financial holding company that commences an activity or acquires 
shares of a company engaged in an activity listed in Sec. 225.86, must 
notify the appropriate Federal Reserve Bank in writing within 30 
calendar days. See 12 CFR 225.87(a) for specific details on the content 
of the notice. There are reporting forms for this information 
collection. For domestic FHCs, this form is the FR Y-6A (OMB No. 7100-
0124) and for foreign FHCs, the form is the FR Y-7A (OMB No. 7100-
0125). 65 FR 20821 (April 18, 2000). These forms

[[Page 414]]

shortly will be replaced by the FR Y-10 and FR Y-10F (OMB No. 7100-
0297), respectively.
    The Federal Reserve estimates that financial holding companies will 
make 450 filings of this notice annually and that it would take 
approximately 1 hour to complete this notification. This would result 
in an estimated annual burden of 450 hours. Based on a rate of $20 per 
hour, the annual cost to the public for this information collection 
would be $9,000.
    Financial holding companies requesting the Board's determination 
that an activity is financial in nature or incidental to a financial 
activity must provide to the Board the information described in 12 CFR 
225.88(b). Financial holding companies may request an advisory opinion 
from the Board about whether a specific proposed activity falls within 
the scope of an activity listed in 12 CFR 225.86 as financial in nature 
or incidental to a financial activity by submitting the information 
described in 12 CFR 225.88(e). Financial holding companies that seek 
prior approval to engage in an activity that the financial holding 
company believes is complementary to a financial activity must provide 
to the Board the information identified in 12 CFR 225.89(a). The 
Federal Reserve estimates that only 25 financial holding companies 
would file the information requested in these sections annually and 
that it would take approximately 1 hour to complete each information 
collection. This would result in estimated annual burden of 25 hours. 
Based on a rate of $20 per hour, the annual cost to the public for this 
information collection would be $500.
    A bank holding company 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)).
    The Federal Reserve has a continuing interest in the public's 
opinions of our collections of information. At any time, comments 
regarding the burden estimate, or any other aspect of this collection 
of information, including suggestions for reducing the burden, may be 
sent to: Secretary, Board of Governors of the Federal Reserve System, 
20th and C Streets, NW., Washington, DC 20551; and to the Office of 
Management and Budget, Paperwork Reduction Project (7100-0292), 
Washington, DC 20503.

List of Subjects in 12 CFR Part 225

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

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

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

    1. The authority citation for part 225 is amended to read as 
follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1843(k), 1844(b), 1972(l), 2903, 2905, 3106, 3108, 3310, 
3331-3351, 3907, and 3909.

    2. In subpart A, Sec. 225.1, a new paragraph (c)(9) is added to 
read as follows:


Sec. 225.1  Authority, purpose, and scope.

* * * * *
    (c) * * *
    (9) Subpart I establishes the procedure by which a bank holding 
company may elect to become a financial holding company, enumerates the 
consequences if a financial holding company ceases to meet a 
requirement applicable to a financial holding company, lists the 
activities in which a financial holding company may engage, establishes 
the procedure by which a person may request the Board to authorize 
additional activities as financial in nature or incidental thereto, and 
establishes the procedure by which a financial holding company may seek 
approval to engage in an activity that is complementary to a financial 
activity.
* * * * *

    3. In subpart A, Sec. 225.2 is amended by revising paragraph (r)(2) 
and (s) and adding paragraph (t) to read as follows:


Sec. 225.2  Definitions

* * * * *
    (r) * * *
    (2) Insured and uninsured depository institution--(i) Insured 
depository institution. In the case of an insured depository 
institution, ``well capitalized'' means that the institution has and 
maintains at least the capital levels required to be well capitalized 
under the capital adequacy regulations or guidelines applicable to the 
institution that have been adopted by the appropriate Federal banking 
agency for the institution under section 38 of the Federal Deposit 
Insurance Act (12 U.S.C. 1831o).
    (ii) Uninsured depository institution. In the case of a depository 
institution the deposits of which are not insured by the Federal 
Deposit Insurance Corporation, ``well capitalized'' means that the 
institution has and maintains at least the capital levels required for 
an insured depository institution to be well capitalized.
* * * * *
    (s) Well managed--(1) In general. Except as otherwise provided in 
this part, a company or depository institution is well managed if:
    (i) At its most recent inspection or examination or subsequent 
review by the appropriate Federal banking agency for the company or 
institution (or the appropriate state banking agency in an examination 
described in section 10(d) of the Federal Deposit Insurance Act (12 
U.S.C. 1820(d)), the company or institution received:
    (A) At least a satisfactory composite rating; and
    (B) At least a satisfactory rating for management, if such rating 
is given.
    (ii) In the case of a company or depository institution that has 
not received an inspection or examination rating, the Board has 
determined, after a review of the managerial and other resources of the 
company or depository institution and after consulting with the 
appropriate Federal and state banking agencies, as applicable, for the 
company or institution, that the company or institution is well 
managed.
    (2) Merged depository institutions--(i) Merger involving well 
managed institutions. A depository institution that results from the 
merger of two or more depository institutions that are well managed 
shall be considered to be well managed unless the Board determines 
otherwise after consulting with the appropriate Federal and state 
banking agencies, as applicable, for each depository institution 
involved in the merger.
    (ii) Merger involving a poorly rated institution. A depository 
institution that results from the merger of a depository institution 
that is well managed with one or more depository institutions that are 
not well managed or have not been examined shall be considered to be 
well managed if the Board determines, after a review of the managerial 
and other resources of the resulting depository institution and after 
consulting with the appropriate Federal and state banking agencies for 
the institutions involved in the merger, as applicable, that the 
resulting institution is well managed.
    (3) Foreign banking organizations. Except as otherwise provided in 
this part, a foreign banking organization is considered well managed if 
the combined operations of the foreign banking organization in the 
United States have received at least a satisfactory composite rating at 
the most recent annual assessment.
    (t) Depository institution. For purposes of this part, the term

[[Page 415]]

``depository institution'' has the same meaning as in section 3(c) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
* * * * *

    4. In subpart B, Sec. 225.14(c)(2)(i) is revised to read as 
follows:


Sec. 225.14  Expedited action for certain bank acquisitions by well-run 
bank holding companies i

* * * * *
    (c) * * *
    (2) Well managed organization--(i) Satisfactory examination 
ratings. At the time of the transaction, the acquiring bank holding 
company, its lead insured depository institution, and insured 
depository institutions that control at least 80 percent of the total 
risk-weighted assets of insured depository institutions controlled by 
the holding company are well managed and have received at least a 
satisfactory rating for compliance at their most recent examination if 
such rating was given;
* * * * *

    5. In subpart C, Sec. 225.23(c)(2)(i) is revised to read as 
follows:


Sec. 225.23  Expedited action for certain nonbanking proposals by well-
run bank holding companies

* * * * *
    (c) * * *
    (2) Well managed organization--(i) Satisfactory examination 
ratings. At the time of the transaction, the acquiring bank holding 
company, its lead insured depository institution, and insured 
depository institutions that control at least 80 percent of the total 
risk-weighted assets of insured depository institutions controlled by 
the holding company are well managed and have received at least a 
satisfactory rating for compliance at their most recent examination if 
such rating was given;
* * * * *

    6. Subpart I is revised to read as follows:
Subpart I--Financial Holding Companies
Sec.
225.81  What is a financial holding company?
225.82  How does a bank holding company elect to become a financial 
holding company?
225.83  What are the consequences of failing to continue to meet 
applicable capital and management requirements?
225.84  What are the consequences of failing to maintain a 
satisfactory or better rating under the Community Reinvestment Act 
at all insured depository institution subsidiaries?
225.85  Is notice to or approval from the Board required prior to 
engaging in a financial activity?
225.86  What activities are permissible for any financial holding 
company?
225.87  Is notice to the Board required after engaging in a 
financial activity?
225.88  How to request the Board to determine that an activity is 
financial in nature or incidental to a financial activity?
225.89  How to request approval to engage in an activity that is 
complementary to a financial activity?
225.90  What are the requirements for a foreign bank to be treated 
as a financial holding company?
225.91  How may a foreign bank elect to be treated as a financial 
holding company?
225.92  How does an election by a foreign bank become effective?
225.93  What are the consequences of a foreign bank failing to 
continue to meet applicable capital and management requirements?
225.94  What are the consequences of an insured branch or depository 
institution failing to maintain a satisfactory or better rating 
under the Community Reinvestment Act?

Subpart I--Financial Holding Companies


Sec. 225.81  What is a financial holding company?

    (a) Definition. A financial holding company is a bank holding 
company that meets the requirements of this section.
    (b) Requirements to be a financial holding company. In order to be 
a financial holding company:
    (1) All depository institutions controlled by the bank holding 
company must be and remain well capitalized;
    (2) All depository institutions controlled by the bank holding 
company must be and remain well managed; and
    (3) The bank holding company must have made an effective election 
to become a financial holding company.
    (c) Requirements for foreign banks that are or are owned by bank 
holding companies--(1) Foreign banks with U.S. branches or agencies 
that also own U.S. banks. A foreign bank that is a bank holding company 
and that operates a branch or agency or owns or controls a commercial 
lending company in the United States must comply with the requirements 
of this section, Sec. 225.82, and Secs. 225.90 through 225.92 in order 
to be a financial holding company. After it becomes a financial holding 
company, a foreign bank described in this paragraph will be subject to 
the provisions of Secs. 225.83, 225.84, 225.93, and 225.94.
    (2) Bank holding companies that own foreign banks with U.S. 
branches or agencies. A bank holding company that owns a foreign bank 
that operates a branch or agency or owns or controls a commercial 
lending company in the United States must comply with the requirements 
of this section, Sec. 225.82, and Secs. 225.90 through 225.92 in order 
to be a financial holding company. After it becomes a financial holding 
company, a bank holding company described in this paragraph will be 
subject to the provisions of Secs. 225.83, 225.84, 225.93, and 225.94.


Sec. 225.82  How does a bank holding company elect to become a 
financial holding company?

    (a) Filing requirement. A bank holding company may elect to become 
a financial holding company by filing a written declaration with the 
appropriate Reserve Bank. A declaration by a bank holding company is 
considered to be filed on the date that all information required by 
paragraph (b) of this section is received by the appropriate Reserve 
Bank.
    (b) Contents of declaration. To be deemed complete, a declaration 
must:
    (1) State that the bank holding company elects to be a financial 
holding company;
    (2) Provide the name and head office address of the bank holding 
company and of each depository institution controlled by the bank 
holding company;
    (3) Certify that each depository institution controlled by the bank 
holding company is well capitalized as of the date the bank holding 
company submits its declaration;
    (4) Provide the capital ratios as of the close of the previous 
quarter for all relevant capital measures, as defined in section 38 of 
the Federal Deposit Insurance Act (12 U.S.C. 1831o), for each 
depository institution controlled by the company on the date the 
company submits its declaration; and
    (5) Certify that each depository institution controlled by the 
company is well managed as of the date the company submits its 
declaration.
    (c) Effectiveness of election. An election by a bank holding 
company to become a financial holding company shall not be effective 
if, during the period provided in paragraph (e) of this section, the 
Board finds that, as of the date the declaration was filed with the 
appropriate Reserve Bank:
    (1) Any insured depository institution controlled by the bank 
holding company (except an institution excluded under paragraph (d) of 
this section) has not achieved at least a rating of ``satisfactory 
record of meeting community credit needs'' under the Community 
Reinvestment Act at the institution's most recent examination; or
    (2) Any depository institution controlled by the bank holding 
company

[[Page 416]]

is not both well capitalized and well managed.
    (d) Consideration of the CRA performance of a recently acquired 
insured depository institution. Except as provided in paragraph (f) of 
this section, an insured depository institution will be excluded for 
purposes of the review of the Community Reinvestment Act rating 
provisions of paragraph (c)(1) of this section if:
    (1) The bank holding company acquired the insured depository 
institution during the 12-month period preceding the filing of an 
election under paragraph (a) of this section;
    (2) The bank holding company has submitted an affirmative plan to 
the appropriate Federal banking agency for the institution to take 
actions necessary for the institution to achieve at least a rating of 
``satisfactory record of meeting community credit needs'' under the 
Community Reinvestment Act at the next examination of the institution; 
and
    (3) The appropriate Federal banking agency for the institution has 
accepted the plan described in paragraph (d)(2) of this section.
    (e) Effective date of election--(1) In general. An election filed 
by a bank holding company under paragraph (a) of this section is 
effective on the 31st calendar day after the date that a complete 
declaration was filed with the appropriate Reserve Bank, unless the 
Board notifies the bank holding company prior to that time that the 
election is ineffective.
    (2) Earlier notification that an election is effective. The Board 
or the appropriate Reserve Bank may notify a bank holding company that 
its election to become a financial holding company is effective prior 
to the 31st day after the date that a complete declaration was filed 
with the appropriate Reserve Bank. Such a notification must be in 
writing.
    (f) Requests to become a financial holding company submitted as 
part of an application to become a bank holding company--(1) In 
general. A company that is not a bank holding company and has applied 
for the Board's approval to become a bank holding company under section 
3(a)(1) of the BHC Act (12 U.S.C. 1842(a)(1)) may as part of that 
application submit a request to become a financial holding company.
    (2) Contents of request. A request to become a financial holding 
company submitted as part of an application to become a bank holding 
company must:
    (i) State that the company seeks to become a financial holding 
company on consummation of its proposal to become a bank holding 
company; and
    (ii) Certify that each depository institution that would be 
controlled by the company on consummation of its proposal to become a 
bank holding company will be both well capitalized and well managed as 
of the date the company consummates the proposal.
    (3) Request becomes a declaration and an effective election on date 
of consummation of bank holding company proposal. A complete request 
submitted by a company under this paragraph (f) becomes a complete 
declaration by a bank holding company for purposes of section 4(l) of 
the BHC Act (12 U.S.C. 1843(l)) and becomes an effective election for 
purposes of Sec. 225.81(b) on the date that the company lawfully 
consummates its proposal under section 3 of the BHC Act (12 U.S.C. 
1842), unless the Board notifies the company at any time prior to 
consummation of the proposal and that:
    (i) Any depository institution that would be controlled by the 
company on consummation of the proposal will not be both well 
capitalized and well managed on the date of consummation; or
    (ii) Any insured depository institution that would be controlled by 
the company on consummation of the proposal has not achieved at least a 
rating of ``satisfactory record of meeting community credit needs'' 
under the Community Reinvestment Act at the institution's most recent 
examination.
    (4) Limited exclusion for recently acquired institutions not 
available. Unless the Board determines otherwise, an insured depository 
institution that is controlled or would be controlled by the company as 
part of its proposal to become a bank holding company may not be 
excluded for purposes of evaluating the Community Reinvestment Act 
criterion described in this paragraph or in paragraph (d) of this 
section.
    (g) Board's authority to exercise supervisory authority over a 
financial holding company. An effective election to become a financial 
holding company does not in any way limit the Board's statutory 
authority under the BHC Act, the Federal Deposit Insurance Act, or any 
other relevant Federal statute to take appropriate action, including 
imposing supervisory limitations, restrictions, or prohibitions on the 
activities and acquisitions of a bank holding company that has elected 
to become a financial holding company, or enforcing compliance with 
applicable law.


Sec. 225.83  What are the consequences of failing to continue to meet 
applicable capital and management requirements?

    (a) Notice by the Board. If the Board finds that a financial 
holding company controls any depository institution that is not well 
capitalized or well managed, the Board will notify the company in 
writing that it is not in compliance with the applicable requirement(s) 
for a financial holding company and identify the area(s) of 
noncompliance. The Board may provide this notice at any time before or 
after receiving notice from the financial holding company under 
paragraph (b) of this section.
    (b) Notification by a financial holding company required--(1) 
Notice to Board. A financial holding company must notify the Board in 
writing within 15 calendar days of becoming aware that any depository 
institution controlled by the company has ceased to be well capitalized 
or well managed. This notification must identify the depository 
institution involved and the area(s) of noncompliance.
    (2) Triggering events for notice to the Board--(i) Well 
capitalized. A company becomes aware that a depository institution it 
controls is no longer well capitalized upon the occurrence of any 
material event that would change the category assigned to the 
institution for purposes of section 38 of the Federal Deposit Insurance 
Act (12 U.S.C. 1831o). See 12 CFR 6.3(b)-(c), 208.42(b)-(c), and 
325.102(b)-(c).
    (ii) Well managed. A company becomes aware that a depository 
institution it controls is no longer well managed at the time the 
depository institution receives written notice from the appropriate 
Federal or state banking agency that either its composite rating or its 
rating for management is not at least satisfactory.
    (c) Execution of agreement acceptable to the Board--(1) Agreement 
required; time period. Within 45 days after receiving a notice from the 
Board under paragraph (a) of this section, the company must execute an 
agreement acceptable to the Board to comply with all applicable capital 
and management requirements.
    (2) Extension of time for executing agreement. Upon request by a 
company, the Board may extend the 45-day period under paragraph (c)(1) 
of this section if the Board determines that granting additional time 
is appropriate under the circumstances. A request by a company for 
additional time must include an explanation of why an extension is 
necessary.
    (3) Agreement requirements. An agreement required by paragraph 
(c)(1)

[[Page 417]]

of this section to correct a capital or management deficiency must:
    (i) Explain the specific actions that the company will take to 
correct all areas of noncompliance;
    (ii) Provide a schedule within which each action will be taken;
    (iii) Provide any other information that the Board may require; and
    (iv) Be acceptable to the Board.
    (d) Limitations during period of noncompliance--Until the Board 
determines that a company has corrected the conditions described in a 
notice under paragraph (a) of this section:
    (1) The Board may impose any limitations or conditions on the 
conduct or activities of the company or any of its affiliates as the 
Board finds to be appropriate and consistent with the purposes of the 
BHC Act; and
    (2) The company and its affiliates may not commence any additional 
activity or acquire control or shares of any company under section 4(k) 
of the BHC Act without prior approval from the Board.
    (e) Consequences of failure to correct conditions within 180 days--
(1) Divestiture of depository institutions. If a company does not 
correct the conditions described in a notice under paragraph (a) of 
this section within 180 days of receipt of the notice or such 
additional time as the Board may permit, the Board may order the 
company to divest ownership or control of any depository institution 
owned or controlled by the company. Such divestiture must be done in 
accordance with the terms and conditions established by the Board.
    (2) Alternative method of complying with a divestiture order. A 
company may comply with an order issued under paragraph (e)(1) of this 
section by ceasing to engage (both directly and through any subsidiary 
that is not a depository institution or a subsidiary of a depository 
institution) in any activity that may be conducted only under section 
4(k), (n), or (o) of the BHC Act (12 U.S.C. 1843(k), (n), or (o)). The 
termination of activities must be completed within the time period 
referred to in paragraph (e)(1) of this section and in accordance with 
the terms and conditions acceptable to the Board.
    (f) Consultation with other agencies. In taking any action under 
this section, the Board will consult with the relevant Federal and 
state regulatory authorities.


Sec. 225.84  What are the consequences of failing to maintain a 
satisfactory or better rating under the Community Reinvestment Act at 
all insured depository institution subsidiaries?

    (a) Limitations on activities--(1) In general. Upon receiving a 
notice regarding performance under the Community Reinvestment Act in 
accordance with paragraph (a)(2) of this section, a financial holding 
company may not:
    (i) Commence any additional activity under section 4(k) or 4(n) of 
the BHC Act (12 U.S.C. 1843(k) or (n)); or
    (ii) Directly or indirectly acquire control, including all or 
substantially all of the assets, of a company engaged in any activity 
under section 4(k) or 4(n) of the BHC Act (12 U.S.C. 1843(k) or (n)).
    (2) Notification. A financial holding company receives notice for 
purposes of this paragraph at the time that the appropriate Federal 
banking agency for any insured depository institution controlled by the 
company or the Board provides notice to the institution or company that 
the institution has received a rating of ``needs to improve record of 
meeting community credit needs'' or ``substantial noncompliance in 
meeting community credit needs'' in the institution's most recent 
examination under the Community Reinvestment Act.
    (b) Exceptions for certain activities--(1) Continuation of 
investment activities. The prohibition in paragraph (a) of this section 
does not prevent a financial holding company from continuing to make 
investments in the ordinary course of conducting merchant banking 
activities under section 4(k)(4)(H) of the BHC Act (12 U.S.C. 
1843(k)(4)(H)) or insurance company investment activities under section 
4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I))if:
    (i) The financial holding company lawfully was a financial holding 
company and commenced the merchant banking activity under section 
4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)) or the insurance 
company investment activity under section 4(k)(4)(I) of the BHC Act (12 
U.S.C. 1843(k)(4)(I)) prior to the time that an insured depository 
institution controlled by the financial holding company received a 
rating below ``satisfactory record of meeting community credit needs'' 
under the Community Reinvestment Act; and
    (ii) The Board has not, in the exercise of its supervisory 
authority, advised the financial holding company that these activities 
must be restricted.
    (2) Activities that are closely related to banking. The prohibition 
in paragraph (a) of this section does not prevent a financial holding 
company from commencing any additional activity or acquiring control of 
a company engaged in any activity under section 4(c) of the BHC Act (12 
U.S.C. 1843(c)), if the company complies with the notice, approval, and 
other requirements of that section and section 4(j) of the BHC Act (12 
U.S.C. 1843(j)).
    (c) Duration of prohibitions. The prohibitions described in 
paragraph (a) of this section shall continue in effect until such time 
as each insured depository institution controlled by the financial 
holding company has achieved at least a rating of ``satisfactory record 
of meeting community credit needs'' under the Community Reinvestment 
Act at the most recent examination of the institution.


Sec. 225.85  Is notice to or approval from the Board required prior to 
engaging in a financial activity?

    (a) No prior approval required generally--(1) In general. A 
financial holding company and any subsidiary (other than a depository 
institution or subsidiary of a depository institution) of the financial 
holding company may engage in any activity listed in Sec. 225.86, or 
acquire shares or control of a company engaged exclusively in 
activities listed in Sec. 225.86, without providing prior notice to or 
obtaining prior approval from the Board unless required under paragraph 
(c) of this section.
    (2) Acquisitions by a financial holding company of a company 
engaged in other permissible activities. In addition to the activities 
listed in Sec. 225.86, a company acquired or to be acquired by a 
financial holding company under paragraph (a)(1) of this section may 
engage in activities otherwise permissible for a financial holding 
company under this part in accordance with any applicable notice, 
approval, or other requirement.
    (3) Acquisition by a financial holding company of a company engaged 
in limited nonfinancial activities--(i) Mixed acquisitions generally 
permitted. A financial holding company may under this subpart acquire 
more than 5 percent of the outstanding shares of any class of voting 
securities or control of a company that is not engaged exclusively in 
activities that are financial in nature, incidental to a financial 
activity, or otherwise permissible for the financial holding company 
under section 4(c) of the BHC Act (12 U.S.C. 1843(c)) if:
    (A) The company to be acquired is substantially engaged in 
activities that are financial in nature, incidental to a financial 
activity, or otherwise permissible for the financial holding

[[Page 418]]

company under section 4(c) of the BHC Act (12 U.S.C. 1843(c));
    (B) The financial holding company complies with the notice 
requirements of Sec. 225.87, if applicable; and
    (C) The company conforms, terminates, or divests, within 2 years of 
the date the financial holding company acquires shares or control of 
the company, all activities that are not financial in nature, 
incidental to a financial activity, or otherwise permissible for the 
financial holding company under section 4(c) (12 U.S.C. 1843(c))of the 
BHC Act.
    (ii) Definition of ``substantially engaged.'' Unless the Board 
determines otherwise, a company will be considered to be 
``substantially engaged'' in activities permissible for a financial 
holding company for purposes of paragraph (a)(3)(A) of this section if 
at least 85 percent of the company's consolidated total annual gross 
revenues is derived from and at least 85 percent of the company's 
consolidated total assets is attributable to the conduct of activities 
that are financial in nature, incidental to a financial activity, or 
otherwise permissible for a financial holding company under section 
4(c) of the BHC Act (12 U.S.C. 1843(c)).
    (b) Locations in which a financial holding company may conduct 
financial activities. A financial holding company may conduct any 
activity listed in Sec. 225.86 at any location in the United States or 
at any location outside of the United States subject to the laws of the 
jurisdiction in which the activity is conducted.
    (c) Circumstances under which prior notice to the Board is 
required--(1) Acquisition of more than 5 percent of the shares of a 
savings association. A financial holding company must obtain Board 
approval in accordance with section 4(j) of the BHC Act (12 U.S.C. 
1843(j)) and either Sec. 225.14 or Sec. 225.24, as appropriate, prior 
to acquiring control or more than 5 percent of the outstanding shares 
of any class of voting securities of a savings association or of a 
company that owns, operates, or controls a savings association.
    (2) Supervisory actions. The Board may, if appropriate in the 
exercise of its supervisory or other authority, including under 
Sec. 225.82(g) or Sec. 225.83(d) or other relevant authority, require a 
financial holding company to provide notice to or obtain approval from 
the Board prior to engaging in any activity or acquiring shares or 
control of any company.


Sec. 225.86  What activities are permissible for any financial holding 
company?

    The following activities are financial in nature or incidental to a 
financial activity:
    (a) Activities determined to be closely related to banking. (1) Any 
activity that the Board had determined by regulation prior to November 
12, 1999, to be so closely related to banking as to be a proper 
incident thereto, subject to the terms and conditions contained in this 
part, unless modified by the Board. These activities are listed in 
Sec. 225.28.
    (2) Any activity that the Board had determined by an order that was 
in effect on November 12, 1999, to be so closely related to banking as 
to be a proper incident thereto, subject to the terms and conditions 
contained in this part and those in the authorizing orders. These 
activities are:
    (i) Providing administrative and other services to mutual funds 
(Societe Generale, 84 Federal Reserve Bulletin 680 (1998));
    (ii) Owning shares of a securities exchange (J.P. Morgan & Co, 
Inc., and UBS AG, 86 Federal Reserve Bulletin 61 (2000));
    (iii) Acting as a certification authority for digital signatures 
and authenticating the identity of persons conducting financial and 
nonfinancial transactions (Bayerische Hypo- und Vereinsbank AG, et al., 
86 Federal Reserve Bulletin 56 (2000));
    (iv) Providing employment histories to third parties for use in 
making credit decisions and to depository institutions and their 
affiliates for use in the ordinary course of business (Norwest 
Corporation, 81 Federal Reserve Bulletin 732 (1995));
    (v) Check cashing and wire transmission services (Midland Bank, 
PLC, 76 Federal Reserve Bulletin 860 (1990) (check cashing); Norwest 
Corporation, 81 Federal Reserve Bulletin 1130 (1995) (money 
transmission));
    (vi) In connection with offering banking services, providing notary 
public services, selling postage stamps and postage-paid envelopes, 
providing vehicle registration services, and selling public 
transportation tickets and tokens (Popular, Inc., 84 Federal Reserve 
Bulletin 481 (1998)); and
    (vii) Real estate title abstracting (The First National Company, 81 
Federal Reserve Bulletin 805 (1995)).
    (b) Activities determined to be usual in connection with the 
transaction of banking abroad. Any activity that the Board had 
determined by regulation in effect on November 11, 1999, to be usual in 
connection with the transaction of banking or other financial 
operations abroad (see Sec. 211.5(d) of this chapter), subject to the 
terms and conditions in part 211 and Board interpretations in effect on 
that date regarding the scope and conduct of the activity. In addition 
to the activities listed in paragraphs (a) and (c) of this section, 
these activities are:
    (1) Providing management consulting services, including to any 
person with respect to nonfinancial matters, so long as the management 
consulting services are advisory and do not allow the financial holding 
company to control the person to which the services are provided;
    (2) Operating a travel agency in connection with financial services 
offered by the financial holding company or others; and
    (3) Organizing, sponsoring, and managing a mutual fund, so long as:
    (i) The fund does not exercise managerial control over the entities 
in which the fund invests; and
    (ii) The financial holding company reduces its ownership in the 
fund, if any, to less than 25 percent of the equity of the fund within 
one year of sponsoring the fund or such additional period as the Board 
permits.
    (c) Activities permitted under section 4(k)(4) of the BHC Act (12 
U.S.C. 1843(k)(4)). Any activity defined to be financial in nature 
under sections 4(k)(4)(A) through (E), (H) and (I) of the BHC Act (12 
U.S.C. 1843(k)(4)(A) through (E), (H) and (I)).


Sec. 225.87  Is notice to the Board required after engaging in a 
financial activity?

    (a) Post-transaction notice generally required to engage in a 
financial activity. A financial holding company that commences an 
activity or acquires shares of a company engaged in an activity listed 
in Sec. 225.86 must notify the appropriate Reserve Bank in writing 
within 30 calendar days after commencing the activity or consummating 
the acquisition by using the appropriate form.
    (b) Cases in which notice to the Board is not required--(1) 
Acquisitions that do not involve control of a company. A notice under 
paragraph (a) of this section is not required in connection with the 
acquisition of shares of a company if, following the acquisition, the 
financial holding company does not control the company.
    (2) No additional notice required to engage de novo in an activity 
for which a financial holding company already has provided notice. 
After a financial holding company provides the appropriate Reserve Bank 
with notice that the company is engaged in an activity listed in 
Sec. 225.86, a financial

[[Page 419]]

holding company may, unless otherwise notified by the Board, commence 
the activity de novo through any subsidiary that the financial holding 
company is authorized to control without providing additional notice 
under paragraph (a) of this section.
    (3) Conduct of certain investment activities. Unless required by 
paragraph (b)(4) of this section, a financial holding company is not 
required to provide notice under paragraph (a) of this section of any 
individual acquisition of shares of a company as part of the conduct by 
a financial holding company of securities underwriting, dealing, or 
market making activities as described in section 4(k)(4)(E) of the BHC 
Act (12 U.S.C. 1843(k)(4)(E)), merchant banking activities conducted 
pursuant to section 4(k)(4)(H) of the BHC Act (12 U.S.C. 
1843(k)(4)(H)), or insurance company investment activities conducted 
pursuant to section 4(k)(4)(I) of the BHC Act (12 U.S.C. 
1843(k)(4)(I)), if the financial holding company previously has 
notified the Board under paragraph (a) of this section that the company 
has commenced the relevant securities, merchant banking, or insurance 
company investment activities, as relevant.
    (4) Notice of large merchant banking or insurance company 
investments. Notwithstanding paragraph (b)(1) or (b)(3) of this 
section, a financial holding company must provide notice under 
paragraph (a) of the section if:
    (i) As part of a merchant banking activity conducted under section 
4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)), the financial 
holding company acquires more than 5 percent of the shares, assets, or 
ownership interests of any company at a total cost that exceeds the 
lesser of 5 percent of the financial holding company's Tier 1 capital 
or $200 million;
    (ii) As part of an insurance company investment activity conducted 
under section 4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I)), the 
financial holding company acquires more than 5 percent of the shares, 
assets, or ownership interests of any company at a total cost that 
exceeds the lesser of 5 percent of the financial holding company's Tier 
1 capital or $200 million; or
    (iii) The Board in the exercise of its supervisory authority 
notifies the financial holding company that a notice is necessary.


Sec. 225.88  How to request the Board to determine that an activity is 
financial in nature or incidental to a financial activity?

    (a) Requests regarding activities that may be financial in nature 
or incidental to a financial activity. A financial holding company or 
other interested party may request a determination from the Board that 
an activity not listed in Sec. 225.86 is financial in nature or 
incidental to a financial activity.
    (b) Required information. A request submitted under this section 
must be in writing and must:
    (1) Identify and define the activity for which the determination is 
sought, specifically describing what the activity would involve and how 
the activity would be conducted;
    (2) Explain in detail why the activity should be considered 
financial in nature or incidental to a financial activity; and
    (3) Provide information supporting the requested determination and 
any other information required by the Board concerning the proposed 
activity.
    (c) Board procedures for reviewing requests--(1) Consultation with 
the Secretary of the Treasury. Upon receipt of the request, the Board 
will provide the Secretary of the Treasury a copy of the request and 
consult with the Secretary in accordance with section 4(k)(2)(A) of the 
BHC Act (12 U.S.C. 1843(k)(2)(A)).
    (2) Public notice. The Board may, as appropriate and after 
consultation with the Secretary, publish a description of the proposal 
in the Federal Register with a request for public comment.
    (d) Board action. The Board will endeavor to make a decision on any 
request filed under paragraph (a) of this section within 60 calendar 
days following the completion of both the consultative process 
described in paragraph (c)(1) of this section and the public comment 
period, if any.
    (e) Advisory opinions regarding scope of financial activities--(1) 
Written request. A financial holding company or other interested party 
may request an advisory opinion from the Board about whether a specific 
proposed activity falls within the scope of an activity listed in 
Sec. 225.86 as financial in nature or incidental to a financial 
activity. The request must be submitted in writing and must contain:
    (i) A detailed description of the particular activity in which the 
company proposes to engage or the product or service the company 
proposes to provide;
    (ii) An explanation supporting an interpretation regarding the 
scope of the permissible financial activity; and
    (iii) Any additional information requested by the Board regarding 
the activity.
    (2) Board response. The Board will provide an advisory opinion 
within 45 calendar days of receiving a complete written request under 
paragraph (e)(1) of this section.


Sec. 225.89  How to request approval to engage in an activity that is 
complementary to a financial activity?

    (a) Prior Board approval is required. A financial holding company 
that seeks to engage in or acquire more than 5 percent of the 
outstanding shares of any class of voting securities of a company 
engaged in an activity that the financial holding company believes is 
complementary to a financial activity must obtain prior approval from 
the Board in accordance with section 4(j) of the BHC Act (12 U.S.C. 
1843(j)). The notice must be in writing and must:
    (1) Identify and define the proposed complementary activity, 
specifically describing what the activity would involve and how the 
activity would be conducted;
    (2) Identify the financial activity for which the proposed activity 
would be complementary and provide detailed information sufficient to 
support a finding that the proposed activity should be considered 
complementary to the identified financial activity;
    (3) Describe the scope and relative size of the proposed activity, 
as measured by the percentage of the projected financial holding 
company revenues expected to be derived from and assets associated with 
conducting the activity;
    (4) Discuss the risks that conducting the activity may reasonably 
be expected to pose to the safety and soundness of the subsidiary 
depository institutions of the financial holding company and to the 
financial system generally;
    (5) Describe the potential adverse effects, including potential 
conflicts of interest, decreased or unfair competition, or other risks, 
that conducting the activity could raise, and explain the measures the 
financial holding company proposes to take to address those potential 
effects;
    (6) Describe the potential benefits to the public, such as greater 
convenience, increased competition, or gains in efficiency, that the 
proposal reasonably can be expected to produce; and
    (7) Provide any information about the financial and managerial 
resources of the financial holding company and any other information 
requested by the Board.
    (b) Factors for consideration by the Board. In evaluating a notice 
to engage in a complementary activity, the Board must consider whether:
    (1) The proposed activity is complementary to a financial activity;
    (2) The proposed activity would pose a substantial risk to the 
safety or

[[Page 420]]

soundness of depository institutions or the financial system generally; 
and
    (3) The proposal could be expected to produce benefits to the 
public that outweigh possible adverse effects.
    (c) Board action. The Board will inform the financial holding 
company in writing of the Board's determination regarding the proposed 
activity within the period described in section 4(j) of the BHC Act (12 
U.S.C. 1843(j)).


Sec. 225.90  What are the requirements for a foreign bank to be treated 
as a financial holding company?

    (a) Foreign banks as financial holding companies. A foreign bank 
that operates a branch or agency or owns or controls a commercial 
lending company in the United States, and any company that owns or 
controls such a foreign bank, will be treated as a financial holding 
company if:
    (1) The foreign bank, any other foreign bank that maintains a U.S. 
branch, agency, or commercial lending company and is controlled by the 
foreign bank or company, and any U.S. depository institution subsidiary 
that is owned or controlled by the foreign bank or company, is and 
remains well capitalized and well managed; and
    (2) The foreign bank, and any company that owns or controls the 
foreign bank, has made an effective election to be treated as a 
financial holding company under this subpart.
    (b) Standards for ``well capitalized.'' A foreign bank will be 
considered ``well capitalized'' if either:
    (1)(i) Its home country supervisor, as defined in Sec. 211.21 of 
the Board's Regulation K (12 CFR 211.21), has adopted risk-based 
capital standards consistent with the Capital Accord of the Basel 
Committee on Banking Supervision (Basel Accord);
    (ii) The foreign bank maintains a Tier 1 capital to total risk-
based assets ratio of 6 percent and a total capital to total risk-based 
assets ratio of 10 percent, as calculated under its home country 
standard; and
    (iii) The foreign bank's capital is comparable to the capital 
required for a U.S. bank owned by a financial holding company; or
    (2) The foreign bank has obtained a determination from the Board 
under Sec. 225.91(c) that the foreign bank's capital is otherwise 
comparable to the capital that would be required of a U.S. bank owned 
by a financial holding company.
    (c) Standards for ``well managed.'' A foreign bank will be 
considered ``well managed'' if:
    (1) The foreign bank has received at least a satisfactory composite 
rating of its U.S. branch, agency, and commercial lending company 
operations at its most recent assessment;
    (2) The home country supervisor of the foreign bank consents to the 
foreign bank expanding its activities in the United States to include 
activities permissible for a financial holding company; and
    (3) The management of the foreign bank meets standards comparable 
to those required of a U.S. bank owned by a financial holding company.


Sec. 225.91  How may a foreign bank elect to be treated as a financial 
holding company?

    (a) Filing requirement. A foreign bank that operates a branch or 
agency or owns or controls a commercial lending company in the United 
States, or a company that owns or controls such a foreign bank, may 
elect to be treated as a financial holding company by filing a written 
declaration with the appropriate Reserve Bank.
    (b) Contents of declaration. The declaration must:
    (1) State that the foreign bank or the company elects to be treated 
as a financial holding company;
    (2) Provide the risk-based capital ratios and amount of Tier 1 
capital and total assets of the foreign bank, and of each foreign bank 
that maintains a U.S. branch, agency, or commercial lending company and 
is controlled by the foreign bank or company, as of the close of the 
most recent quarter and as of the close of the most recent audited 
reporting period;
    (3) Certify that the foreign bank, and each foreign bank that 
maintains a U.S. branch, agency, or commercial lending company and is 
controlled by the foreign bank or company, meets the standards of well 
capitalized set out in Sec. 225.90(b)(1)(i) and (ii) or 
Sec. 225.90(b)(2) as of the date the foreign bank or company files its 
election;
    (4) Certify that the foreign bank, and each foreign bank that 
maintains a U.S. branch, agency, or commercial lending company and is 
controlled by the foreign bank or company, is well managed as defined 
in Sec. 225.90(c)(1) as of the date the foreign bank or company files 
its election;
    (5) Certify that all U.S. depository institution subsidiaries of 
the foreign bank or company are well capitalized and well managed as of 
the date the foreign bank or company files its election; and
    (6) Provide the capital ratios for all relevant capital measures 
(as defined in section 38 of the Federal Deposit Insurance Act (12 
U.S.C. 1831(o))) as of the close of the previous quarter for each U.S. 
depository institution subsidiary of the foreign bank or company.
    (c) Pre-clearance process. Before filing an election to be treated 
as a financial holding company, a foreign bank or company may file a 
request for review of its qualifications to be treated as a financial 
holding company. The Board will endeavor to make a determination on 
such requests within 30 days of receipt. A foreign bank that has not 
been found, or that is chartered in a country where no bank from that 
country has been found, by the Board under the Bank Holding Company Act 
or the International Banking Act to be subject to comprehensive 
supervision or regulation on a consolidated basis by its home country 
supervisor is required to use this process.


Sec. 225.92  How does an election by a foreign bank become effective?

    (a) In general. An election described in Sec. 225.91 is effective 
on the 31st day after the date that an election was received by the 
appropriate Federal Reserve Bank, unless the Board notifies the foreign 
bank or company prior to that time that:
    (1) The election is ineffective; or
    (2) The period is extended with the consent of the foreign bank or 
company making the election.
    (b) Earlier notification that an election is effective. The Board 
or the appropriate Federal Reserve Bank may notify a foreign bank or 
company that its election to be treated as a financial holding company 
is effective prior to the 31st day after the election was filed with 
the appropriate Federal Reserve Bank. Such notification must be in 
writing.
    (c) Under what circumstances will the Board find an election to be 
ineffective? An election to be treated as a financial holding company 
shall not be effective if, during the period provided in paragraph (a) 
of this section, the Board finds that:
    (1) The foreign bank certificant, or any foreign bank that operates 
a branch or agency or owns or controls a commercial lending company in 
the United States and is controlled by a foreign bank or company 
certificant, is not both well capitalized and well managed;
    (2) Any U.S. insured depository institution subsidiary of the 
foreign bank or company (except an institution excluded under paragraph 
(d) of this section) or any U.S. branch of a foreign bank that is 
insured by the Federal Deposit Insurance Corporation has not achieved 
at least a rating of ``satisfactory record of meeting community needs'' 
under the Community Reinvestment Act

[[Page 421]]

at the institution's most recent examination;
    (3) Any U.S. depository institution subsidiary of the foreign bank 
or company is not both well capitalized and well managed; or
    (4) The Board does not have sufficient information to assess 
whether the foreign bank or company making the election meets the 
requirements of this subpart.
    (d) How is CRA performance of recently acquired insured depository 
institutions considered? An insured depository institution will be 
excluded for purposes of the review of CRA ratings described in 
paragraph (c)(2) of this section consistent with the provisions of 
Sec. 225.82(d).
    (e) Factors used in the Board's determination regarding 
comparability of capital and management.--(1) In general. In 
determining whether a foreign bank is well capitalized and well managed 
in accordance with comparable capital and management standards, the 
Board will give due regard to national treatment and equality of 
competitive opportunity. In this regard, the Board may take into 
account the foreign bank's composition of capital, Tier 1 capital to 
total assets leverage ratio, accounting standards, long-term debt 
ratings, reliance on government support to meet capital requirements, 
the foreign bank's anti-money laundering procedures, whether the 
foreign bank is subject to comprehensive supervision or regulation on a 
consolidated basis, and other factors that may affect analysis of 
capital and management. The Board will consult with the home country 
supervisor for the foreign bank as appropriate.
    (2) Assessment of consolidated supervision. A foreign bank that is 
not subject to comprehensive supervision on a consolidated basis by its 
home country authorities may not be considered well capitalized and 
well managed unless:
    (i) The home country has made significant progress in establishing 
arrangements for comprehensive supervision on a consolidated basis; and
    (ii) The foreign bank is in strong financial condition as 
demonstrated, for example, by capital levels that significantly exceed 
the minimum levels that are required for a well capitalized 
determination and strong asset quality.


Sec. 225.93  What are the consequences of a foreign bank failing to 
continue to meet applicable capital and management requirements?

    (a) Notice by the Board. If a foreign bank or company has made an 
effective election to be treated as a financial holding company under 
this subpart and the Board finds that the foreign bank, any foreign 
bank that maintains a U.S. branch, agency, or commercial lending 
company and is controlled by the foreign bank or company, or any U.S. 
depository institution subsidiary controlled by the foreign bank or 
company, ceases to be well capitalized or well managed, the Board will 
notify the foreign bank and company, if any, in writing that it is not 
in compliance with the applicable requirement(s) for a financial 
holding company and identify the areas of noncompliance.
    (b) Notification by a financial holding company required.--(1) 
Notice to Board. Promptly upon becoming aware that the foreign bank, 
any foreign bank that maintains a U.S. branch, agency, or commercial 
lending company and is controlled by the foreign bank or company, or 
any U.S. depository institution subsidiary of the foreign bank or 
company, has ceased to be well capitalized or well managed, the foreign 
bank and company, if any, must notify the Board and identify the area 
of noncompliance.
    (2) Triggering events for notice to the Board--(i) Well 
capitalized. A foreign bank becomes aware that it is no longer well 
capitalized at the time that the foreign bank or company is required to 
file a report of condition (or similar supervisory report) with its 
home country supervisor or the appropriate Federal Reserve Bank that 
indicates that the foreign bank no longer meets the well capitalized 
standards.
    (ii) Well managed. A foreign bank becomes aware that it is no 
longer well managed at the time that the foreign bank receives written 
notice from the appropriate Federal Reserve Bank that the composite 
rating of its U.S. branch, agency, and commercial lending company 
operations is not at least satisfactory.
    (c) Execution of agreement acceptable to the Board--(1) Agreement 
required; time period. Within 45 days after receiving a notice under 
paragraph (a) of this section, the foreign bank or company must execute 
an agreement acceptable to the Board to comply with all applicable 
capital and management requirements.
    (2) Extension of time for executing agreement. Upon request by the 
foreign bank or company, the Board may extend the 45-day period under 
paragraph (c)(1) of this section if the Board determines that granting 
additional time is appropriate under the circumstances. A request by a 
foreign bank or company for additional time must include an explanation 
of why an extension is necessary.
    (3) Agreement requirements. An agreement required by paragraph 
(c)(1) of this section to correct a capital or management deficiency 
must:
    (i) Explain the specific actions that the foreign bank or company 
will take to correct all areas of noncompliance;
    (ii) Provide a schedule within which each action will be taken;
    (iii) Provide any other information that the Board may require; and
    (iv) Be acceptable to the Board.
    (d) Limitations during period of noncompliance--Until the Board 
determines that a foreign bank or company has corrected the conditions 
described in a notice under paragraph (a) of this section:
    (1) The Board may impose any limitations or conditions on the 
conduct or the U.S. activities of the foreign bank or company or any of 
its affiliates as the Board finds to be appropriate and consistent with 
the purposes of the Bank Holding Company Act; and
    (2) The foreign bank or company and its affiliates may not commence 
any additional activity in the United States or acquire control or 
shares of any company under section 4(k) of the Bank Holding Company 
Act (12 U.S.C. 1843(k)) without prior approval from the Board.
    (e) Consequences of failure to correct conditions within 180 days--
(1) Termination of Offices and Divestiture. If a foreign bank or 
company does not correct the conditions described in a notice under 
paragraph (a) of this section within 180 days of receipt of the notice 
or such additional time as the Board may permit, the Board may order 
the foreign bank or company to terminate the foreign bank's U.S. 
branches and agencies and divest any commercial lending companies owned 
or controlled by the foreign bank or company. Such divestiture must be 
done in accordance with the terms and conditions established by the 
Board.
    (2) Alternative method of complying with a divestiture order. A 
foreign bank or company may comply with an order issued under paragraph 
(e)(1) of this section by ceasing to engage (both directly and through 
any subsidiary that is not a depository institution or a subsidiary of 
a depository institution) in any activity that may be conducted only 
under section 4(k), (n), or (o) of the BHC Act (12 U.S.C. 1843(k), (n) 
and (o)). The termination of activities must be completed within the 
time period referred to in paragraph (e)(1) of this section and subject 
to terms and conditions acceptable to the Board.

[[Page 422]]

    (f) Consultation with Other Agencies. In taking any action under 
this section, the Board will consult with the relevant Federal and 
state regulatory authorities and the appropriate home country 
supervisor(s) of the foreign bank.


Sec. 225.94  What are the consequences of an insured branch or 
depository institution failing to maintain a satisfactory or better 
rating under the Community Reinvestment Act?

    (a) Insured branch as an ``insured depository institution.'' A U.S. 
branch of a foreign bank that is insured by the Federal Deposit 
Insurance Corporation shall be treated as an ``insured depository 
institution'' for purposes of Sec. 225.84.
    (b) Applicability. The provisions of Sec. 225.84, with the 
modifications contained in this section, shall apply to a foreign bank 
that operates an insured branch referred to in paragraph (a) of this 
section or an insured depository institution in the United States, and 
any company that owns or controls such a foreign bank, that has made an 
effective election under Sec. 225.92 in the same manner and to the same 
extent as they apply to a financial holding company.

    Dated: December 21, 2000.

    By order of the Board of Governors of the Federal Reserve 
System.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 01-34 Filed 1-2-01; 8:45 am]
BILLING CODE 6210-01-P