[Federal Register Volume 68, Number 168 (Friday, August 29, 2003)]
[Notices]
[Pages 52024-52035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-22091]
[[Page 52024]]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1158]
Anti-Tying Restrictions of Section 106 of the Bank Holding
Company Act Amendments of 1970
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed interpretation and supervisory guidance with request
for public comment.
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SUMMARY: The Board proposes to adopt an interpretation of the anti-
tying restrictions of section 106 of the Bank Holding Company Act
Amendments of 1970 and related supervisory guidance. The interpretation
describes the scope and purposes of section 106, the elements of a
tying arrangement prohibited by section 106, and the statutory and
regulatory exceptions to the prohibitions of section 106. The
interpretation also includes examples of the types of conduct, actions
and arrangements by banks that are prohibited and permissible under
section 106. The Board believes that adoption of the interpretation
will assist banks and their customers in understanding the scope of the
anti-tying restrictions of the statute. The related supervisory
guidance discusses the types of internal controls that should help
banks comply with section 106. The proposed interpretation and guidance
reflect the principles that the Board will apply in enforcing section
106 and conducting anti-tying reviews at banking organizations.
DATES: Comments must be received on or before September 30, 2003.
ADDRESSES: Comments should refer to Docket No. OP-1158 and may be
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551. However, because paper mail in the Washington
area and at the Board of Governors is subject to delay, please consider
submitting your comments by e-mail to [email protected]
or faxing them to the Office of the Secretary at 202-452-3819 or 202-
452-3102. 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 pursuant to
section 261.12, except as provided in section 261.14, of the Board's
Rules Regarding Availability of Information (12 CFR 261.12 and 261.14).
FOR FURTHER INFORMATION CONTACT: Scott G. Alvarez, Associate General
Counsel (202-452-3583), Kieran J. Fallon, Senior Counsel (202-452-
5270), Mark E. Van Der Weide, Counsel (202-452-2263), or Andrew S.
Baer, Counsel (202-452-2246), Legal Division; or Michael G. Martinson,
Associate Director (202-452-3640), or Michael J. Schoenfeld, Senior
Supervisory Financial Analyst (202-452-2836), 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) only, contact
202-263-4869.
SUPPLEMENTARY INFORMATION:
Background
Section 106 of the Bank Holding Company Act Amendments of 1970
(section 106) generally prohibits a bank from conditioning the
availability or price of one product on a requirement that the customer
also obtain another product from the bank or an affiliate of the
bank.\1\ Thus, for example, the statute prohibits a bank from
conditioning the availability of a loan from the bank (or a discount on
the loan) on the requirement that the customer also purchase an
insurance product from the bank or an affiliate.\2\
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\1\ 12 U.S.C. 1972. Although part of the Bank Holding Company
Act Amendments of 1970, section 106 applies to a bank whether or not
the bank is owned or controlled by a bank holding company.
\2\ Section 106 also generally prohibits a bank from
conditioning the availability or price of one product on a
requirement that the customer (i) provide another product to the
bank or an affiliate of the bank or (ii) not obtain another product
from a competitor of the bank or a competitor of an affiliate of the
bank. 12 U.S.C. 1972(1)(C), (D) and (E). The arrangements prohibited
by section 106 are collectively referred to as ``tying
arrangements.''
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Congress adopted section 106 in 1970 at the same time that it
expanded the ability of bank holding companies to engage in nonbanking
activities under section 4(c)(8) of the Bank Holding Company Act (BHC
Act).\3\ Congress expressed concern that banks might use their ability
to offer bank products--credit in particular--in a coercive manner to
gain a competitive advantage in markets for nonbanking products and
services (such as insurance sales).\4\ Congress therefore decided to
impose the special anti-tying restrictions in section 106 on banks.
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\3\ 12 U.S.C. 1843(c)(8).
\4\ See S. Rep. No. 1084, 91st Cong., 2d Sess. (1970).
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Section 106 does not apply to the nonbank affiliates of a bank or
other nonbank entities.\5\ The nonbank affiliates of banks, as well as
banks themselves, however, are subject to the anti-tying restrictions
contained in the Federal antitrust laws (the Sherman and Clayton
Acts).\6\
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\5\ In 1971, the Board by regulation extended the anti-tying
restrictions of section 106 to bank holding companies and their
nonbank subsidiaries. In 1997, however, the Board rescinded this
regulatory extension of the statute. See 62 FR 9290, Feb. 28, 1997.
\6\ 15 U.S.C. 1 et seq.; 15 U.S.C. 12 et seq.
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Although section 106 prohibits banks from imposing certain types of
tying arrangements on their customers, the statute also expressly
permits banks to engage in other forms of tying and authorizes the
Board to grant additional exceptions to the statute's restrictions by
regulation or order. For example, section 106 and the Board's
regulations expressly permit a bank to condition the availability or
price of a product or service on a requirement that the customer also
obtain a ``loan, discount, deposit, or trust service'' (a ``traditional
bank product'') from the bank or an affiliate of the bank.\7\
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\7\ See 12 U.S.C. 1972(1)(A); 12 CFR 225.7(b)(1).
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Although the general prohibitions of section 106 can be stated
fairly simply, determining whether a violation of the statute has
occurred often requires a careful analysis of the facts and
circumstances associated with the particular transaction (or proposed
transaction) at issue. For example, as noted above, several important
exceptions exist to the statute's prohibitions. Moreover, the actions,
statements and policies of the bank involved in the particular
transaction often play an important role in determining whether the
bank has violated section 106.
The Federal banking agencies have long required that banking
organizations establish and maintain appropriate policies and
procedures to ensure compliance with the anti-tying restrictions of
section 106,\8\ and the agencies monitor these policies and procedures
through the supervisory process. For example, the anti-tying policies
and procedures of bank holding companies and state member banks are
reviewed and evaluated by Federal Reserve examiners as part of the
compliance examinations of these organizations. In addition, examiners
may conduct more targeted examinations of the marketing programs, anti-
tying training materials, internal reports and internal tying
investigations of a banking organization.
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\8\ See, e.g., Federal Reserve Board Bank Holding Company
Supervision Manual 3500.0; Office of the Comptroller of the Currency
Insurance Activities Handbook, Federal Prohibitions on Tying (June
2002); Office of the Comptroller of the Currency Bulletin 95-20
(April 14, 1995).
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Over the past several months, Board staff also has met with
customers of
[[Page 52025]]
banks, professional associations representing customers of banks,
competitors of banks, and banking organizations and their trade
associations concerning the scope, effectiveness and impact of the
anti-tying restrictions of section 106 and related issues. In addition,
the Board has received inquiries from banks, competitors of banks,
customers of banks and a member of Congress regarding section 106 and
its application to specific situations.
In light of these events, the complexities associated with section
106, and the increasing importance of section 106 in the wake of the
Gramm-Leach-Bliley Act,\9\ the Board believes it would be useful and
appropriate at this time to publish, and seek public comment on, an
official interpretation of section 106 and supervisory guidance for
banks concerning section 106. In supervising compliance by banking
organizations with section 106 and this interpretation, the Board will
take into account whether the manner of applying section 106 or the
Board's interpretation in the context of a particular practice was
unclear before this document was issued.
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\9\ Pub. L. No. 106-102, 113 Stat. 1338 (1999).
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Outline of the Proposed Interpretation and Supervisory Guidance
The proposed statement explains the Board's interpretation of
section 106. The statement also sets forth the principles that the
Board will apply in enforcing the statute and in assessing the anti-
tying policies, procedures and systems of banks during the supervisory
process. The Board has consulted extensively with the Office of the
Comptroller of the Currency in developing the interpretation and
supervisory guidance.
The statement is divided into several parts. The first six parts
(Parts I-VI) are a proposed Board interpretation of section 106. These
parts describe the types of bank conduct that are prohibited by section
106 (Part II), explain the essential elements of a tying arrangement
prohibited by section 106 (Part III), and describe the statutory and
regulatory exceptions to the anti-tying prohibitions of section 106
(Part IV). The remainder of these six parts provide an introduction to
the statement (Part I) and discuss the scope of the terms ``bank'' and
``affiliate'' for purposes of section 106 and the statement (Parts V
and VI).
The final part of the statement (Part VII) discusses the policies,
procedures and systems that should help banks ensure and monitor their
compliance with section 106. This section is guidance that the Board
proposes to follow in its supervision of banking organizations going
forward.
The interpretation discusses a wide variety of issues related to
section 106. Among other matters, the Board's interpretation addresses
(i) the scope of the statutory and regulatory traditional bank product
exceptions, including the types of products that would qualify as a
traditional bank product (i.e., a ``loan, discount, deposit, or trust
service'') for purposes of the exceptions; (ii) the permissibility
under section 106 of relationship banking programs that involve both
traditional bank products and other products (referred to in the
interpretation and guidance as ``mixed-product arrangements''); and
(iii) whether tying arrangements voluntarily sought or demanded by a
customer are permissible under section 106. The interpretation also
includes examples of the types of conduct, actions and arrangements by
banks that are prohibited and permissible under section 106. These
examples, which are included for illustrative purposes, are based
solely on the facts stated in the example. Because the determination of
whether a violation of section 106 has occurred is fact specific, these
examples by themselves do not represent a finding that any past action
by a particular bank violated the statute.
The Board seeks comment on all aspects of the proposed
interpretation and supervisory guidance. In addition, the Board asks
commenters to identify and discuss any section 106 interpretive or
compliance issues that are not addressed in the statement but that, in
the view of commenters, would be of sufficient importance and general
interest to address either in the Board's interpretation or supervisory
guidance.
The proposed interpretation and related supervisory guidance
follows.
Interpretation of the Anti-tying Restrictions of Section 106 of the
Bank Holding Company Act Amendments of 1970 and Related Supervisory
Guidance
I. Introduction
The anti-tying provisions of section 106 of the Bank Holding
Company Act Amendments of 1970 (``section 106'' or the ``anti-tying
prohibitions'') prohibit certain forms of tying by banks.\10\ The
statute is intended to prevent banks from using their ability to offer
bank products, credit in particular, in a coercive manner to gain a
competitive advantage in markets for other products and services.
Although section 106 sets forth an absolute bar to certain forms of
tying by banks, the statute permits other types of tying and permits
the Board to grant additional exceptions to its prohibitions.
Violations of section 106 may be addressed by the bank's appropriate
Federal banking agency through an enforcement action, by the Department
of Justice through a request for an injunction, or by a customer or
other person injured by the illegal tying arrangement through a request
for an injunction or an action for damages.\11\
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\10\ 12 U.S.C. 1972(1).
\11\ 12 U.S.C. 1972, 1973, 1975 and 1976.
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This statement explains the Board's interpretation of the
prohibitions of, and statutory and regulatory exceptions to, section
106. This statement also reflects the principles and factors that the
Board will apply in conducting anti-tying reviews at banking
organizations and enforcing section 106. In addition, Part VII of this
statement includes supervisory guidance outlining the types of anti-
tying policies, procedures and systems that the Board believes will
help banks ensure compliance with section 106.
Banks and their affiliates also are subject to the tying
restrictions contained in the Sherman Act and the Clayton Act that
apply to all persons acting in interstate commerce.\12\ This statement
does not address the applicability of these general antitrust laws,
which are within the jurisdiction of the Department of Justice. This
statement also does not address the treatment of arrangements involving
customers and banks and their affiliates under other Federal or state
laws, including sections 23A and 23B of the Federal Reserve Act (12
U.S.C. 371c, 371c-1) and the Real Estate Settlement Procedures Act (12
U.S.C. 2601 et seq.).
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\12\ 15 U.S.C. 1 et seq.; 15 U.S.C. 12 et seq.
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II. What Conduct Is Prohibited by Section 106?
Section 106 prohibits a bank from extending credit, leasing or
selling any property or furnishing any service, or fixing or varying
the consideration for any of the foregoing, on the condition or
requirement that the customer do any of the following:
1. Obtain some additional credit, property or service from the
bank, other than a loan, discount, deposit or trust service;
2. Provide some additional credit, property or service to the bank,
other than those related to and usually provided in connection with a
loan, discount, deposit or trust service;
[[Page 52026]]
3. Obtain from or provide to an affiliate of the bank some
additional credit, property or service; or
4. Not obtain some additional credit, property or service from a
competitor of the bank or of an affiliate of the bank, unless the
condition is reasonably imposed in a credit transaction to ensure the
soundness of the credit.\13\
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\13\ For a discussion of the definition of the terms ``bank''
and ``affiliate,'' see Parts V and VI, respectively.
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As this list illustrates, section 106 prohibits banks from imposing
certain tying arrangements as well as certain reciprocity and exclusive
dealing arrangements on their customers.\14\ Thus, for example, section
106 prohibits a bank from imposing a condition on a prospective
borrower that requires the borrower to do any of the following in order
to obtain a loan from the bank--
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\14\ ``Tying arrangements'' are arrangements that require a
customer to obtain a product from the bank or one of its affiliates
as a condition of the bank providing another product to the
customer. ``Reciprocity arrangements'' are arrangements that require
a customer to provide a product to the bank or one of its affiliates
as a condition of the bank providing another product to the
customer. ``Exclusive dealing arrangements'' are arrangements that
require a customer not to obtain a product from a competitor of the
bank or of an affiliate as a condition of the bank providing another
product to the customer.
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[sbull] Purchase an insurance product from the bank or an affiliate
of the bank (a prohibited tie);
[sbull] Obtain corporate debt or equity underwriting services from
an affiliate of the bank (a prohibited tie);
[sbull] Sell the bank or an affiliate of the bank a piece of real
estate unrelated to the requested loan (a prohibited reciprocity
arrangement); or
[sbull] Refrain from obtaining insurance products or securities
underwriting services from a competitor of the bank or from a
competitor of an affiliate of the bank (a prohibited exclusive dealing
arrangement).
For ease of reference, this statement uses the phrase ``tying
arrangement'' to refer to all types of tying, reciprocity and exclusive
dealing arrangements described in section 106. In addition, although
section 106 generally refers to ``credit,'' ``property'' or ``service''
in describing the items sought or required to be obtained from (or
provided to) the bank or an affiliate, this statement uses the term
``product'' to refer to any type of credit, property or service.
There are several noteworthy points about the anti-tying
prohibitions of section 106. First, section 106 does not require a bank
to extend credit or provide any other product to any customer. That is,
section 106 does not prohibit a bank from declining to provide credit
or any other product to a customer so long as the bank's decision is
not based on the customer's failure to satisfy a condition or
requirement prohibited by section 106. Thus, for example, section 106
does not prohibit a bank from denying credit to a customer on the basis
of the customer's financial condition, financial resources or credit
history, or because the bank does not offer (or seeks to exit the
market for) the type of credit requested by the customer.
Second, section 106 applies only to tying arrangements that are
imposed by a bank. The statute does not apply to tying arrangements
imposed by a nonbank affiliate of a bank.\15\ For example, section 106
prohibits a bank from requiring a person to purchase insurance from the
bank's insurance affiliate in order to obtain a reduced interest rate
on a loan from the bank. Importantly, such an arrangement is prohibited
by section 106 even if the customer is informed of the bank's reduced-
rate offer by the bank's insurance affiliate (for example, when the
customer applies to the insurance affiliate to obtain insurance). In
either case, it is the bank that is varying the price of a bank product
(the loan) based on a requirement that the customer obtain another
product (insurance) from an affiliate. Such action by the bank violates
section 106.
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\15\ Tying arrangements imposed by a nonbank affiliate of a bank
are, however, subject to the anti-tying restrictions of the general
antitrust laws.
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On the other hand, section 106 does not apply to the insurance
agency affiliate of the bank.\16\ Thus, section 106 would not prohibit
the insurance agency affiliate of a bank from offering a discount on
the premiums the affiliate charges to customers that purchase more than
one type of insurance (e.g., homeowners and automobile insurance) from
the affiliate. In addition, section 106 would not prohibit the
insurance agency affiliate from offering discounts on premiums to
customers who also have a loan from, or deposit account with, the bank.
In both of these cases, it is the affiliate (and not the bank) that has
imposed the condition governing the sale of its products.\17\
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\16\ There is one exception to the general rule that affiliates
of a bank are not subject to section 106. This exception is
discussed in Part V.
\17\ A bank, however, may not evade the prohibitions of section
106 by engaging jointly with an affiliate in a transaction in which
the affiliate nominally imposes a condition on the customer that the
bank is prohibited from imposing on the customer under section 106.
Part VI of this statement provides some examples of situations when
a tie that is nominally imposed by an affiliate of a bank will be
viewed as a tie imposed by the bank for purposes of section 106.
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Third, section 106 covers some activities that are not included in
the conventional notion of tying. Namely, section 106 prohibits banks
from granting certain types of price discounts--that is, varying the
price of a product on the condition that the customer purchase one or
more other products from the bank or an affiliate. Thus, section 106
may restrict the ability of banks to provide price discounts (including
rebates) on bundled products depending on what products are in the
bundle and which ones are discounted. Section 106 does not, however,
prohibit a bank from discounting the price of an individual product for
reasons that are unrelated to another product. For example, a bank may
offer a customer a discount on the purchase of an individual product in
light of the amount of the individual product proposed to be purchased
by the customer, the creditworthiness of the customer, or the unique
features of the product or transaction.
Fourth, several important exceptions exist to the general
prohibitions of section 106. For example, the statute itself expressly
permits a bank to condition the availability or price of a product on a
requirement that the customer also obtain a loan, discount, deposit or
trust service from the bank. The statute also expressly permits a bank
to condition the availability or price of a product on a requirement
that the customer provide the bank some additional product that is
related to and usually provided in connection with a loan, discount,
deposit or trust service. The Board, acting pursuant to authority
conferred by section 106, also has adopted by regulation several
important exceptions to the statute's anti-tying restrictions.\18\ The
statutory and regulatory exceptions to section 106 are discussed in
Part IV of this statement.
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\18\ 12 U.S.C. 1972(1). The exceptions to section 106 adopted by
the Board by regulation are codified in section 225.7 of the Board's
Regulation Y (12 CFR 225.7).
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Because of the statute's complexity and the importance of the
actions, statements and policies of the bank in analyzing whether
section 106 has been violated, the determination of whether a violation
of section 106 has occurred often requires a careful review of the
specific facts and circumstances associated with the relevant
transaction (or proposed transaction) between the bank and the
customer. Banks should establish and maintain policies, procedures and
systems that, in light of the nature, scope and complexity of the
bank's activities, are reasonably designed to ensure that the bank's
employees and representatives are trained appropriately concerning the
[[Page 52027]]
anti-tying prohibitions of section 106 and that the bank complies with
the statute. Part VII of this statement discusses the types of
policies, procedures and systems that should help banks comply with the
anti-tying restrictions of section 106.
Bank customers that believe they have been the object of a tying
arrangement prohibited by section 106 are encouraged to contact the
appropriate Federal banking agency for the bank involved. These
agencies are the Office of the Comptroller of the Currency for national
banks, the Board for state-chartered banks that are members of the
Federal Reserve System (``state member banks''), and the Federal
Deposit Insurance Corporation for state-chartered banks that are not
members of the Federal Reserve System (``state non-member banks'').
Savings associations are subject to anti-tying restrictions under
the Home Owners' Loan Act (HOLA) that are virtually identical to those
applicable to banks under section 106.\19\ Customers of a savings
association that believe the savings association has violated the anti-
tying restrictions of the HOLA should contact the Office of Thrift
Supervision.
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\19\ See 12 U.S.C. 1464(q); Integon Life Insurance Corp. v.
Browning, 989 F.2d 1143, 1149 (11th Cir. 1993).
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III. What Are the Essential Elements of an Impermissible Tying
Arrangement Under Section 106?
Congress modeled section 106 on the anti-tying principles developed
under the general antitrust laws (the Sherman and Clayton Acts), which
apply to all companies, including banks and their affiliates, that act
in interstate commerce. As a general matter, a tying arrangement
violates the Sherman and Clayton Acts if:
(1) The arrangement involves two or more separate products;
(2) The seller forces a customer seeking to purchase one of the
products (the ``desired product'') also to purchase the other product;
(3) The seller has sufficient economic power in the market for the
desired product to enable it to restrain trade in the market for the
other product;
(4) The arrangement has anti-competitive effects in the market for
the other product; and
(5) The arrangement affects a ``not insubstantial'' amount of
interstate commerce.\20\
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\20\ See Yentsch v. Texaco, Inc., 630 F.2d 46 (2d Cir. 1980);
Tic-X-Press, Inc. v. Omni Promotions Co., 815 F.2d 1407 (11th Cir.
1987); see also 9 Phillip Areeda, Antitrust Law at ] 1702 (1991). A
tying arrangement may be found to be per se illegal under the
general antitrust laws without any showing of anti-competitive
effects in the market for the other product if the seller has
sufficiently strong economic power in the market for the desired
product. See Jefferson Parish Hospital District No. 2 v. Hyde, 466
U.S. 2 (1984). In these cases, the courts essentially assume that
the tying arrangement, combined with the seller's strong economic
position in the market for the desired product, has or will produce
anti-competitive effects. Id. at 16, n. 25.
In conventional antitrust parlance, the desired product is known
as the ``tying product,'' because it is customers' desire to obtain
it that allows a producer to tie other, possibly unwanted products--
the tied products--to it. In the interest of clarity, this statement
uses the term ``desired product'' instead of ``tying product.''
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Although tying arrangements by banks are subject to the general
antitrust laws, Congress determined to subject tying arrangements by a
bank to a stricter standard. As a general matter, there are only two
essential elements that must be shown to establish that a tying
arrangement by a bank violates section 106:
(1) The arrangement must involve two or more separate products: the
customer's desired product(s) and one or more separate tied products;
and
(2) The bank must force the customer to obtain (or provide) the
tied product(s) from (or to) the bank or an affiliate in order to
obtain the customer's desired product(s) from the bank.\21\
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\21\ Legislative history indicates that economic power, anti-
competitive effects, and effects on interstate commerce are not
necessary elements of a section 106 claim. See S. Rep. No. 1084,
91st Cong., 2d Sess. (1970), reprinted in 1970 U.S.C.C.A.N. 5519,
5558 (``Senate Report'') (Supplementary views of Sen. Brooke);
Senate Report at 5547 (Supplementary views of Senators Bennett,
Tower, Percy and Packwood); see also Integon Life Insurance Corp. v
Browning, 989 F.2d 1143 (11th Cir. 1993); Amerifirst Properties,
Inc. v. FDIC, 880 F.2d 821 (5th Cir. 1989); 62 FR 9290, 9313, Feb.
28, 1997; 59 FR 65473, Dec. 20, 1994.
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This Part III discusses the essential elements of any prohibited
tying arrangement under section 106.\22\ Part IV discusses the
statutory and regulatory exceptions to these general rules, as well as
special issues that arise in applying these exceptions.
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\22\ The exclusive dealing prohibition in section 106 (12 U.S.C.
1972(1)(E)) also prohibits a bank from requiring that a customer
refrain from obtaining another product from a competitor of the bank
or of an affiliate in order to obtain the customer's desired
product. Although exclusive dealing arrangements are not
specifically discussed in this Part III, the elements discussed in
this Part III are equally applicable to exclusive dealing
arrangements prohibited by section 106.
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A. Arrangement Must Involve Two Products--a Desired Product and a Tied
Product.
In order for a tying arrangement to exist under section 106, the
arrangement must involve two or more separate products. A bank does not
violate section 106 by requiring a customer to obtain (or provide) two
or more aspects of a single product from (or to) the bank or an
affiliate, or by conditioning the availability or varying the price of
a product on the basis of the characteristics or terms of that
product.\23\ For example, a bank does not violate section 106 by
requiring--
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\23\ As a general matter, two products are separate and distinct
for purposes of section 106 only if there is sufficient consumer
demand for each of the products individually that it would be
efficient for a firm to provide the two products separately. See
Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451,
462 (1992); Jefferson Parish Hospital District No. 2 v. Hyde, 466
U.S. 2, 19 (1984). Determining whether sufficient consumer demand
exists for the two products separately often is a highly fact-
intensive inquiry that depends on the nature and character of the
products and markets involved. See 2 Joseph P. Bauer and William H.
Page, Kintner Federal Antitrust Law 13.17 (2002).
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[sbull] A prospective borrower to provide the bank specified
collateral in order to obtain the loan or to obtain the loan at a
favorable interest rate; or
[sbull] An existing borrower to post additional collateral, accept
a higher interest rate, or provide updated or additional financial
information as a condition of renewal of the loan.
In such circumstances, the bank's conditions relate to the single
product sought by the customer (a loan) and do not involve separate,
distinguishable products.\24\
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\24\ A tying arrangement, however, may exist where a bank
imposes a condition that involves two separate products of the same
type (e.g., two separate insurance products).
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In applying section 106, it is useful to identify which of the
separate products is the ``tied product'' and which is the ``desired
product.'' The ``tied product'' is the product that the customer is
required to obtain (or provide) in order to have access to or get a
price discount on the ``desired product.'' Section 106 is premised on
the notion that the ``desired product'' is the product the customer
really seeks.
To illustrate, suppose a customer seeks a mortgage loan (the
desired product) from a bank. Section 106 prohibits a bank from
requiring that the customer purchase homeowners insurance (the tied
product) from the bank or an affiliate of the bank as a condition to
granting the customer the mortgage loan or a discount on the loan.
However, as discussed in Part IV, some exceptions from the statute's
prohibitions are available where the tied product is a traditional bank
product (that is a loan, discount, deposit or trust service). The Board
notes that certain types of derivative products, such as interest rate
and foreign exchange swaps, often are sold by banks and purchased by
customers in connection with lending transactions. The Board
[[Page 52028]]
requests comment on how interest rate swaps, foreign exchange swaps,
and other derivative products that often are connected with lending
transactions should be treated under section 106.
B. Bank--Imposed Condition or requirement.
Section 106 applies only if a bank provides or offers to provide a
customer one product (the desired product), or a discount on the
desired product, ``on the condition or requirement'' that the customer
obtain (or provide) an additional product (the tied product) from (or
to) the bank or an affiliate. This element of section 106 was modeled
on the tying prohibitions in the general antitrust laws.
Under the general antitrust laws, an illegal tie exists only where
the seller forces the customer to purchase the tied product in order
for the customer to obtain its desired product.\25\ Accordingly, a
seller engages in an illegal tie under the general antitrust laws only
if it requires the customer to purchase the tied product to obtain the
customer's desired product.\26\ Moreover, the evidence must demonstrate
that the seller imposed the arrangement on the customer through some
type of coercion.\27\ Thus, the courts have held that a seller's
bundled sale of multiple products to a customer does not violate the
general antitrust laws if the customer voluntarily decided to purchase
the package of products from the seller.\28\ In such circumstances, the
seller has not coerced or forced the buyer to purchase any product from
the seller.
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\25\ See Times-Picayune Publishing Co. v. United States, 345
U.S. 594, 614 (1953) (``The common core of . . . unlawful tying
arrangements is the forced purchase of a second distinct commodity
with the desired purchase of a dominant `tying' product'')(emphasis
added); see also Datagate, Inc. v. Hewlett-Packard Co., 60 F.3d 1421
(9th Cir. 1995), cert. denied 517 U.S. 1115 (1996); Thompson v.
Multi-List, Inc., 934 F.2d 1566, 1577-78 (11th Cir. 1991), reh'g en
banc denied 946 F.2d 906 (1991); Yentsch v. Texaco, Inc., 630 F.2d
46, 56-57 (2d Cir. 1980); Response of Carolina, Inc. v. Leasco
Response, Inc., 537 F.2d 1307, 1327 (5th Cir. 1976); American
Manufacturers Mut. Ins. Co. v. American Broadcasting-Paramount
Theatres, Inc., 446 F.2d 1131, 1137 (2d Cir. 1971), cert. denied 404
U.S. 1063 (1972).
\26\ See, e.g., Northern Pacific Ry. v. United States, 356 U.S.
1, 5-6 (1958) (``a tying arrangement may be defined as an agreement
by one party to sell one product only on the condition that the
buyer also purchases a different (or tied) product'') (emphasis
supplied); Tic-X-Press, Inc. v. Omni Promotions Co., 815 F.2d 1407,
1415-17 (11th Cir. 1987); 9 Phillip Areeda, Antitrust Law at ] 1752
(1991) (``There is no tie for any antitrust purpose unless the
defendant improperly imposes conditions that explicitly or
practically require buyers to take the second product if they want
the first one.'')
\27\ See, e.g., Thompson v. Multi-List, Inc., 934 F.2d 1566,
1577-78 (11th Cir. 1991), reh'g en banc denied 946 F.2d 906 (1991);
Tic-X-Press, Inc. v. Omni Promotions Co., 815 F.2d 1407, 1415 &
1418-19 (11th Cir. 1987); Unijax, Inc. v. Champion Int'l, Inc., 683
F.2d 678, 685 (2d Cir. 1982) (``Actual coercion by the seller that
in fact forces the buyer to purchase the tied product is an
indispensable element of a tying violation.''); Bob Maxfield, Inc.
v. American Motors Corp., 637 F.2d 1033, 1037 (5th Cir.) (``actual
coercion is an indispensable element of a tie-in charge''), cert.
denied 454 U.S. 860 (1981).
\28\ See, e.g., Tic-X-Press, Inc. v. Omni Promotions Co., 815
F.2d 1407, 1417 (11th Cir. 1987) (``two products are not tied as a
matter of antitrust law if the buyer voluntarily purchases the tied
product''); Sports Form, Inc. v. United Press International, Inc.,
686 F.2d 750, 754 (9th Cir. 1982) (``Where a company is simply sold
what it wishes to buy, there can be no tying problem.''); Dunkin
Donuts of America, Inc. v. Dunkin Donuts, Inc., 531 F.2d 1211, 1224
(3d Cir.), cert. denied 429 U.S. 823 (1976) (``a voluntary purchase
of two products is simply not a tie-in''); Capital Temporaries, Inc.
v. Olsten Corporation, 506 F.2d 658, 662 (2d Cir. 1974) (``We do not
think that there can be any question that no tying arrangement can
possibly exist unless the person aggrieved can establish that he has
been required to purchase something which he does not want to
take.'')
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The language and legislative history of section 106 indicate that
this distinction between an arrangement imposed by the seller and one
voluntarily sought by the customer also is embedded in section 106.\29\
Accordingly, section 106 applies only if each of two requirements are
met: (1) A condition or requirement exists that ties the customer's
desired product to another product; and (2) this condition or
requirement was imposed or forced on the customer by the bank.\30\
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\29\ See Conf. Rep. No. 1747, 91st Cong., 2d Sess., reprinted in
1970 U.S.C.C.A.N. 5561, 5569 (``Conference Report'').
\30\ As discussed in Part IV, exceptions to section 106 allow a
bank to impose a condition on a customer in certain circumstances
where the tied product is a traditional bank product. In addition,
as discussed in Part IV, arrangements that allow the customer the
option to satisfy a condition imposed by the bank through the
purchase of traditional bank products or other products do not force
a customer to purchase a non-traditional product in violation of
section 106 if the customer has a meaningful choice of satisfying
the condition solely through the purchase of traditional bank
products.
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1. Existence of a condition or requirement.
First, a violation of section 106 may occur only when a customer is
required to obtain an additional product from, or provide an additional
product to, the bank or an affiliate in order to obtain the customer's
desired product or a discount on the desired product.\31\ It is the
existence of such a requirement that forms the heart of an illegal
tying arrangement. Absent a requirement that the customer obtain a
separate product from, or provide a separate product to, the bank or an
affiliate, there is no ``tie'' between the customer's desired product
and another product.
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\31\ See Conference Report at 5580 (Section 106 ``prohibits any
subsidiary bank from providing any credit, property or service for a
customer on the condition that he must obtain from, or provide to,
the holding company or any other subsidiary thereof some additional
credit, property or service.''); Senate Report at 5535 (``The
purpose of [the anti-tying provisions] is to prohibit anti-
competitive practices which require bank customers to accept or
provide some other service or product or refrain from dealing with
other parties in order to obtain the bank product or services they
desire.''); see also Integon Life Insurance Corp. v Browning, 989
F.2d 1143 (11th Cir. 1993); Tose v. First Pennsylvania Bank, 648
F.2d 879 (3rd Cir. 1981), cert. denied 454 U.S. 893 (1981); Duryea
v. Third Northwestern National Bank, 606 F.2d 823 (8th Cir. 1979);
Stefiuk v. First Union, 61 F. Supp.2d 1294 (S.D. Fla. 1999), aff'd
without opinion 207 F.3d 664 (11th Cir. 2000).
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Thus, for example, a bank would violate section 106 if the bank
informs a customer seeking only a loan from the bank that the bank will
make the loan only if the customer commits to hire the bank's
securities affiliate to underwrite an upcoming bond offering for the
customer. In this example, the bank has conditioned the availability of
credit to the customer on a requirement that the customer obtain
another product (bond underwriting services) from an affiliate of the
bank.
Section 106, however, does not prohibit a customer from deciding on
its own to award some of its business to a bank or an affiliate as a
reward for the bank previously providing credit or other products to
the customer. Using the example in the previous paragraph, if the bank
made the loan to the customer without conditioning it on a requirement
that the customer obtain one or more additional products from the bank
or an affiliate, then no tie actionable under section 106 would exist
if the customer later voluntarily decides to award some of its
securities underwriting business to the bank's securities affiliate.
In addition, section 106 does not prohibit a bank from granting
credit or providing any other product to a customer based solely on a
desire or hope (but not a requirement) that the customer will obtain
additional products from the bank or its affiliates in the future. This
is true even if the bank conveys to the customer this desire or hope
for additional business. Section 106 also does not prohibit a bank from
cross-marketing the full range of products offered by the bank or its
affiliates to a customer or encouraging an existing customer to
purchase additional products offered by the bank or its affiliates.
Cross-marketing and cross-selling activities, whether suggestive or
aggressive, are part of the nature of ordinary business dealings and do
not, in and of themselves, represent a violation of section 106.
However, bank actions that go beyond cross-marketing or cross-selling
and that
[[Page 52029]]
indicate that the bank will not provide the customer the desired
product unless the customer obtains (or provides) another product from
(or to) the bank or an affiliate do raise issues under section 106.
Importantly, a prohibited tying arrangement does not exist if the
bank offers the customer the opportunity to obtain the customer's
desired product (or a discount on the desired product) from the bank
separately from the allegedly tied product. That is, if the customer
was offered the option of obtaining the customer's desired product or
discount from the bank without also obtaining (or providing) the
allegedly tied product from (or to) the bank or an affiliate, then the
customer was not required to obtain (or provide) the other product to
obtain the desired product or discount. In such circumstances, no
``tie'' would exist between the two products for purposes of section
106.\32\
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\32\ See John Doe v. Norwest Bank Minnesota, N.A., 107 F.3d
1297, 1304 (8th Cir. 1997); Stefiuk v. First Union Nat'l Bank, 61 F.
Supp. 2d 1294, 1299 (S.D. Fla. 1999), aff'd without opinion 207 F.3d
664 (11th Cir. 2000); Nordic Bank PLC v. Trend Group, Ltd., 619 F.
Supp. 542, 553 (S.D.N.Y. 1985).
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2. Condition or requirement was imposed or forced on the customer
by the bank.
Even if a condition or requirement exists tying the customer's
desired product to another product, a violation of section 106 may
occur only if the condition or requirement was imposed or forced on the
customer by the bank.\33\ In this regard, section 106 was intended to
prohibit banks from using their ability to offer bank products, and
credit in particular, as leverage to force a customer to purchase (or
provide) another product from (or to) the bank or an affiliate.\34\ It
was not the purpose of the statute to prohibit bank customers from
using their own bargaining power to obtain a package of desired
products from a bank and its affiliates or a price discount on those
products. Similarly, it was not the purpose of the statute to prohibit
customers from voluntarily seeking and obtaining multiple products that
the customer desires from a bank or its affiliates.\35\
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\33\ See 116 Cong. Rec. S15708 (daily ed. Sept. 16, 1970) (``The
bill as amended would require that a condition or requirement
imposed by the bank must be demonstrated in order to prove that a
violation of [section 106] has occurred.'') (Statement of Sen.
Bennett).
\34\ See Conference Report at 5569 (``Section 106 of the bill,
which has become known as the anti-tie-in section, will largely
prevent coercive tie-ins and reciprocity.''); 116 Cong. Rec. S20647
(daily ed. Dec. 18, 1970) (Statement of Sen. Brooke) (violation of
section 106 occurs ``where the totality of the circumstances
indicates that the customer has not voluntarily entered into the
transaction, but rather has been induced into doing so through
coercion''); 116 Cong. Rec. S15709 (daily ed. Sept. 16, 1970)
(attaching letter from Arthur Burns, Chairman of the Board of
Governors of the Federal Reserve System, noting that section 106
``would prohibit coercive tie-ins involving banks, bank holding
companies, and their subsidiaries'').
\35\ See Conference Report at 5569; 116 Cong. Rec. S16316 (daily
ed. Sept. 23, 1970) (Remarks of Donald I. Baker, Deputy Director of
Policy Planning, Antitrust Division, Department of Justice,
submitted by Senator Proxmire). The statute's legislative history,
for example, indicates that a voluntary tie-in may occur when a
customer believes that it stands a better chance of ``securing a
scarce and important commodity (such as credit) by `volunteering' to
accept other products or services'' from the bank or its affiliates.
Although the statute's legislative history characterizes this type
of voluntary tying as generally being undesirable, it also
explicitly states that such voluntary tying is not prohibited by
section 106. See Conference Report at 5569. The Board also has noted
previously that section 106 prohibits coercive tying arrangements,
but does not prohibit voluntary tying. See, e.g., Mercantile
Bancorporation, 66 Federal Reserve Bulletin 799 (1980); Barnett
Banks, Inc., 61 Federal Reserve Bulletin 678 (1975).
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Accordingly, if a condition or requirement exists, further inquiry
may be necessary to determine whether the condition or requirement was
imposed or forced on the customer by the bank. If the condition or
requirement resulted from coercion by the bank, then the condition or
requirement violates section 106, unless an exemption is available for
the transaction.\36\ Prohibited coercive actions may be explicit or
implicit. In some cases, a bank's coercive behavior may be clear from
the agreement or conversations between the bank and the customer. In
other cases, coercion may be implicit and reasonably inferred from the
facts and circumstances surrounding the transaction.
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\36\ The Board recognizes that some courts have held that a
tying arrangement may violate section 106 without a showing that the
arrangement resulted from any type of coercion by the bank. See,
e.g., Dibidale of Louisiana, Inc. v. American Bank & Trust Company,
916 F.2d 300 (5th Cir. 1990). After carefully reviewing the
language, legislative history and purposes of the statute, the Board
believes the better interpretation of section 106 is that a
violation may exist only if a bank forces or coerces a customer to
obtain (or provide) the tied product as a condition to obtaining the
customer's desired product.
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On the other hand, if a condition or requirement was voluntarily
sought or imposed by the customer, then the arrangement results from
the free choice of the customer and no violation of section 106 has
occurred. Thus, for example, a violation of section 106 does not occur
if a large corporate customer of a bank demands that the bank provide
the customer one product (such as a loan) in order for the bank or its
affiliates to obtain other business from the customer (such as bond
underwriting business), and the bank agrees to the customer's
condition. In such circumstances, it is the customer that is using its
business as leverage to obtain the products it desires--an action that
does not implicate the purposes or proscriptions of section 106.
Likewise, a violation of section 106 does not occur if a customer
seeking to engage in a multi-faceted corporate transaction voluntarily
solicits a bid from a bank and its securities affiliate for a package
of products related to the transaction (such as a bridge loan,
strategic advisory services, and bond underwriting services) and the
bank and the securities affiliate offer to provide the customer all of
the requested products.
3. Factual inquiry required.
As the foregoing illustrates, the specific facts and circumstances
surrounding the bank-customer relationship often will be critical in
determining whether a prohibited condition or requirement existed and
whether the condition or requirement was imposed or forced on the
customer by the bank or was volunteered or sought by the customer.
Typically, the terms of the bank's offer to the customer or the
agreement entered into between the bank and the customer will provide
the best evidence of whether the customer was required to purchase (or
provide) an additional product as a condition of obtaining the
customer's desired product. The timing and sequence of the offers,
purchases or other transactions between the customer and the bank or
its affiliates that form the basis of the alleged tying arrangement,
and the nature of the condition or requirement itself, also may be
particularly relevant in determining whether the customer was required
to obtain (or provide) the tied product in order to obtain the desired
product.
Other information that may be useful in determining whether a
condition or requirement exists and, if so, whether the bank coerced
the customer into accepting the condition or requirement include any
correspondence and conversations between the bank and the customer
concerning the transaction; the marketing or other materials presented
to the customer by the bank or an affiliate; the bank's course of
dealings with the customer and other similarly situated customers; the
banking organization's policies and procedures; the customer's course
of dealings with the bank and other financial institutions; the
financial resources and level of sophistication of the customer; and
whether the customer was represented by legal counsel or other
advisors.
[[Page 52030]]
IV. What Are the Exceptions to the Anti-Tying Prohibitions of Section
106?
Section 106 contains several exceptions to its anti-tying
prohibitions. Congress also authorized the Board to grant additional
exceptions from the statute's prohibitions, by regulation or order, if
the Board determines the exception ``will not be contrary to the
purposes of [section 106].'' \37\ The exceptions adopted by Congress
and the authorization granted to the Board to grant additional
exceptions were intended in part to ensure that section 106 did not
interfere with the conduct of appropriate traditional banking
practices.\38\
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\37\ 12 U.S.C. 1972(1). The exceptions that the Board has
adopted by regulation are set forth at section 225.7(b) of the
Board's Regulation Y (12 CFR 225.7(b)). Regulation Y expressly
permits the Board to terminate the eligibility of a bank to operate
under any exception set forth in section 225.7(b) if the Board finds
the activities conducted by the bank under the exception result in
anti-competitive practices. 12 CFR 225.7(c).
\38\ See 116 Cong. Rec. S15708 (daily ed. Sept. 16, 1970)
(Statement of Sen. Bennett); see also Senate Report at 5535.
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A. Tying Arrangements Involving Traditional Bank Products.
1. Statutory and regulatory exceptions.
Section 106 specifically allows a bank to condition both the
availability and price of any bank product (the desired product) on the
requirement that the customer obtain a ``traditional bank product''
(the tied product) from the bank. One of the purposes of this exception
was to allow banks and their customers to continue to negotiate their
fee arrangements on the basis of the customer's entire banking
relationship with the bank.\39\ The Board has extended this exception
by regulation to include situations where the tied product is a
traditional bank product offered by an affiliate of the bank, rather
than by the bank itself.\40\ Taken together, these exceptions allow a
bank to restrict the availability or vary the price of any bank product
on the condition that the customer also obtain a traditional bank
product from the bank or an affiliate of the bank.
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\39\ See id.
\40\ See 12 CFR 225.7(b)(1)(i).
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Several facts are important in determining whether the traditional
bank product exceptions apply in a given situation. First, the
exceptions are available only if the tied product is a traditional bank
product. The availability of the exceptions, however, does not depend
on the type of desired product involved; the desired product may or may
not be a traditional bank product.
Second, the exceptions apply only if the tied product is a defined
traditional bank product. The statute defines a traditional bank
product to be a ``loan, discount, deposit, or trust service.'' \41\ The
statute also defines a ``trust service'' to mean any service
customarily performed by a bank trust department.\42\ Products that
fall within the scope of these terms include, among other things, the
following:
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\41\ 12 U.S.C. 1972(1)(A).
\42\ Id. at section 1971. A product that meets this ``trust
service'' standard is a traditional bank product even if the bank or
affiliate providing the product does not have, or does not provide
the product through, a trust department.
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[sbull] All types of extensions of credit, including loans, lines
of credit, and backup lines of credit; \43\
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\43\ An ``extension of credit'' for this purpose does not
include underwriting, privately placing or brokering debt
securities.
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[sbull] Letters of credit and financial guarantees;
[sbull] Lease transactions that are the functional equivalent of an
extension of credit; \44\
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\44\ ``CEBA leases'' that are entered into by banks pursuant to
12 U.S.C. 24 (Tenth) are not considered to be the functional
equivalent of an extension of credit.
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[sbull] Credit derivatives where the bank or affiliate is the
seller of credit protection;
[sbull] Acquiring, brokering, arranging, syndicating and servicing
loans or other extensions of credit;
[sbull] All forms of deposit accounts, including demand, negotiable
order of withdrawal (``NOW''), savings and time deposit accounts;
[sbull] Safe deposit box services;
[sbull] Escrow services;
[sbull] Payment and settlement services, including check clearing,
check guaranty, ACH, wire transfer, and debit card services;
[sbull] Payroll services;
[sbull] Traveler's check and money order services;
[sbull] Cash management services; \45\
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\45\ The term ``cash management services'' refers generally to
the payment and collection services that are provided to customers
to speed collection of receivables, control payments and efficiently
manage deposit balances. Cash management services may include one or
more of the traditional bank products listed separately above, such
as deposit, payment and lockbox services.
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[sbull] Services provided as trustee or guardian, or as executor or
administrator of an estate;
[sbull] Discretionary asset management services provided as
fiduciary; \46\
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\46\ A bank has discretionary authority over an account for
these purposes if the bank, acting in a fiduciary capacity, has sole
or shared authority (whether or not that authority is exercised) to
determine what assets to purchase or sell on behalf of the account.
See 12 CFR 9.2(i).
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[sbull] Custody services (including securities lending services);
and
[sbull] Paying agent, transfer agent and registrar services.
Thus, for example, the traditional bank product exceptions permit a
bank to condition the availability or price of a particular loan on a
requirement that the customer maintain a specified amount of deposits
with the bank or its affiliates. Similarly, a bank may inform a
customer that it will lend (or continue lending) to the customer only
if the customer obtains cash management services from the bank or its
affiliates. In both cases, the bank's actions are permissible because
the tied products (deposits and cash management services) are
traditional bank products.
A bank, however, may not require a customer seeking an auto loan
from the bank to purchase automobile insurance from the bank or from an
insurance agency affiliate of the bank. Although the desired product
(an auto loan) in this case is a traditional bank product, the tied
product (automobile insurance) is not and, accordingly, the traditional
bank product exceptions are not available for this transaction.
2. Mixed-product arrangements.
As discussed above, section 106 does not prohibit a bank from
conditioning the grant of a loan to a customer on a requirement that
the customer also obtain one or more traditional bank products, or a
specified amount of traditional bank products, from the bank or its
affiliates. In some cases, however, a bank may wish to provide a
customer the freedom to choose whether to satisfy a condition imposed
by the bank through the purchase of one or more traditional bank
products or other ``non-traditional'' products (a ``mixed-product
arrangement'').\47\ Allowing a bank to offer the customer the option of
satisfying a condition by purchasing either traditional bank products
or non-traditional products can provide benefits to the customer (by
increasing the choices available to the customer) without requiring the
customer to purchase any non-traditional product from the bank or an
affiliate in violation of section 106.\48\
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\47\ As used in this discussion, a mixed-product arrangement
involves a choice among traditional bank products and non-
traditional products. The term does not apply to arrangements that
involve only traditional bank products (which, as discussed in Part
IV.A.1., are permissible under section 106) or arrangements that
involve only non-traditional products (which, as discussed
throughout this statement, may be prohibited by section 106).
\48\ The Board previously has noted that the addition of non-
traditional products to a menu of traditional bank products offered
a customer may, in some circumstances, increase customer choice in a
manner consistent with the purposes and intent of section 106. See
60 FR 20186, 20187-88, April 25, 1995. Indeed, this rationale formed
the basis of the safe harbor that the Board adopted in 1995, as an
exception to section 106, for certain types of combined-balance
discount programs. Id. This safe harbor is discussed further in Part
IV.D.
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[[Page 52031]]
Accordingly, where a bank offers a customer a mixed-product
arrangement, further analysis may be necessary to determine whether the
offer constitutes a tying arrangement prohibited by section 106. If the
customer that is offered the mixed-product arrangement has a meaningful
option to satisfy the bank's condition solely through the purchase of
the traditional bank products included in the arrangement, then the
bank's offer would not, in fact, require the customer to purchase any
non-traditional product from the bank or its affiliates in violation of
section 106.\49\ In these circumstances, the customer has been provided
a meaningful choice in determining whether to satisfy the bank's
condition through the purchase of traditional bank products or non-
traditional products, and the bank's inclusion of non-traditional
products within the range of tied products may be viewed as giving the
customer additional flexibility in determining how it may choose to
satisfy a condition that the bank is permitted by law to impose.
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\49\ Cf. Tic-X-Press, Inc. v. Omni Promotions Co., 815 F.2d
1407, 1416-17 (11th Cir. 1987) (a tying arrangement does not exist
under the Sherman Act if the buyer had ``meaningful freedom of
choice'' in deciding whether or not to purchase allegedly tied
product from the seller); Stephen Jay Photography, Ltd. v. Olan
Mills, Inc., 903 F.2d 988, 991 (4th Cir. 1990) (tying arrangement
does not exist if customer had the option to purchase, or not
purchase, the allegedly tied product).
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If, on the other hand, the customer does not have a meaningful
option to satisfy the bank's condition solely through the purchase of
the traditional bank products included in the arrangement, then the
arrangement violates section 106 because the arrangement effectively
requires the customer to purchase one or more non-traditional products
in order to obtain the customer's desired product or a discount on the
desired product. A mixed-product arrangement also would violate section
106 if the facts indicate that the bank did not provide the customer
the freedom to choose to satisfy the bank's condition solely through
the purchase of one or more of the traditional bank products included
in the mixed-product arrangement.\50\
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\50\ Thus, a bank would violate section 106 if it ostensibly
offered a customer a mixed-product arrangement, but informed the
customer that the customer could satisfy the bank's condition only
by purchasing one or more of the non-traditional products included
in the arrangement.
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To illustrate a mixed-product arrangement, assume Company, a large
manufacturing concern with an investment-grade credit rating, has a
backup credit facility with Bank that will shortly come up for renewal.
Assume also that Bank and its affiliates periodically review the
overall profitability of their combined business relationships with
their large corporate customers to determine whether the profitability
of the customers' aggregate business relationships with Bank and its
affiliates meets the internal profitability threshold (the ``hurdle
rate'') established by Bank and its affiliates for that customer or
type of customer. In accordance with this policy, Bank conducts a
review of the overall profitability of Company's relationships with
Bank and its affiliates and determines that the profitability of
Company's existing relationships with Bank and its affiliates (i.e.,
the credit facility with Bank) does not meet the hurdle rate.
In light of this review, Bank informs Company that Bank will not
renew Company's credit facility unless Company commits to provide Bank
or its affiliates sufficient additional business to allow Company's
overall relationships with Bank and its affiliates to meet the hurdle
rate. Bank does not tie renewal of the credit to the purchase by
Company of any specific product or package of products from Bank or its
affiliates. Rather, Bank informs Company that Company is free to choose
from among all of the products offered by Bank and its affiliates in
determining how Company may seek to meet the hurdle rate. Bank and its
affiliates offer a wide variety of products, including deposits, trust
services, cash management services and several other traditional bank
products as well as bond underwriting services and several other non-
traditional products.
Bank's actions would be permissible under section 106 if, for
example, Company could reasonably obtain sufficient cash management
services from Bank to permit Company to meet the hurdle rate. In such
circumstances, Company would have a meaningful option to satisfy the
hurdle rate solely through the purchase of one or more of the
traditional bank products that are offered by Bank and its affiliates
(cash management services in this example),\51\ and Bank's actions
would not effectively require Company to purchase any non-traditional
product in order to obtain renewal of the credit facility. This is true
regardless of the product(s), if any, that Company ultimately chooses
to obtain from Bank or its affiliates.
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\51\ Company would have a meaningful option even though Company
had a long-standing cash management arrangement with another
financial institution so long as Company may legally transfer its
cash management business to Bank and Bank is able to satisfy
Company's cash management needs.
---------------------------------------------------------------------------
On the other hand, Bank's actions would violate section 106 if, for
example, Company could satisfy the hurdle rate only by obtaining
insurance, securities underwriting or strategic advisory services from
Bank or an affiliate of Bank. In such circumstances, Company would not
have a meaningful option to satisfy the hurdle rate solely through the
purchase of one or more of the traditional bank products that are
offered by Bank and its affiliates.
As the foregoing illustrates, the determination of whether a mixed-
product arrangement comports with section 106 often will depend on the
nature and characteristics of the arrangement itself and the customers
to whom the arrangement is offered. Part VII of this statement
discusses the types of policies, procedures and systems, including
internal audit and recordkeeping systems, that should help banks
offering mixed-product arrangements ensure that these arrangements are
structured and offered in a manner consistent with section 106. The
Board will review these policies, procedures and systems during the
supervisory process as part of its examination and review of bank anti-
tying policies, procedures and systems.
B. Reciprocity Exceptions
The reciprocity restrictions of section 106 generally prohibit a
bank from conditioning the availability or price of a product (the
desired product) on a requirement that the customer provide another
product (the tied product) to the bank or an affiliate.\52\ Section
106, however, contains an exception for situations where the tied
product is to be provided to the bank and is ``related to and usually
provided in connection with a loan, discount, deposit, or trust
service'' (a ``usually connected product'').\53\ The Board has extended
this exception by regulation to include situations where a bank
requires the customer to provide a usually connected product to an
affiliate of the bank, rather than to the bank itself.\54\ Taken
together, these exceptions allow a bank to restrict the availability or
vary the price of any bank product on the condition that the customer
provide a usually connected product to the bank or an affiliate of the
bank.
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\52\ 12 U.S.C. 1972(1)(C) and (D).
\53\ Id. at 1972(1)(C).
\54\ See 12 CFR 225.7(b)(1)(ii).
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Both the statutory and regulatory reciprocity exceptions are
intended to ensure that section 106 does not restrict appropriate
traditional banking
[[Page 52032]]
practices. Thus, for example, the exceptions permit a bank to condition
the availability of secured credit on a requirement that the customer
obtain insurance, for the benefit of the bank, that protects the value
of the bank's security interest in the collateral securing the
loan.\55\ Similarly, the exceptions permit a bank to take a wide
variety of steps to protect the bank's financial interest in its credit
relationships, such as, for example, requiring the affiliated parties
of a troubled borrower to pay down their loans with the bank prior to
renewing or advancing additional credit to the troubled borrower or
requiring the owners of a corporate borrower to provide a personal
guarantee of the corporation's debt to the bank.
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\55\ The bank, however, may not require that the customer obtain
the insurance from the bank or an affiliate of the bank.
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Facts that may be relevant in determining whether a bank's demand
that a customer provide an additional product is usual and appropriate
and, thus, permissible under the exceptions include the relationship
between the tied product and the desired product; whether the practice
protects the value of the bank's credit or other exposures to the
customer and associated parties; whether the practice is usual in the
banking industry in connection with the type of product involved; and
whether the condition was imposed by the bank principally to reduce
competition or allow it to compete unfairly in the market for the tied
product. The Board notes, however, that a reciprocity arrangement
involving a loan or other product does not violate section 106 simply
because the arrangement is not frequently imposed in banking
transactions. Contractual agreements between banks and their customers,
and loan agreements in particular, often are tailored to account for
the characteristics of the individual customer and the specific
transaction at issue. Accordingly, even though a particular reciprocal
arrangement is uncommon, it still may reflect an appropriate banking
practice in light of the facts and circumstances surrounding the
transaction.\56\
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\56\ For example, as one court has noted, debtors in ``serious
financial straits, working with their creditors, [often] enter into
numerous types of transactions that protect the creditors'
investments while permitting the debtors' businesses to continue.
The complexity of the transactions and special needs of the parties
involved determine the type of arrangement that will be made to
secure the joint aims of the debtor and creditor. Due to the
complicated circumstances of many bailout cases, the specific
banking transactions utilized may appear uncommon, yet, in the
milieu of bailouts, they constitute appropriate banking practices.
As such, they do not violate [section 106].'' See Continental Bank
of Pennsylvania v. Barclay Riding Academy, Inc., 93 N.J. 153, 459
A.2d 1163, cert. denied 464 U.S. 994 (1983).
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C. Exclusive Dealing Exception
The statute's exclusive dealing restriction generally prohibits a
bank from conditioning the availability or price of a bank product (the
desired product) on a requirement that the customer not obtain another
product (the tied product) from a competitor of the bank or a
competitor of an affiliate of the bank.\57\ This restriction, for
example, prohibits a bank that has a securities affiliate engaged in
bond underwriting activities from threatening a corporate customer that
the bank will terminate the bank's credit relationships with the
customer if the customer uses the bond underwriting services of a
competitor of the bank's securities affiliate.
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\57\ 12 U.S.C. 1972(1)(E).
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Section 106 contains an exception to its exclusive dealing
restriction for situations where the condition was reasonably imposed
by the bank in a credit transaction to ensure the soundness of the
credit.\58\ This exception, like the statutory reciprocity exception,
was intended to preserve the ability of banks to take appropriate steps
to protect their credit extensions to customers.
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\58\ Id.
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This exception, for example, permits a bank, when consistent with
appropriate banking standards, to condition the availability of a loan
to a customer on the requirement that the customer not borrow from
other sources (or pledge any collateral securing the loan to other
entities) during the term of the loan.\59\ Similarly, this exception
would permit a bank to condition the availability of floating-rate
credit on a requirement that the prospective borrower hedge its
floating-rate exposure by purchasing a fixed-to-floating interest rate
swap, and limiting the permitted swap counterparties to those with a
certain minimum credit rating. Although this condition may prevent the
borrower from obtaining the swap from some less creditworthy
competitors of the bank, the condition would appear to be reasonably
designed to enhance the collectibility of the credit.
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\59\ See 116 Cong. Rec. S15708 (daily ed. Sep. 16, 1970)
(Statement of Sen. Bennett).
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D. Regulatory Safe Harbors
1. Combined-balance discount safe harbor.
The Board has granted a regulatory safe harbor for combined-balance
discount packages, provided that they are structured in a way that does
not, as a practical matter, obligate customers to purchase non-
traditional products in order to obtain the discount.\60\ This safe
harbor allows a bank to vary the consideration for a product or package
of products based on a customer's maintaining a combined minimum
balance in certain products specified by the bank if three conditions
are met: the bank offers deposits; all deposits are eligible to be
counted toward the minimum balance; and deposits count at least as much
as nondeposit products toward the minimum balance.\61\ Although the
products included in the combined-balance discount program must be
specified by the bank, the products may be offered by the bank or by an
affiliate of the bank.
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\60\ 12 CFR 225.7(b)(2).
\61\ The Board recently issued an interpretive letter clarifying
that any financial product, including insurance products, may be
included in a combined-balance discount program and explaining the
permissible methods for weighting insurance products within a
combined-balance discount program. See Letter dated May 16, 2001,
from J. Virgil Mattingly, Jr., General Counsel of the Board, to Carl
Howard. The Board also recently issued a letter indicating that, for
purposes of applying the regulatory safe harbor for combined-balance
discount programs, the term ``customer'' may include separate
individuals who are all members of the same immediate family (as
defined in 12 CFR 225.41(b)(3)) and who all reside at the same
address. See Letter dated November 26, 2002, from J. Virgil
Mattingly, Jr., General Counsel of the Board, to Oliver I. Ireland.
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2. Foreign transaction safe harbor.
The Board also has granted a regulatory safe harbor for bank
transactions with foreign persons.\62\ The foreign transaction safe
harbor provides that the anti-tying prohibitions of section 106 do not
apply to transactions between a bank and a customer if: (i) The
customer is a company that is incorporated, chartered, or otherwise
organized outside the United States and has its principal place of
business outside the United States (a ``foreign company''); or (ii) the
customer is an individual who is a citizen of a country other than the
United States and is not resident in the United States.
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\62\ 12 CFR 225.7(b)(3).
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The foreign transaction safe harbor would generally be available
for a loan transaction entered into by a bank with a foreign company
even if the loan is partially guaranteed by a U.S. incorporated
affiliate of the foreign company, or the foreign company directs the
bank to disburse a portion of the loan proceeds to a U.S. incorporated
affiliate of the foreign company that is not a party to the loan
agreement. Such a loan transaction with a foreign company, however,
would not qualify for the foreign transaction safe harbor if
[[Page 52033]]
the facts and circumstances surrounding the transaction indicate that
the borrower, in substance, was the U.S. incorporated affiliate and not
the foreign company. The safe harbor also would not protect tying
arrangements where the customer itself is a U.S. incorporated
subsidiary of a foreign company.
3. Transactions outside a ``safe harbor''.
The combined-balance discount and foreign transaction provisions
discussed above are regulatory safe harbors. Accordingly, some
combined-balance discount programs that are outside the regulatory safe
harbor still may not be covered by section 106 because the arrangement
does not satisfy the essential elements of a prohibited tying
arrangement under section 106 or qualifies for another statutory or
regulatory exception from section 106. In addition, some tying
arrangements that are outside the foreign transaction safe harbor still
may not be covered by section 106 because the transactions involved are
so foreign in nature that they do not raise the competitive concerns
that section 106 was designed to address.
V. What Is a ``Bank'' for Purposes of Section 106?
Section 106 applies, by its terms, to any depository institution
that meets the definition of ``bank'' in section 2(c) of the Bank
Holding Company Act (BHC Act), including a grandfathered ``nonbank
bank'' that is controlled by a company under section 4(f) of the BHC
Act.\63\ The statute also applies to any depository institution that is
described in section 2(c)(2)(D), (F), (G), (H), (I) or (J) of the BHC
Act and, thus, excluded from the definition of ``bank'' under the BHC
Act.\64\ As a result, virtually every type of institution that is
chartered as a bank, including every ``insured bank'' (as defined in
section 3 of the Federal Deposit Insurance Act), is subject to section
106.\65\ This is true whether or not the covered depository institution
is owned or controlled by a bank holding company registered under the
BHC Act.
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\63\ See 12 U.S.C. 1971 and 1841(c)(1).
\64\ 12 U.S.C. 1843(f)(9) and (h)(1). These institutions include
limited-purpose trust companies, credit card banks, Edge Act and
Agreement corporations, and industrial loan companies and similar
institutions.
\65\ See 12 U.S.C. 1813.
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Section 106 also applies to any U.S. branch, agency, or commercial
lending company of a foreign bank (as those terms are defined in
section 8 of the International Banking Act).\66\ In addition, although
affiliates of a bank generally are not subject to section 106, the BHC
Act specifically provides that an affiliate of an institution
controlled pursuant to section 4(f) or described in section 2(c)(2)(D),
(F), (G), (H), (I), or (J) of the BHC Act is subject to the anti-tying
prohibitions of section 106 in connection with any transaction
involving the products of both the affiliate and the institution as if
the affiliate were a bank and the institution were an affiliate.\67\
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\66\ See 12 U.S.C. 3106.
\67\ See 12 U.S.C. 1843(f)(9)(B) and (h)(2).
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Section 106 also applies to most, but not all, subsidiaries of
banks. In particular, section 106 applies to all subsidiaries of a
bank--other than a financial subsidiary--in exactly the same manner as
the statute applies to the bank itself. A financial subsidiary of a
national bank or a state member bank, however, is treated as an
affiliate of the bank, and not as a subsidiary of the bank, for
purposes of the statute.\68\
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\68\ See 12 U.S.C. 1971; 12 CFR 208.73(e). Tying arrangements
imposed by a financial subsidiary of a bank, like tying arrangements
imposed by any other affiliate of a bank, remain subject to the
general antitrust laws.
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This statement uses the term ``bank'' to refer to all entities that
are subject to section 106. As noted above, savings associations are
subject to anti-tying restrictions that are virtually identical to
those applicable to banks under section 106.\69\
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\69\ See 12 U.S.C. 1464(q).
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VI. What Is an ``Affiliate'' for Purposes of Section 106?
Section 106 prohibits a bank from requiring that a customer obtain
any additional product from, or provide any additional product to, ``a
bank holding company of such bank, or * * * any other subsidiary of
such bank holding company.'' \70\ For purposes of these restrictions,
any company that controls a bank that is subject to section 106 is
treated as a bank holding company (even if the company is not a bank
holding company under the BHC Act), and any subsidiary of such a
company is treated as a subsidiary of a bank holding company.\71\ In
addition, for purposes of section 106, any natural person that controls
a bank that is subject to section 106 is treated as a ``bank holding
company'' of the bank, and any other company controlled by such a
natural person is treated as a subsidiary of the ``bank holding
company'' of such bank.\72\
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\70\ See 12 U.S.C. 1972(1)(B) and (D). The exclusive dealing
prohibition in section 106(1)(E) similarly prohibits a bank from
requiring that a customer not obtain an additional product from a
competitor of the ``bank holding company of such bank, or any
subsidiary of such bank holding company.'' Id. at 1972(1)(E).
\71\ See 12 U.S.C. 1843(f)(9) and (h)(1). A company that
controls a bank (as defined under section 2(c) of the BHC Act) and
that is not considered a bank holding company by reason of section
2(a)(5) of the BHC Act, however, is not considered a bank holding
company for purposes of section 106 and, thus, is not considered an
affiliate of the bank for purposes of this statement.
\72\ See 12 U.S.C. 1971.
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To reflect the scope of section 106, the term ``affiliate'' as used
in this statement with respect to a bank means any company or natural
person that controls the bank, and any company that is controlled by
such company or person (other than the bank itself).
As noted previously, section 106 generally does not apply to tying
arrangements imposed by an affiliate of a bank. However, a bank may not
participate in a transaction in which an affiliate has nominally
imposed a condition on a customer that the bank is prohibited from
directly imposing under section 106 if the affiliate was acting on
behalf of, as agent for, or in conjunction with the bank. For example,
a bank should not have a pre-arrangement or understanding with an
affiliate to fund a syndicated loan for which the affiliate acts as
syndicate manager if the affiliate has conditioned the availability (or
price) of its syndication services on a requirement that the customer
obtain securities underwriting services from the affiliate. Similarly,
if an affiliate of a bank has conditioned the availability (or price)
of a bridge loan on a requirement that the customer hire the bank's
securities affiliate as an underwriter for the company's follow-on bond
offering, the bank should not have an arrangement or understanding with
the affiliate at the time the bridge loan is made to purchase the loan
(or a participation in the loan) from the affiliate.
VII. What Internal Controls Should Banks Have to Ensure Compliance With
the Anti-Tying Prohibitions of Section 106?
The board of directors and senior management of a bank are
responsible for ensuring that the bank establishes and maintains an
effective system of internal controls that, among other things,
provides reasonable assurances that the bank complies with applicable
laws and regulations, including the anti-tying prohibitions of section
106. An effective system of internal controls and a management
environment that emphasizes compliance not only helps an organization
operate in an efficient and safe and sound manner, but also helps
mitigate the legal and reputational risks that may arise from actual or
perceived violations of the anti-tying prohibitions of section 106.
[[Page 52034]]
A. Anti-Tying Policies, Procedures and Systems
Banks should have policies, procedures and systems in place that
are reasonably designed to ensure that the bank complies with the anti-
tying prohibitions of section 106. The types of anti-tying policies,
procedures and systems appropriate for a particular bank depends on the
size of the bank, and the nature, scope and complexity of the bank's
activities (including activities conducted in conjunction with
affiliates). Banks should review and update their anti-tying policies,
procedures and systems periodically to ensure that these policies,
procedures and systems reflect any changes in the nature, scope or
complexity of the bank's activities or applicable law, regulations or
supervisory guidance.
The anti-tying policies and procedures of banks should describe the
scope of section 106 and the types of tying arrangements prohibited by
the statute. Banks should ensure that the anti-tying prohibitions of
section 106 are appropriately reflected or incorporated in the
institution's corporate policies and procedures, including the
institution's policies and procedures concerning credit approval, new
product approval and pricing, and marketing.
Banks also should ensure that appropriate bank personnel receive
education and training concerning the anti-tying prohibitions of
section 106. The scope and frequency of the education and training
provided an individual or department should be tailored to the nature
and scope of the person's or department's functions at the bank, with
greater focus and resources devoted to those positions or departments
that present the greatest legal or reputational risk to the bank.
Corporate relationship managers, syndicated lending personnel, persons
with authority to approve credit extensions or establish pricing
policies for the bank and other personnel that have direct contact with
customers for purposes of marketing or selling the bank's products, for
example, should receive comprehensive and regular anti-tying
training.\73\
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\73\ Banks also should review their employee compensation
programs in order to ensure that such programs do not provide
employees inappropriate incentives to tie products in a manner
prohibited by section 106.
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In addition, the policies and procedures of a bank should--
[sbull] Permit personnel with questions concerning section 106 or
its application to a particular transaction to discuss the issue with
an appropriate representative of the institution's compliance or legal
department;
[sbull] Include procedures for the receipt, handling and resolution
of customer complaints alleging a violation of section 106 by the bank;
and
[sbull] Prohibit the bank or any employee of the bank from taking
adverse action against a customer because the customer submitted a
complaint to the bank or a Federal banking agency alleging a violation
of section 106 by the bank.
A bank's compliance function should take a lead role in monitoring
the bank's compliance with section 106. Appropriate compliance
activities may include reviewing periodically the bank's policies and
procedures to ensure they are updated as necessary to reflect changes
in the bank's business or applicable laws, regulations or supervisory
guidance and conducting training sessions for appropriate bank
personnel. The compliance function also should review the bank's
marketing materials and individual transactions to test the bank's
compliance with the anti-tying restrictions of section 106. In
performing such tests, compliance personnel typically should review the
documentation associated with the transaction and discuss the
transaction with the relevant bank personnel involved in the
transaction.
Internal audit also plays an important role in ensuring a bank's
compliance with the anti-tying restrictions. A bank's internal audit
function should periodically review and test the institution's anti-
tying policies, procedures and systems in order to confirm that they
are working effectively and in the manner intended. The appropriate
scope and frequency of these reviews and tests will depend on the size,
nature and complexity of the bank's business operations and the
effectiveness of the bank's compliance function. Thus, for example, if
the bank's compliance function properly conducts transaction testing on
a regular basis, the bank's internal audit reviews may focus on
reviewing the adequacy of the bank's policies and procedures and
validating the compliance function's work. Banks should ensure that the
compliance and internal audit personnel responsible for monitoring and
assessing the institution's compliance with section 106 are well
trained with respect to the anti-tying rules.
B. Internal Control and Recordkeeping Requirements for Banks Offering
Mixed-Product Arrangements Outside a Regulatory Safe Harbor
As discussed above, a bank may offer a mixed-product arrangement
under which the bank provides the customer the option of satisfying a
condition imposed by the bank through the purchase of traditional bank
products or non-traditional products where the customer has a
meaningful option to satisfy the condition solely through the purchase
of traditional bank products.\74\ Because mixed-product arrangements
present special compliance issues under section 106, the anti-tying
policies, procedures and systems of a bank offering a mixed-product
arrangement play a particularly important role in demonstrating and
ensuring that the bank's actions with respect to these arrangements are
consistent with section 106. Accordingly, in conducting anti-tying
compliance reviews at banking organizations, the Board expects to
carefully review the anti-tying policies, procedures and systems used
by banks that offer mixed-product arrangements.
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\74\ See Part IV.A.2.
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A bank's policies, procedures and documentation should reflect how
the bank will and does establish a good faith belief that a customer
offered a mixed-product arrangement would be able to satisfy the
condition associated with the arrangement solely through the purchase
of traditional bank products. For example, the bank's policies,
procedures and documentation generally should address--
[sbull] The factors and types of information that the bank will
review in forming a good faith belief that any customer offered a
mixed-product arrangement has a meaningful option to satisfy the bank s
condition solely through the purchase of one or more of the traditional
bank products included in the arrangement. Information relevant to this
determination may include:
[sbull] The range and types of traditional bank products that are
offered by the bank and its affiliates and included in the mixed-
product arrangement;
[sbull] The manner in which traditional bank products and non-
traditional products are treated for purposes of determining whether a
customer has or would meet the condition associated with the
arrangement; \75\
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\75\ In mixed-product arrangements, banks may not weight,
discourage the use of, or otherwise treat traditional bank products
in a manner that is designed to deprive customers of a meaningful
choice.
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[sbull] The types and amounts of traditional bank products
typically required or obtained by companies that are comparable in
size, credit quality, and nature, scope and complexity of business
operations to the customer; and
[[Page 52035]]
[sbull] Information provided by the customer concerning the types
and amounts of traditional bank products needed or desired by the
customer and the customer s ability to obtain those products from the
bank or its affiliates; and
[sbull] The bank personnel authorized to make the analysis
described above for individual customers or classes of customers and
the training and guidelines provided these personnel; and
[sbull] The internal processes and controls, including approval and
documentation requirements, the bank uses to ensure that the analysis
described above is (i) performed by the bank for a customer before the
customer is offered a mixed-product arrangement and (ii) adequately
reflected in the records of the bank.
The bank's policies and procedures also should ensure that any
material information relied on by the bank in analyzing the types and
amounts of traditional bank products likely required by a customer is
current and reliable, and that the assessment of a customer's ability
to satisfy the condition associated with a mixed-product arrangement
solely through the purchase of traditional bank products is made prior
to, and reasonably current with, the time the arrangement is offered to
the customer.
The types and amount of information and level of analysis necessary
for a bank to establish a good faith belief that a customer has a
meaningful choice under a mixed-product arrangement may vary depending
on the nature and characteristics of the arrangement and the types of
customer(s) to which it is offered. For example, a less detailed and
granular review likely would be required for a bank to establish a good
faith belief that a large, complex company has a meaningful option of
satisfying a condition solely through the purchase of traditional bank
products than a smaller company with less complex business operations.
In addition, a less detailed review likely would be necessary for a
bank to develop a good faith estimate of the need for traditional bank
products of an existing customer with a long history with the bank than
of a potential customer or a customer with only a brief relationship
with the bank.
C. Ability of Banks to Offer Mixed-Product Arrangements to Individuals
Bank products directed to individuals typically are standardized.
Although such standardization may allow the product to be offered
economically to large numbers of individual customers, it also means
that the terms of the product typically are not modified to the same
extent as with corporate customers to reflect the specific needs and
resources of the customer.
Furthermore, because individuals typically have less bargaining
power and may be less financially sophisticated, individuals may be
more susceptible to subtle pressure by a bank that encourages the
customer to purchase a non-traditional product from the bank or an
affiliate. The potential for such subtle pressure to be applied in a
manner that is both effective and difficult to uncover is particularly
strong in mixed-product arrangements because these arrangements include
both traditional bank products and non-traditional products and
individuals often believe that they do not have (and, in fact, may not
have) the ability to negotiate with a bank. These facts make it
difficult for a bank to establish a good faith belief that a mixed-
product arrangement provides an individual a meaningful option to
satisfy the condition associated with the arrangement solely through
the purchase of traditional bank products without a detailed and, in
many cases, uneconomical analysis of the financial needs and
capabilities of each individual offered the arrangement.
The Board recognizes that section 106 limits the ability of banking
organizations to provide individual consumers with discounts on
packages of bundled products and, thus, pass along the cost savings
that may arise from bundled offerings in ways that are both pro-
consumer and not anti-competitive. It was in part to allow banks some
flexibility to provide individual consumers with the benefits of
discounts on bundled offerings that the Board in 1995 exercised its
exemptive authority to adopt a safe-harbor for combined-balance
discount programs, which are a type of mixed-product arrangement that
typically are marketed to individuals.\76\ Moreover, the Board notes
that section 106 does not impede the ability of a bank to provide
individual consumers with discounts on packages of bundled traditional
bank products and does not restrict the ability of a nonbank affiliate
of a bank to offer mixed-product arrangements to individual consumers.
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\76\ This exception, which is discussed in Part IV.D, allows
banks to offer certain combined-balance discount programs to
individuals without making a specific determination that the
particular customer has a meaningful option of qualifying for the
discounts within the program solely through the use of the deposit
products (a traditional bank product) included in the program. See
12 CFR 225.7(b)(2).
By order of the Board of Governors of the Federal Reserve
System, August 25, 2003.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 03-22091 Filed 8-28-03; 8:45 am]
BILLING CODE 6210-02-P