[Federal Register Volume 66, Number 2 (Wednesday, January 3, 2001)]
[Proposed Rules]
[Pages 307-314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-43]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / 
Proposed Rules  

[[Page 307]]



FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-1091]

Bank Holding Companies and Change in Bank Control

DEPARTMENT OF THE TREASURY

Office of the Under Secretary for Domestic Finance

12 CFR Part 1501

RIN 1505-AA84


Financial Subsidiaries

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

ACTION: Joint proposed rule with request for public comments.

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SUMMARY: The Board of Governors of the Federal Reserve System and the 
Secretary of the Treasury jointly propose to seek comment on whether to 
determine by rule that real estate brokerage is an activity that is 
financial in nature or incidental to a financial activity and therefore 
permissible for financial holding companies and financial subsidiaries 
of national banks. The Board and the Secretary also jointly propose to 
solicit comment on whether real estate management activities could be 
considered financial in nature or incidental to a financial activity. 
The Board's proposed rule would amend subpart I of the Board's 
Regulation Y to add real estate brokerage and real estate management to 
the list of activities permissible for financial holding companies. The 
Secretary's proposed rule would amend its financial subsidiary 
regulations to add real estate brokerage and real estate management to 
the activities permissible for financial subsidiaries of national 
banks. The Board and the Secretary solicit comment on all aspects of 
the proposal.

DATES: Comments must be received by March 2, 2001.

ADDRESSES: Comments should refer to docket number R-1091 and should be 
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551 (or mailed electronically to 
[email protected]) and to Real Estate Brokerage and 
Management Regulation, Office of Financial Institution Policy, U.S. 
Department of the Treasury, 1500 Pennsylvania Avenue, NW., Room SC 37, 
Washington, DC 20220 (or mailed electronically to 
[email protected]). Comments addressed to Ms. Johnson 
also may be delivered to the Board's mailroom between 8:45 a.m. and 
5:15 p.m. and, outside those hours, to the Board's security control 
room. Both the mailroom and the security control room are accessible 
from the Eccles Building courtyard entrance, located on 20th Street 
between Constitution Avenue and C Street, N.W. Members of the public 
may inspect comments in room MP-500 of the Martin Building between 9 
a.m. and 5 p.m. on weekdays. Comments addressed to the Treasury 
Department may also be delivered to the Treasury Department mail room 
between the hours of 8:45 a.m. and 5:15 p.m. at the 15th Street 
entrance to the Treasury Building.

FOR FURTHER INFORMATION CONTACT:
    Board of Governors: Scott G. Alvarez, Associate General Counsel 
(202/452-3583), or Mark E. Van Der Weide, Counsel (202/452-2263), Legal 
Division; 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'') only, contact Janice 
Simms at 202/872-4984.
    Department of the Treasury: Gerry Hughes, Senior Financial Analyst 
(202/622-2740); Roberta K. McInerney, Assistant General Counsel 
(Banking and Finance) (202/622-0480); or Gary W. Sutton, Senior Banking 
Counsel (202/622-0480).

SUPPLEMENTARY INFORMATION:

Background

    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 or foreign bank 
that qualifies as a financial holding company (``FHC'') to engage in a 
broad range of activities that are defined by the GLB Act to be 
financial in nature. The GLB Act also permits FHCs to engage in other 
activities that the Board determines, by regulation or order and in 
consultation with the Secretary of the Treasury (``Secretary''), to be 
financial in nature or incidental to a financial activity.
    The GLB Act also amended the National Bank Act (12 U.S.C. 1 et 
seq.) to allow a national bank to invest in financial subsidiaries. 
Financial subsidiaries may engage, with certain exceptions, in the same 
broad range of activities that are defined by the GLB Act to be 
financial in nature and, therefore, permissible for FHCs.\1\ In 
addition, the GLB Act permits financial subsidiaries to engage in other 
activities that the Secretary determines, in consultation with the 
Board, to be financial in nature or incidental to a financial activity.
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    \1\ The exceptions are engaging as principal in certain 
insurance underwriting activities, real estate investment and 
development (unless otherwise expressly authorized by law), and 
merchant banking activities permitted in 12 U.S.C. 1843(k)(4)(H) or 
(I). 12 U.S.C. 24a(a)(2)(B).
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    The American Bankers Association (``ABA'') and Fremont National 
Bank & Trust Company, Fremont, Nebraska, have asked the Board and the 
Secretary (collectively, the ``Agencies'') to determine that real 
estate brokerage and management activities are financial in nature. Two 
additional trade associations, the Financial Services Roundtable and 
the New York Clearing House Association, have requested that the Board 
permit FHCs to engage in real estate brokerage activities.\2\ The 
National Association of Realtors (``NAR'') has urged the Agencies not 
to determine that real estate brokerage activities are financial in 
nature or incidental to a financial activity.
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    \2\ The New York Clearing House Association submitted its 
request on behalf of The Bank of New York Company, Inc.; Chase 
Manhattan Corporation; Citigroup, Inc.; J.P. Morgan, Inc.; Bankers 
Trust Company; Fleet Boston, Inc.; HSBC; Bank One Corporation; First 
Union Corporation; and Wells Fargo & Company.
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    The GLB Act directs the Board to consider a variety of factors when 
considering a request for a determination that an activity is financial 
in nature or incidental to a financial activity, including (i) the 
purposes of the BHC Act and the GLB

[[Page 308]]

Act; (ii) the changes or reasonably expected changes in the marketplace 
in which FHCs compete; (iii) the changes or reasonably expected changes 
in the technology for delivering financial services; and (iv) whether 
the proposed activity is necessary or appropriate to allow a FHC to 
compete effectively with any company seeking to provide financial 
services in the United States, efficiently deliver financial 
information and services through the use of technological means, or 
offer customers any available or emerging technological means for using 
financial services or for the document imaging of data.\3\ The 
Secretary must consider a virtually identical set of factors in 
determining whether an activity is permissible for financial 
subsidiaries.\4\ The Agencies also may consider other factors and 
information that they consider relevant to their determination.
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    \3\ See 12 U.S.C. 1843(k)(3).
    \4\ See 12 U.S.C. 24a(b)(2).
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    The Agencies believe that the GLB Act's ``financial in nature or 
incidental'' standard represents a significant expansion of the 
``closely related to banking'' standard that the Board previously 
applied in determining the permissibility of activities for bank 
holding companies.\5\ In considering whether an activity was closely 
related to banking, the Board and the courts looked to whether banks 
generally (i) conduct the proposed activity, (ii) provide services that 
are operationally or functionally so similar to the proposed services 
as to equip them particularly well to provide the proposed services, or 
(iii) provide services that are so integrally related to the proposed 
services as to require their provision in a specialized form.\6\ 
Because the new ``financial in nature or incidental'' test appears to 
be substantially broader than the old ``closely related to banking'' 
test, the Agencies believe that they should consider an activity to be 
financial in nature or incidental to a financial activity to the extent 
that it meets the old standard.
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    \5\ See H.R. Conf. Rep. No. 106-434, at 153 (1999) (``permitting 
banks to affiliate with firms engaged in financial activities 
represents a significant expansion from the current requirement that 
bank affiliates may only be engaged in activities that are closely 
related to banking'').
    \6\ See National Courier Association v. Board of Governors of 
the Federal Reserve System, 516 F.2d 1229, 1237 (D.C. Cir. 1975).
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    After considering the factors listed above and other relevant 
information, the Agencies propose to seek public comment on whether to 
adopt rules that would define real estate brokerage and real estate 
management as activities that are financial in nature or incidental to 
a financial activity. The Board's proposed rule would amend Sec. 225.86 
of the Board's Regulation Y to add these two new activities to the list 
of activities permissible for FHCs. Bank holding companies and foreign 
banks that qualify as FHCs would be permitted to engage in real estate 
brokerage and real estate management by using the post-consummation 
notice procedure described in Sec. 225.87 of Regulation Y. Bank holding 
companies and foreign banks that do not qualify as FHCs may engage only 
in those nonbanking activities that were permissible for bank holding 
companies prior to the enactment of the GLB Act and, thus, could not 
provide real estate brokerage or management services under the proposed 
rule. The Secretary's proposed rule would amend its regulations 
regarding financial subsidiaries to add real estate brokerage and real 
estate management to the activities permissible for financial 
subsidiaries. Qualifying national banks would be permitted to engage in 
these activities through financial subsidiaries by providing the Office 
of the Comptroller of the Currency (``OCC'') with a notice under the 
OCC's rules.
    The GLB Act requires that the Board and the Secretary consult with 
each other concerning any request, proposal, or application for a 
determination that an activity is financial in nature or incidental to 
a financial activity. The Agencies have consulted with each other 
concerning the proposed rules, and each Agency supports the other's 
determination to seek public comment on the proposed rules.\7\
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    \7\ Under the GLB Act, neither Agency may determine that an 
activity is financial in nature or incidental to a financial 
activity if the other Agency indicates in writing that it believes 
that the activity is not financial in nature, incidental to a 
financial activity, or otherwise permissible. 12 U.S.C. 
1843(k)(2)(A)(ii), 24a(b)(1)(B)(i)(II).
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Proposed Rules

A. Real Estate Brokerage

    Real estate brokerage is the business of bringing together parties 
interested in consummating a real estate purchase, sale, exchange, 
lease, or rental transaction and negotiating on behalf of such parties 
a contract relating to the transaction. The activity of real estate 
brokerage would include acting as agent for a party to a real estate 
transaction; listing and advertising real estate; locating buyers, 
sellers, lessors, and lessees interested in engaging in real estate 
transactions among themselves; conveying information between the 
parties to a potential real estate transaction; providing advice in 
connection with a real estate transaction; negotiating price and other 
terms on behalf of parties to a real estate transaction; and 
administering the closing to a real estate transaction. Real estate 
brokerage generally does not involve purchasing or selling real estate 
as principal. The business of real estate brokerage may only be 
conducted pursuant to state licensing laws and regulations.
    As noted, prior to the passage of the GLB Act, bank holding 
companies were permitted to engage only in activities that the Board 
determined were closely related to banking under section 4(c)(8) of the 
BHC Act. In 1972, the Board determined that real estate brokerage was 
not closely related to banking for purposes of the BHC Act.\8\ Although 
the GLB Act does not explicitly authorize FHCs to act as real estate 
brokers, the statute permits FHCs to engage in any activity that the 
Board, in consultation with the Secretary, has determined to be 
financial in nature or incidental to a financial activity. As noted, 
the GLB Act's ``financial in nature or incidental'' test is broader 
than the former ``closely related to banking'' test.
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    \8\ 12 CFR 225.126(c); Boatmen's Bancshares, Inc., 58 Federal 
Reserve Bulletin 427, 428 (1972). In 1987, as part of a proposal to 
authorize bank holding companies to engage in real estate investment 
(the ``1987 Proposal''), the Board proposed permitting a bank 
holding company to provide real estate brokerage services in 
connection with real estate in which the bank holding company had an 
interest. See 52 FR 543 (Nov. 4, 1987); see also 50 FR 4519 (Jan. 
31, 1985). The Board never adopted this proposed rule in final form.
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    Similarly, the OCC has not permitted national banks to engage in 
general real estate brokerage.\9\ Although the GLB Act does not 
explicitly authorize financial subsidiaries to act as real estate 
brokers, the statute permits financial subsidiaries to engage in any 
activity that the Secretary, in consultation with the Board, has 
determined to be financial in nature or incidental to a financial 
activity. For the reasons discussed below, the Agencies believe that 
they should seek public comment on whether real estate brokerage 
activities are financial in nature or incidental to a financial 
activity within the meaning of section 4(k)(1)(A) of the BHC Act and 
section 5136A(a)(2)(A)(i) of the Revised Statutes.
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    \9\ See OCC Interpretive Letter No. 84, reprinted in [1978-1979 
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,159 (Apr. 3, 
1979).
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1. General ``Financial in Nature or Incidental'' Analysis

    Some depository institutions already engage in real estate 
brokerage. Although, as noted, the OCC has not permitted national banks 
to provide

[[Page 309]]

general real estate brokerage services, several states currently permit 
their state-chartered banks to act as a general real estate broker.\10\ 
The Office of Thrift Supervision (``OTS'') also has permitted the 
service corporation subsidiaries of federal savings associations to 
provide general real estate brokerage services.\11\ In addition, 
national and state bank trust departments have long been involved as 
agent in the purchase and sale of real estate assets that are part of 
trust estates.
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    \10\ See, e.g., Iowa Code Sec. 524.802 (``A state bank shall 
have * * * the power to * * * engage in the brokerage of insurance 
and real estate subject to the prior approval of the 
superintendent.''); N.J. Admin. Code tit. 3, Sec. 11-11.5(a)(4) 
(permitting a subsidiary of a New Jersey state-chartered bank to 
provide real estate brokerage services); 1979 Ky. AG LEXIS 224 (``A 
state bank, through its authorized trust department, and state trust 
companies may act as real estate brokers or salesmen in the general 
real estate business, regardless of whether it involves the 
institution's fiducial business or not.'').
    \11\ See 12 CFR 559.4(e)(4) and OTS Letter, July 16, 1997 (1997 
OTS LEXIS 3).
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    Although bank holding companies and financial subsidiaries do not 
have authority to provide real estate brokerage services, banks and 
bank holding companies engage in a wide variety of other real-estate 
related activities, including (i) holding bank premises and acquiring 
real estate in a fiduciary capacity or in full or partial satisfaction 
of a debt previously contracted; (ii) making real estate investments 
that have as their primary purpose community development (subject to 
certain limits); (iii) providing real estate appraisal services; (iv) 
arranging commercial real estate equity financing; (v) real estate 
lending; (vi) real estate leasing; (vii) providing real estate 
settlement and escrow services; and (viii) providing real estate 
investment advisory services.\12\ Since the passage of the GLB Act, 
FHCs and financial subsidiaries also have been able to provide title 
insurance, private mortgage insurance, and any other type of insurance 
to the parties to a real estate transaction.\13\ As a result, banks and 
bank holding companies participate in most aspects of the typical real 
estate transaction other than brokerage.
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    \12\ With respect to bank holding companies, see, e.g., 12 CFR 
225.22(d)(1) and (3) and 225.28(b)(2), (3), and (12). With respect 
to national banks, see, e.g., 12 U.S.C. 29 (holding bank premises 
and acquiring real estate DPC); 12 U.S.C. 92a (general fiduciary 
authority); OCC Interpretive Letter No. 467, reprinted in [1988-1989 
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,691 (Jan. 24, 
1989) (providing real estate appraisal services); OCC Interpretive 
Letter No. 387, reprinted in [1988-1989 Transfer Binder] Fed. 
Banking L. Rep. (CCH) para. 85,611 (June 22, 1987) (arranging 
commercial real estate equity financing); 12 U.S.C. 371 (real estate 
lending); 12 CFR 5.34(e)(5)(v) (providing real estate settlement and 
escrow services and real estate investment advisory services).
    \13\ See 12 U.S.C. 1843(k)(4)(B), 24a(b)(1)(A)(i). The authority 
of a financial subsidiary to underwrite certain types of insurance 
is, however, limited. See 12 U.S.C. 24a(a)(2)(B)(i).
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    In addition, banks and bank holding companies currently engage in a 
variety of activities that are functionally and operationally similar 
to real estate brokerage. Banking organizations have provided their 
customers with various agency transactional services, including 
securities brokerage services, private placement services, futures 
commission merchant services, agency transactional services relating to 
swaps and other derivative instruments, and insurance agency 
services.\14\ Although these agency services are provided by banking 
organizations in connection with an underlying financial transaction 
(the purchase of securities, derivatives, or insurance), the agency 
services provided by a real estate broker are similar in nature to 
those provided by a securities, derivatives, or insurance broker.
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    \14\ With respect to bank holding companies, see, e.g., 12 CFR 
225.28(b)(7) and 12 U.S.C. 1843(k)(4)(B). With respect to national 
banks, see, e.g., 12 U.S.C. 24(7) (securities brokerage services); 
OCC Interpretive Letter No. 329, reprinted in [1985-1987 Transfer 
Binder] Fed. Banking L. Rep. (CCH) para. 85,499 (Mar. 4, 1985) 
(private placement services); 12 CFR 5.34(e)(5)(v) (futures 
commission merchant services and agency transactional services 
relating to swaps and derivatives); and 12 U.S.C. 92 (insurance 
agency services).
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    Although the full range of real estate brokerage services would not 
fit within the scope of national bank or FHC finder authority,\15\ many 
of the essential aspects of real estate brokerage are already 
permissible finder activities. The OCC's regulations provide that ``a 
national bank may act as a finder in bringing together a buyer and a 
seller'' for a financial or nonfinancial transaction and further 
provide that permissible finder activities include ``identifying 
potential parties, making inquiries as to interest, introducing or 
arranging meetings of interested parties, and otherwise bringing 
parties together for a transaction that the parties themselves 
negotiate and consummate.'' \16\ Pursuant to the finder and financial 
counseling authorities, the OCC has permitted national banks to locate, 
analyze, and make recommendations regarding the purchase or sale of 
real estate; and to place real estate investment properties by 
contacting a limited number of qualified investors, identifying and 
engaging real estate brokers, advising investors regarding the terms of 
a real estate sale, and administering a real estate closing.\17\ A 
final rule issued by the Board on December 13, 2000, authorized FHCs to 
act as a finder.\18\
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    \15\ Real estate brokerage would not fit within the finder 
activities permitted to national banks because real estate brokerage 
essentially involves the real estate broker in negotiation of the 
real estate transaction--a role specifically forbidden to national 
bank finders. See 12 CFR 7.1002(b). Real estate brokerage would not 
fit within the finder activities authorized for FHCs because the 
Board's finder rule prohibits a finder from becoming involved in 
negotiation and specifically excludes any activity that would 
require the FHC to register or obtain a license as a real estate 
agent or broker. See Board press release (December 13, 2000).
    \16\ 12 CFR 7.1002.
    \17\ See OCC Interpretive Letter No. 238, reprinted in [1983-
1984 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,402 (Feb. 
9, 1982). The OCC also has allowed national banks to participate in 
the structuring and negotiation of certain real estate exchange 
transactions. See OCC Interpretive Letter No. 880, reprinted in 
[1999-2000 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81,373 
(Dec. 6, 1999).
    \18\ See Board press release (December 13, 2000).
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    In addition, the authority of national banks and bank holding 
companies to assist third parties in obtaining commercial real estate 
equity financing includes an important subset, although not the full 
panoply, of services provided by the typical real estate broker.\19\ In 
this regard, the Board has allowed bank holding companies to act as an 
intermediary for the financing of commercial or industrial income-
producing real estate by arranging for the transfer of the title, 
control, and risk of such a real estate project to one or more 
investors. Bank holding companies may only arrange commercial real 
estate equity financing with respect to real estate projects that are 
not sponsored by or invested in by the holding company. The OCC 
similarly has authorized national banks to arrange for the placement of 
equity interests in commercial and investment real estate.\20\
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    \19\ See, e.g., 12 CFR 225.28(b)(2)(ii).
    \20\ See OCC Interpretive Letter No. 271, reprinted in [1983-
1984 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,435 (Sept. 
21, 1983).
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    In determining whether an activity is financial in nature or 
incidental to a financial activity, the GLB Act specifically instructs 
the Board and the Secretary to consider whether the activity is 
necessary or appropriate to allow a FHC or a bank, respectively, to 
compete effectively with other financial services companies operating 
in the United States.\21\ Before the passage of the GLB Act, in 
determining whether an activity was ``closely related to banking,'' the 
law directed the Board to consider whether banks engaged in the 
activity, but did not explicitly authorize the Board to consider 
whether other financial service providers engaged in the activity.\22\ 
This change in law represents a significant expansion of the

[[Page 310]]

Board's capacity to consider the competitive realities of the U.S. 
financial marketplace in determining the permissibility of activities 
for FHCs.
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    \21\ 12 U.S.C. 1843(k)(3)(D)(i), 24a(b)(2)(D)(i).
    \22\ See National Courier Association v. Board of Governors of 
the Federal Reserve System, 516 F.2d 1229, 1237 (D.C. Cir. 1975).
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    As the financial marketplace continues to evolve, it appears that 
many financial companies are adding real estate brokerage to their menu 
of services. In this regard, the ABA has provided evidence that several 
diversified financial companies provide real estate brokerage services 
in addition to their more traditional banking, securities, and 
insurance services.\23\ The ABA also has asserted that buyers and 
sellers of real estate are increasingly looking to a single company to 
provide all of their real estate-related needs. Purchasers of real 
estate seem especially interested in obtaining real estate brokerage 
and mortgage finance from a single provider. The ABA argues that 
permitting FHCs and financial subsidiaries to engage in real estate 
brokerage activities would permit FHCs and banks to compete effectively 
with other financial service providers in the United States. The 
Agencies solicit comment on the extent to which U.S. financial services 
companies provide real estate brokerage services.
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    \23\ For example, General Motors Acceptance Corporation operates 
a thrift, makes mortgage loans, and provides real estate brokerage 
services; Prudential Insurance Company provides insurance and 
securities products and real estate brokerage services; Cendant 
Corporation provides insurance, mortgage loans, and real estate 
brokerage services; and Long & Foster provides mortgage loans, 
insurance products, and real estate brokerage services.
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    Existing federal and state laws should operate to mitigate the 
potential adverse effects of combining banking and real estate 
brokerage. The antitying rules should help prevent banks from using any 
market power they possess to assist an affiliated financial subsidiary 
or FHC in monopolizing or competing unfairly in the real estate 
brokerage business. The antitying rules would prohibit a subsidiary 
bank of a FHC engaged in real estate brokerage or the parent bank of a 
financial subsidiary engaged in real estate brokerage from extending 
credit, furnishing any service, or varying the consideration for any 
loan or service on the condition that the customer obtain real estate 
brokerage services from the bank or any affiliate (including a 
financial subsidiary) of the bank.\24\ Sections 23A and 23B of the 
Federal Reserve Act would limit the amount of credit and certain other 
forms of support that a bank could provide to a real estate brokerage 
affiliate (including a financial subsidiary).\25\ In addition, section 
23B would require mortgage loans by a bank to a customer who obtains 
real estate brokerage services from a bank affiliate (including a 
financial subsidiary) to be on market terms.\26\ Furthermore, federal 
and state consumer protection laws, including the Real Estate 
Settlement Procedures Act,\27\ would help protect customers of banks 
and affiliated real estate brokers. The Agencies solicit comment on the 
potential adverse effects of allowing FHCs or financial subsidiaries to 
act as a real estate broker and whether special restrictions on 
transactions or relationships between a real estate broker and its 
affiliated depository institutions are necessary to mitigate those 
adverse effects.\28\
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    \24\ 12 U.S.C. 1972(1)(B).
    \25\ 12 U.S.C. 371c and 371c-1.
    \26\ 12 U.S.C. 371c-1(a)(2)(D). Section 23A also would cover 
mortgage loans by a bank to a customer to the extent that the 
customer uses part of the loan proceeds to pay the brokerage 
commission of a real estate brokerage affiliate of the bank.
    \27\ 12 U.S.C. 2601 et seq.
    \28\ Under section 114 of the GLB Act, the Board has authority 
to impose restrictions or requirements on transactions or 
relationships between a depository institution subsidiary of a bank 
holding company and any affiliate of such depository institution, if 
the Board finds that such action would be (i) consistent with the 
purposes of applicable Federal law and (ii) appropriate, among other 
things, to avoid adverse effects such as undue concentration of 
resources, decreased or unfair competition, conflicts of interest, 
or unsound banking practices. GLB Act Section 114(b). Section 114 
provides the OCC with similar authority to impose restrictions or 
requirements on transactions or relationships between a national 
bank and its subsidiaries. GLB Act Section 114(a).
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    Permitting FHCs and financial subsidiaries to engage in real estate 
brokerage does not appear to present significant risks to those 
organizations or their depository institution affiliates. The proposed 
rules would ensure that the authorized real estate brokerage services 
are agency services only and that FHCs and financial subsidiaries take 
no principal risk in connection with real estate transactions that they 
broker. As a consequence, FHCs and financial subsidiaries engaging in 
real estate brokerage would not be subject to either the liquidity risk 
or market risk associated with real estate investment and development. 
Real estate brokerage involves operational and legal risks, but these 
risks appear similar in nature and extent to those posed by other 
agency activities conducted by FHCs and financial subsidiaries.
2. Real Estate Brokerage as a Statutorily Listed Financial Activity
    The ABA has argued that real estate is a financial asset and that, 
accordingly, the Agencies should find real estate brokerage to be part 
of the statutorily listed financial activity of ``[l]ending, 
exchanging, transferring, investing for others or safeguarding 
financial assets other than money or securities.''\29\ According to the 
ABA, real estate is a financial asset because (i) the home is the 
largest asset for many individuals; (ii) real estate serves as the 
underpinning for hundreds of billions of dollars of mortgage-backed 
securities; and (iii) real estate serves as a means of wealth creation 
by increasing in value over time and providing tax benefits.
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    \29\ 12 U.S.C. 1843(k)(5)(B)(i), 24a(b)(3)(A). The GLB Act 
requires the Agencies jointly to define this activity and two other 
listed activities as ``financial in nature'' and to determine ``the 
extent to which such activities are financial in nature or 
incidental to a financial activity.'' 12 U.S.C. 1843(k)(5)(A), 
24a(b)(3).
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    The Agencies are not convinced that real estate should be deemed a 
financial asset because it is a comparatively large asset on most 
individuals' personal balance sheet or because it often is used as 
collateral for financial instruments. Airplanes, boats, and automobiles 
are large assets that are often used as collateral for financial 
instruments (loans and leases in particular), yet these assets are 
generally considered to be nonfinancial. The Agencies recognize, 
however, that real estate does have certain important attributes of a 
financial asset; namely, that individuals often purchase real estate, 
at least in part, for investment purposes and with a view toward the 
financial benefits of the transaction.
    These financial attributes of real estate may, however, not be 
enough to justify treating real estate as a financial asset. Although 
real estate often is purchased, in part, for investment purposes, the 
same can be said of many nonfinancial assets such as fine art, rare 
stamps, and antique cars. Moreover, whereas loans, securities, and most 
other financial assets are held for investment purposes only, most 
purchasers and renters of real estate also use the property as a 
residence or in the operation of a business. Finally, financial assets 
are generally thought to include money, loans, securities, and other 
similar intangible properties. Real estate, on the other hand, is a 
tangible, physical asset.
    The ABA also has argued that the purchase, sale, or lease of real 
estate is a financial transaction and that, accordingly, the Agencies 
should find that real estate brokerage is part of the listed financial 
activity of ``[a]rranging, effecting, or facilitating financial 
transactions for the account of third parties.'' \30\ The ABA contends 
that the purchase, sale, or lease of real estate is a financial 
transaction because it is the most important, complex, and financially 
difficult transaction that

[[Page 311]]

most individuals undertake. The Agencies are not convinced that the 
importance, complexity, or size of a transaction should affect a 
determination as to whether the transaction is financial in nature. On 
the other hand, real estate transactions often are entered into, at 
least in part, for investment purposes. To that extent, real estate 
transactions do have some aspects of a financial transaction. The 
Agencies seek comment on the above issues.
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    \30\ 12 U.S.C. 1843(k)(5)(B)(iii), 24a(b)(3)(C).
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3. Arguments of the NAR
    As noted, the NAR has asked that the Agencies not authorize real 
estate brokerage activities. The NAR makes four principal contentions 
in support of its position. First, the NAR notes that the GLB Act does 
not specifically authorize FHCs to engage in real estate brokerage. 
Although this contention is true, the GLB Act also authorizes each 
Agency to supplement the statutory activities list with additional 
activities that it determines, in consultation with the other Agency, 
to be financial in nature or incidental to a financial activity. The 
NAR points out that the GLB Act specifically prohibits financial 
subsidiaries from engaging in real estate investment and development 
activities, but this prohibition by its terms does not apply to FHCs or 
to real estate brokerage activities.
    Second, the NAR suggests that it would be inappropriate for the 
Board now to permit FHCs to provide real estate brokerage services 
because the Board prohibited bank holding companies from acting as a 
real estate broker in 1972. As noted above, the Board's 1972 decision 
on real estate brokerage was made pursuant to the former ``closely 
related to banking'' standard; the GLB Act now authorizes the Board to 
approve any activity that is ``financial in nature'' or ``incidental to 
a financial activity.'' The plain meaning of and legislative history 
behind the ``financial'' and ``incidental to financial'' standards 
suggest that Congress intended the new standards to be significantly 
broader than the old ``closely related to banking'' test. Furthermore, 
the financial services environment has changed significantly in the 
past 30 years, and what may have been an inappropriate activity for 
bank holding companies in the early 1970s may be appropriate for the 
diversified FHCs of the early 21st century.
    Third, the NAR claims that real estate brokerage is a commercial 
activity and not a financial activity. Finally, the NAR argues that the 
Agencies should delay finding real estate brokerage to be a permissible 
activity until such time as FHCs gain experience in conducting the 
various other new activities authorized by the GLB Act.
    The Agencies seek comment on whether real estate brokerage is an 
activity that is financial in nature or incidental to a financial 
activity. In addition, the Agencies seek comment on the particular 
arguments advanced by the NAR.

B. Real Estate Management Services

    Real estate management is the business of providing for others day-
to-day management of real estate. Day-to-day management of real estate 
could include procuring tenants; negotiating leases; maintaining 
security deposits; billing and collecting rent payments; providing 
periodic accountings for such payments; making principal, interest, 
insurance, tax, and utilities payments; and generally overseeing 
inspection, maintenance, and upkeep of real property. Real estate 
management generally does not involve purchasing, selling, or owning 
real estate as principal. Although some states do not subject real 
estate managers to special licensing laws or regulations, real estate 
managers in other states are subject to the same state licensing laws 
and regulations that apply to real estate brokers.
    The Board first proposed allowing bank holding companies to provide 
property management services in 1971.\31\ For a variety of reasons, 
however, including the substantial volume of negative public comment 
received on the proposal, the Board determined in 1972 that property 
management was not closely related to banking for purposes of the BHC 
Act.\32\ Similarly, the OCC has not permitted national banks to engage 
in general real estate management.\33\
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    \31\ See 36 FR 18427 (Sept. 7, 1971).
    \32\ 12 CFR 225.126(g); 58 Federal Reserve Bulletin 652 (1972). 
As part of the 1987 Proposal, the Board proposed authorizing a bank 
holding company to provide real estate management services in 
connection with real estate in which the bank holding company had an 
interest. See 52 FR 543 (Nov. 4, 1987); see also 50 FR 4519 (Jan. 
31, 1985). As noted above, the Board never finalized this proposed 
rule.
    \33\ See OCC Interpretive Letter No. 238, supra.
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    The Agencies have some doubts as to whether all aspects of real 
estate management are financial in nature or incidental to a financial 
activity. The Agencies also are concerned that certain forms of real 
estate management appear to resemble more closely day-to-day operation 
of a commercial enterprise than serving as the intermediary between the 
owners and users of real estate. Nevertheless, for the reasons 
discussed below, the Agencies believe that they should seek public 
comment on (i) what activities are included within real estate 
management and (ii) which of these activities, if any, are financial in 
nature or incidental to a financial activity within the meaning of 
section 4(k)(1)(A) of the BHC Act and section 5136A(a)(2)(A)(i) of the 
Revised Statutes.
1. General ``Financial in Nature or Incidental'' Analysis
    Neither the OCC nor state banking departments, to the Agencies' 
knowledge, have permitted banks to provide general real estate 
management services. Thrift holding companies (including non-unitary 
thrift holding companies) and thrift service corporation subsidiaries, 
however, have been permitted to maintain and manage real estate.\34\ In 
addition, as noted above, banking organizations have long been engaged 
in a variety of real estate-related activities. Moreover, some (though 
not all) real estate management activities appear to be functionally 
and operationally similar to various other activities that banks and 
bank holding companies currently engage in. For example, collecting 
rental payments; maintaining security deposits; making principal, 
interest, taxes, and insurance payments; and providing periodic 
accountings are functionally similar to collecting loan or lease 
payments, disbursing escrow payments, and performing related 
accountings. In addition, banks and bank holding companies have a long 
history of managing real estate assets that are part of trust estates, 
that are used by the banking organization in its own operations, or 
that are acquired as a result of foreclosure.\35\
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    \34\ See 12 CFR 559.4(e)(3), 584.2-1(b)(8).
    \35\ See, e.g., OCC Interpretive Letter No. 238, supra; OCC 
Interpretive Letter No. 355, reprinted in [1985-1987 Transfer 
Binder] Fed. Banking L. Rep. (CCH) para. 85,525 (Dec. 10, 1985); 
Bancorp Hawaii, Inc., 71 Federal Reserve Bulletin 168, 168 n.2 
(1985); United Missouri Bancshares, Inc., 64 Federal Reserve 
Bulletin 415, 417 (1978).
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    As noted above, in determining whether an activity is financial in 
nature or incidental to a financial activity, the GLB Act instructs the 
Board and the Secretary to consider whether the activity is necessary 
or appropriate to allow FHCs or banks, respectively, to compete 
effectively with other financial services companies operating in the 
United States. The ABA has contended that competitive considerations 
support a determination to allow FHCs and financial subsidiaries to 
provide real estate management services. The Agencies solicit comment 
on the extent to which financial services companies

[[Page 312]]

provide real estate management services in the United States and on 
whether permitting FHCs and financial subsidiaries to provide real 
estate management services would help ensure competitive equity between 
FHCs and financial subsidiaries and other financial firms.
    The same laws that would operate to mitigate potential adverse 
effects in the real estate brokerage context also would help to 
alleviate adverse effects in the provision of real estate management 
services. The Agencies solicit comment on the potential adverse effects 
of allowing FHCs and financial subsidiaries to act as a real estate 
manager and whether special restrictions are necessary to mitigate 
those adverse effects.
    Permitting FHCs and financial subsidiaries to engage in real estate 
management activities does not appear to present significant risks to 
those organizations or their depository institution affiliates. The 
proposed rules would ensure that the authorized real estate management 
services are agency services only and that FHCs and financial 
subsidiaries take no principal risk in connection with real estate that 
they manage. The Agencies recognize, however, that engaging in property 
management may increase the operational, legal, and reputational risks 
faced by a FHC or financial subsidiary. Accordingly, the Agencies seek 
comment on the nature and extent of these risks.
2. Real Estate Management as a Statutorily Listed Financial Activity
    The ABA has argued that the Agencies should find that real estate 
management is part of the listed financial activity of ``[l]ending, 
exchanging, transferring, investing for others or safeguarding 
financial assets other than money or securities.''\36\ If the Agencies 
were to conclude that real estate is a financial asset, this argument 
would have some textual appeal. Real estate management could be viewed, 
in part, as a form of safeguarding real estate.
---------------------------------------------------------------------------

    \36\ 12 U.S.C. 1843(k)(5)(B)(i), 24a(b)(3)(A).
---------------------------------------------------------------------------

    The ABA also has argued that the Agencies should find that real 
estate management services are part of the listed financial activity of 
``[a]rranging, effecting, or facilitating financial transactions for 
the account of third parties.'' \37\ Part of the role of a property 
manager does involve the facilitation of financial transactions: For 
example, maintenance of security deposits, collection of rent payments, 
and distribution of principal, interest, insurance, tax, and utility 
payments. Property management also, however, appears to have components 
that go beyond the facilitation of financial transactions. The Agencies 
seek comment on the above issues.
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    \37\ 12 U.S.C. 1843(k)(5)(B)(iii), 24a(b)(3)(C).
---------------------------------------------------------------------------

C. Description of the Proposed Rules

1. Real Estate Brokerage
    The proposed rules authorize FHCs and financial subsidiaries to 
provide real estate brokerage services and include examples of the 
sorts of activities that the Agencies consider to be included within 
real estate brokerage. The Agencies seek comment on whether any final 
rules should provide further guidance regarding the scope of activities 
that are included within real estate brokerage.
    Importantly, the proposed rules also contain restrictions designed 
to ensure that a FHC or financial subsidiary, when acting as a real 
estate broker, serves only as an intermediary between buyers and 
sellers (or lessees and lessors) and does not otherwise become 
impermissibly involved in the underlying real estate transaction. In 
particular, the proposed rules make clear that they do not authorize a 
FHC or financial subsidiary to (i) invest in or develop real estate; or 
(ii) take title to, acquire, or hold an ownership interest in any real 
estate that is the subject of the company's real estate brokerage 
services.
    The Agencies understand that many real estate brokers offer 
employee relocation services to their corporate clients. Certain 
fundamental employee relocation services--assisting a client's 
transferred employees to sell their existing homes, buy homes in their 
destination locations, and obtain mortgage financing for their new home 
purchases--appear to be forms of real estate brokerage or currently 
permissible financial activities.
    Other employee relocation activities seem less obviously a part of 
real estate brokerage or otherwise financial in nature. For example, a 
real estate broker providing employee relocation services often commits 
to purchase any home owned by one of its client's transferred employees 
at a fixed price if the broker fails to sell the home within a certain 
time period. The Agencies believe that such services may be incidental 
to real estate brokerage if the homes purchased by the broker are sold 
within a short time period, the broker's total holdings of unsold real 
estate do not exceed some threshold amount, and the broker only 
purchases unsold real estate in connection with providing bona fide 
employee relocation services to customers (not for the purpose of 
speculating on the price of real estate). The Agencies also understand 
that employee relocation services often include assisting transferred 
employees to move household goods to their destination locations and 
assisting the spouses of transferred employees to find employment in 
their destination locations.
    The Agencies request information on the kinds of employee 
relocation services that real estate brokers currently provide. The 
Agencies also seek comment on whether to permit FHCs or financial 
subsidiaries: (i) To provide employee relocation services as part of 
real estate brokerage or otherwise; (ii) to purchase residential real 
estate in connection with providing employee relocation services and, 
if so, what conditions or limits should apply to such real estate 
purchases; and (iii) to assist transferred employees to move their 
household goods and to assist the spouses of transferred employees to 
find employment in connection with providing employee relocation 
services.
2. Real Estate Management
    The proposed rules authorize FHCs and financial subsidiaries to 
provide real estate management services and include examples of the 
sorts of activities that the Agencies consider to be included within 
real estate management.
    The ABA has suggested that the Agencies' definition of real estate 
management should include any activities that may be defined as ``real 
estate management'' under any state law. The Agencies generally are 
reluctant to delegate to state legislatures any determinations 
regarding the scope of permissible activities for federally regulated 
banking organizations. Nevertheless, the Agencies specifically solicit 
comment on whether real estate management activities should be defined 
explicitly to include any activities that are defined as ``real estate 
management'' under state law. The Agencies also request comment more 
generally on whether any final rules should contain further guidance 
regarding the scope of activities that are included within real estate 
management.
    The proposed rules contain restrictions designed to ensure that a 
FHC or financial subsidiary, when providing real estate management 
services, acts only in an agency capacity as an intermediary between 
the owners and users of real estate. In particular, the proposed rules 
make clear that real estate management does not include (i) investing 
in or developing real estate; or

[[Page 313]]

(ii) taking title to, acquiring, or holding an ownership interest in 
any real estate that the FHC or financial subsidiary manages. In light 
of these exclusions, the Agencies request comment on whether real 
estate managers receive compensation in the form of an equity or 
equity-like interest in the managed real estate and, if so, whether the 
Agencies should prevent FHCs that engage in real estate management from 
receiving compensation in this form.
    The proposed rules also prevent a FHC or financial subsidiary that 
provides real estate management services from itself repairing or 
maintaining the managed real estate. The Agencies have doubts as to 
whether repair and maintenance of real estate are activities that are 
financial in nature or incidental to a financial activity. The proposed 
rules allow a FHC or financial subsidiary, however, to arrange for a 
third party to provide these services. The Agencies request comment on 
whether FHCs and financial subsidiaries should be limited in their 
authority to engage in any other aspects of real estate management.
    The Agencies also seek comment on whether they should draw any 
distinctions between the management of single-family housing, multi-
family housing, office buildings, institutional buildings (hotels, 
hospitals, etc.), commercial and industrial properties, and farms. In 
addition, the Agencies solicit comment on whether real estate 
management should include management of the air rights above and the 
oil and mineral rights beneath particular parcels of land. As noted 
above, the Agencies are concerned that certain forms of real estate 
management may more closely resemble day-to-day operation of a 
commercial enterprise than serving as the intermediary between the 
owners and users of real estate.

Plain Language

    Section 722 of the GLB Act requires the Board to use ``plain 
language'' in all proposed and final rules published after January 1, 
2000. In light of this requirement, the Board has sought to present its 
proposed rule in a simple and straightforward manner and has included 
in the rule examples of activities that would be permissible under the 
proposed rule. The Board invites comments on whether there are 
additional steps the Board could take to make the proposed rule easier 
to understand.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Agencies certify that the proposed rules would not have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The 
proposed rules would remove regulatory restrictions on financial 
holding companies and financial subsidiaries of national banks by 
permitting them to engage in real estate brokerage and real estate 
management activities. The proposed rules would apply to all financial 
holding companies and national bank financial subsidiaries, regardless 
of their size. The proposed rules should enhance the ability of 
financial holding companies and financial subsidiaries, including small 
financial holding companies and financial subsidiaries, to compete with 
other providers of financial services in the United States and to 
respond to technological and other changes in the marketplace in which 
they compete. Accordingly, a regulatory flexibility analysis is not 
required.

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 has reviewed the 
proposed rule under the authority delegated to the Board by the Office 
of Management and Budget. No collections of information pursuant to the 
Paperwork Reduction Act are contained in the proposed rule.

List of Subjects

12 CFR Part 225

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

12 CFR Part 1501

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

Federal Reserve System

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the joint preamble, part 225 of 
chapter II, title 12 of the Code of Federal Regulations is proposed to 
be amended as follows:

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

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

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

    2. Section 225.86(d), published at 65 FR 80740, December 22, 2000, 
is amended by adding new paragraphs (d)(2) and (d)(3) to read as 
follows:


Sec. 225.86  What activities are permissible for financial holding 
companies?

* * * * *
    (d) * * *
    (2) Real estate brokerage.
    (i) Providing real estate brokerage services, including, among 
other things, acting as an agent for a buyer, seller, lessor, or lessee 
of real estate; listing and advertising real estate; providing advice 
in connection with a real estate purchase, sale, exchange, lease, or 
rental transaction; bringing together parties interested in 
consummating such a real estate transaction; and negotiating on behalf 
of such parties a contract relating to such a real estate transaction.
    (ii) In providing real estate brokerage services, a financial 
holding company may not:
    (A) Invest in or develop real estate as principal; or
    (B) Take title to, acquire, or hold any ownership interest in real 
estate brokered by the company.
    (3) Real estate management.
    (i) Providing real estate management services, including, among 
other things, procuring tenants; negotiating leases; maintaining 
security deposits; billing and collecting rent payments; providing 
periodic accountings for such payments; making principal, interest, 
insurance, tax, and utility payments; and generally overseeing the 
inspection, maintenance, and upkeep of real estate.
    (ii) In providing real estate management services, a financial 
holding company may not:
    (A) Invest in or develop real estate as principal;
    (B) Take title to, acquire, or hold any ownership interest in real 
estate managed by the company; or
    (C) Directly or indirectly maintain or repair real estate managed 
by the company (but may arrange for a third party to provide these 
services).

    By order of the Board of Governors of the Federal Reserve 
System, December 26, 2000.
Jennifer J. Johnson,
Secretary of the Board.

Department of the Treasury

12 CFR Chapter XV

Authority and Issuance

    For the reasons set forth in the joint preamble, part 1501 of 
chapter XV, title 12 of the Code of Federal Regulations is proposed to 
be amended as follows:

[[Page 314]]

PART 1501--FINANCIAL SUBSIDIARIES

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

    Authority: 12 U.S.C. 24a.

    2. Section 1501.2, published in an interim rule in this issue of 
the Federal Register, is amended by adding new paragraphs (b) and (c) 
to read as follows:


1501.2  What activities has the Secretary determined to be financial in 
nature or incidental to a financial activity?

    (a) * * *
    (b) Real estate brokerage.
    (1) Providing real estate brokerage services, including, among 
other things, acting as an agent for a buyer, seller, lessor, or lessee 
of real estate; listing and advertising real estate; providing advice 
in connection with a real estate purchase, sale, exchange, lease, or 
rental transaction; bringing together parties interested in 
consummating such a real estate transaction; and negotiating on behalf 
of such parties a contract relating to such a real estate transaction.
    (2) In providing real estate brokerage services, a financial 
subsidiary may not:
    (i) Invest in or develop real estate as principal; or
    (ii) Take title to, acquire, or hold any ownership interest in real 
estate brokered by the financial subsidiary.
    (c) Real estate management.
    (1) Providing real estate management services, including, among 
other things, procuring tenants; negotiating leases; maintaining 
security deposits; billing and collecting rent payments; providing 
periodic accountings for such payments; making principal, interest, 
insurance, tax, and utility payments; and generally overseeing the 
inspection, maintenance, and upkeep of real estate.
    (2) In providing real estate management services, a financial 
subsidiary may not:
    (i) Invest in or develop real estate as principal;
    (ii) Take title to, acquire, or hold any ownership interest in real 
estate managed by the financial subsidiary; or
    (iii) Directly or indirectly maintain or repair real estate managed 
by the financial subsidiary (but may arrange for a third party to 
provide these services).

    Dated: December 26, 2000.
Gregory A. Baer,
Assistant Secretary for Financial Institutions, Department of the 
Treasury.
[FR Doc. 01-43 Filed 1-2-01; 8:45 am]
BILLING CODE 6210-01-P