[Federal Register Volume 68, Number 194 (Tuesday, October 7, 2003)]
[Rules and Regulations]
[Pages 57790-57799]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-25217]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 559, 562, and 563

[No. 2003-50]
RIN 1550-AB55


Savings Associations--Transactions With Affiliates

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: In December 2002, the Board of Governors of the Federal 
Reserve System (FRB) issued a final rule implementing sections 23A and 
23B of the Federal Reserve Act (FRA). FRB's rule (Regulation W) 
combines statutory restrictions on transactions with affiliates with 
new and existing interpretations and exemptions. In today's final rule, 
the Office of Thrift Supervision (OTS) conforms its regulations on 
transactions with affiliates to Regulation W and implements additional 
restrictions imposed on savings associations under section 11(a) of the 
Home Owners' Loan Act (HOLA).

DATES: This final rule is effective November 6, 2003.

FOR FURTHER INFORMATION CONTACT: Karen A. Osterloh, Special Counsel, 
(202) 906-6639, Regulations and Legislation Division, Chief Counsel's 
Office, or Donna Deale, Manager, (202) 906-7488, Supervision Policy, 
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 11(a)(1) of the HOLA (12 U.S.C. 1468(a)(1)) applies 
sections 23A and 23B of the FRA (12 U.S.C. 371c and 371c-1) to every 
savings association ``in the same manner and to the same extent'' as if 
the savings association were a member bank of the Federal Reserve 
System.
    Section 23A of the FRA imposes three major limitations on a member 
bank's (and its subsidiaries') transactions with affiliates. First, 
section 23A limits the amount of ``covered transactions'' with any 
single affiliate to no more than 10 percent of the member bank's 
capital stock and surplus. Covered transactions with all affiliates are 
limited to no more than 20 percent of the member bank's capital stock 
and surplus. A covered transaction includes a loan or extension of 
credit to an affiliate, a purchase of or investment in securities 
issued by an affiliate, a purchase of assets from an

[[Page 57791]]

affiliate, the acceptance of securities issued by an affiliate as 
collateral security for a loan or extension of credit to any person or 
company, and the issuance of a guarantee, acceptance, or letter of 
credit on behalf of an affiliate.
    Second, section 23A requires that all covered transactions between 
a member bank and its affiliates be on terms and conditions that are 
consistent with safe and sound banking practices and prohibits a member 
bank from purchasing low-quality assets from an affiliate. Finally, 
section 23A requires that a member bank's extensions of credit to 
affiliates and guarantees on behalf of affiliates be appropriately 
secured by a statutorily defined amount of collateral.
    Section 23B of the FRA protects member banks by requiring that 
transactions between the bank (and its subsidiaries) and its affiliates 
occur on market terms--on terms and under circumstances that are 
substantially the same, or at least as favorable to the bank, as those 
prevailing at the time for comparable transactions with unaffiliated 
companies. Section 23B applies to covered transactions under section 
23A, as well as other transactions, such as the sale of securities or 
other assets to an affiliate and the payment of money or the furnishing 
of services to an affiliate. Section 23B also prohibits certain 
purchases and acquisitions of securities by a member bank or its 
subsidiary subject to certain conditions, and prohibits certain 
advertisements or agreements that state or suggest that the member bank 
is responsible for the obligations of its affiliates.
    In addition to the section 23A and 23B restrictions, section 
11(a)(1) of the HOLA imposes two prohibitions on savings associations. 
First, a savings association may not make a loan or other extension of 
credit to any affiliate unless that affiliate is engaged only in 
activities that a bank holding company may conduct. In addition, no 
savings association may purchase or invest in securities issued by an 
affiliate, other than with respect to shares of a subsidiary. Section 
11(a)(4) of the HOLA authorizes OTS to impose such additional 
restrictions on any transaction between a savings association and any 
affiliate as it determines to be necessary to protect the safety and 
soundness of the association.
    OTS issued comprehensive rules implementing section 11(a) of the 
HOLA in 1991.\1\ These rules, which were codified at 12 CFR 563.41 and 
563.42 (2002), defined and clarified the application of sections 23A 
and 23B to savings associations and their subsidiaries, implemented the 
two prohibitions imposed under section 11(a) of the HOLA, and imposed 
additional restrictions and safeguards, as authorized by section 
11(a)(4) of the HOLA.
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    \1\ 56 FR 34005 (July 25, 1991).
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    FRB has statutory authority to issue regulations to administer and 
carry out the purposes of sections 23A and 23B of the FRA.\2\ Until 
recently, FRB had not promulgated comprehensive regulations on this 
subject. Instead, FRB relied on a series of regulatory interpretations 
and informal staff guidance.\3\ On December 12, 2002, FRB issued 
Regulation W, a comprehensive final rule implementing sections 23A and 
23B of the FRA.\4\ Regulation W incorporated many existing FRB 
interpretations, superseded certain outdated interpretations, exempted 
specific types of transactions, and implemented revisions to sections 
23A and 23B contained in the Gramm-Leach-Bliley Act (GLBA).\5\
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    \2\ 12 U.S.C. 371c(f), 371c-1(e).
    \3\ FRB codified some of these interpretations at 12 CFR 250.240 
through 250.250 (2002).
    \4\ 67 FR 76560 (Dec. 12, 2002), codified at 12 CFR part 223 
(2003).
    \5\ Pub. L. No. 106-102, 113 Stat. 1338 (1999).
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    Regulation W does not, by its terms, apply to savings associations. 
However, because sections 23A and 23B apply to every savings 
association in the same manner and to the same extent as if the savings 
association were a member bank, OTS issued an interim final rule 
revising its regulations on transactions with affiliates to reflect 
Regulation W. 67 FR 77909 (Dec. 20, 2002). The OTS interim final rule 
had three goals:
    [sbull] To incorporate all applicable provisions and exceptions 
prescribed by FRB in Regulation W;
    [sbull] To provide guidance concerning the relationship between the 
additional prohibitions under section 11(a)(1) of the HOLA and 
Regulation W; and
    [sbull] To set out the additional restrictions OTS imposes under 
section 11(a)(4) of the HOLA.
    The interim rule cross referenced the substantive provisions 
contained in Regulation W; interpreted Regulation W to the extent 
necessary to apply these restrictions to savings associations; 
incorporated the prohibitions in section 11(a)(1) of the HOLA; and 
imposed various additional restrictions on savings associations under 
section 11(a)(4) of the HOLA.\6\ The interim rule became effective 
April 1, 2003.
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    \6\ The interim final rule implemented only section 11(a) of the 
HOLA. It did not contain every statutory or regulatory restriction 
on transactions between savings associations and their affiliates. 
For example, the rule did not address additional restrictions on 
transactions with affiliates that OTS may require as prompt 
corrective action under section 38(f)(2)(B) of the Federal Deposit 
Insurance Act (FDIA). 12 U.S.C. 1831o(f)(2)(B).
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    The comment period on the interim rule closed on February 18, 2003. 
OTS received comments from a savings association and from a 
representative of a savings association. Both commenters generally 
supported the interim rule.

II. Discussion of Comments

A. Affiliates

    Regulation W defines the term ``affiliate'' to include parent 
companies (any company that controls the member bank); companies under 
common control with the member bank; companies under other types of 
common control; companies with interlocking directors, trustees or 
general partners; companies that are sponsored and advised on a 
contractual basis by the member bank or an affiliate; investment 
companies for which a member bank or any affiliate is an investment 
advisor; depository institution subsidiaries of a member bank; 
financial subsidiaries; companies held under merchant banking or 
insurance company investment authority; partnerships for which the 
member bank or an affiliate serves as general partner; subsidiaries of 
affiliates, and other companies that FRB deems to be an affiliate of 
the member bank. 12 CFR 223.2(a). This definition specifically excludes 
certain companies, including most subsidiaries of member banks. 12 CFR 
223.2(b).
    Commenters raised various issues regarding the scope of the 
definition of affiliate. These matters are discussed below.
1. Control
    One of the fundamental concepts underlying the definition of 
affiliate is the concept of control. Regulation W states that control 
by a company or shareholder over another company means that:
    [sbull] The company or shareholder, directly or indirectly, or 
acting through one or more other persons, owns, controls, or has the 
power to vote 25 percent or more of any class of voting securities of 
the other company.
    [sbull] The company or shareholder controls in any manner the 
election of a majority of the directors, trustees, or general partners 
(or individuals exercising similar functions) of the other company.
    [sbull] The Board determines, after notice and opportunity for 
hearing, that the company or shareholder, directly or

[[Page 57792]]

indirectly, exercises a controlling influence over the management or 
policies of the other company. 12 CFR 223.3(g)(1).
    Regulation W also includes specific provisions addressing ownership 
or control of shares as a fiduciary, securities by a subsidiary, 
convertible instruments, and nonvoting equity securities. See 12 CFR 
223.3(g)(2)-(5).
    Until today, OTS's transactions with affiliates regulation included 
a more expansive concept of control than prescribed by the FRB in final 
Regulation W. Specifically, OTS's prior rule stated that a company or 
shareholder has control over another company if the company or 
shareholder, directly or indirectly, or acting through one or more 
other persons owns, controls, or has the power to vote 25 percent or 
more of any class of voting securities of the other company or if the 
company or shareholder would be deemed to control another company under 
Sec.  574.4(a) or presumed to control the company under Sec.  574.4(b). 
See 12 CFR 563.41(b)(3) (2002). OTS also applied its own concepts of 
control to define a subsidiary of a savings association. 12 CFR 
563.41(b)(4)(2002). This definition stated that a subsidiary of a 
savings association is a company that is controlled by a savings 
association within the meaning of part 574.
    The major substantive difference between the control definitions in 
the prior OTS rule and final Regulation W involved the application of 
certain OTS rebuttable presumptions of control from part 574. For 
example under these control presumptions, a company will control 
another if it owns between 10 percent and 25 percent of any class of a 
company's voting stock and one or more control factors is present.\7\ 
Regulation W does not have similar provisions.\8\
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    \7\ 12 CFR 574.4(b)(1)(i). The eight control factors are 
described at 12 CFR 574.4(c) and include situations where an 
acquiror would: (1) be one of the two largest holders of any class 
of voting stock; (2) hold more than 25 percent of the total 
stockholders' equity; or (3) hold more than 35 percent of the 
combined debt securities and stockholders' equity.
    \8\ OTS's rule is more expansive in other ways. For example, 
under 12 CFR 574.4(b)(1)(ii) an acquiror has rebuttable control of a 
company if it directly or indirectly owns more than 25 percent of 
any class of stock and is subject to a control factor listed at 12 
CFR 574.4(c). FRB does not have a similar provision.
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    The interim final rule continued to incorporate OTS concepts of 
control, but requested comment on whether the OTS definition of control 
was appropriate. One commenter addressed this issue and urged OTS to 
conform its rule more closely to Regulation W.
    When OTS originally promulgated its transactions with affiliates 
rule in 1991, FRB had promulgated no rules interpreting the meaning of 
control under sections 23A and 23B. In the absence of such guidance, 
OTS defined control for transactions with affiliates consistently with 
other OTS rules addressing similar concepts. At the time, part 574 
represented OTS's most current and comprehensive analysis of control 
issues. Most savings associations had some familiarity with the control 
concepts in part 574.
    Now that FRB has issued final rules interpreting the definition of 
control for sections 23A and 23B it is difficult to articulate any 
regulatory purpose that would be furthered by continuing to prescribe a 
different definition. Applying part 574 control concepts to 
transactions with affiliates restricts savings associations in two 
ways. First, it broadens the application of the section 23A and 23B 
restrictions for thrifts in comparison to similarly situated member 
banks. OTS does not believe that savings association transactions with 
the additional ``affiliates'' reached by the OTS control definitions 
raise safety and soundness concerns that necessitate treating them 
differently from similarly situated member banks. Indeed, the 
application of the OTS definition of control leads to anomalous results 
because a company with identical relationships to a bank and a savings 
association in the same bank holding company structure could have been 
an affiliate of the savings association under the OTS interim rule, but 
not an affiliate of the member bank under Regulation W.
    Second, the application of the part 574 control concepts also 
expands the scope of the additional prohibitions imposed under section 
11 of the HOLA. These prohibitions apply only to savings associations 
and were imposed to reflect the fact that affiliates of savings 
associations engage in a greater range of activities than affiliates of 
banks, which may expose the savings association to greater risk.\9\ 
There is no indication that Congress was concerned about the risks 
posed by relationships with companies that do not meet the definition 
of affiliate in section 23A. Indeed, the statute appears to contemplate 
that OTS would use the same definitions of ``control'' and 
``affiliate'' as set forth in section 23A and Regulation W.\10\ 
Accordingly, to promote consistency and equal treatment of insured 
depository institutions to the maximum extent possible, OTS has revised 
the final rule to use Regulation W control concepts.
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    \9\ H.R. Rep. No. 101-122, at 408 (1989).
    \10\ Section 11(a)(3) states: Any company that would be an 
affiliate (as defined in sections 23A and 23B of the Federal Reserve 
Act [12 U.S.C. 371c and 371c-1]) of any savings association if such 
savings association were a member bank (as such term is defined in 
such Act) shall be deemed to be an affiliate of such savings 
association for purposes of [section 11(a)(1) of the HOLA].
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    Certain companies will no longer be considered to be savings 
association affiliates under the revised definitions in the final rule. 
OTS may, nonetheless, continue to treat such a company as an affiliate 
if it has a relationship with a savings association or any affiliate of 
the savings association such that covered transactions by the savings 
association with the company may be affected by the relationship to the 
detriment of the savings association, or where the company presents a 
risk to the safety and soundness of the savings association.\11\
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    \11\ Final rule at paragraph (b)(3), which incorporates 12 CFR 
223.2(a)(12).
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    While certain companies will no longer be subject to the full range 
of restrictions and prohibitions under section 11 of the HOLA, some 
restrictions will continue to apply. For example, transactions between 
a savings association and a non-affiliate are subject to the ``market 
terms'' standards under section 23B, if an affiliate of the savings 
association has a financial interest in the non-affiliate. Thus, the 
market terms requirements will continue to apply to these entities.
    As a related matter, OTS has identified an area where the OTS 
control rules may not have been as rigorous as final Regulation W. The 
definition of control in final Regulation W includes two provisions, 
not specifically addressed in section 23A, which discuss the treatment 
of convertible securities and nonvoting equity securities.\12\ While 
the OTS control rules address similar concepts, the two rules are not 
identical.\13\ As a

[[Page 57793]]

result, certain entities could have been affiliates under Regulation W, 
but not affiliates under the OTS interim final rules. By adopting the 
FRB's definition of control, the OTS will conform its rules regarding 
the treatment of these securities.
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    \12\ 12 CFR 223.3(g)(4) and (5).
    \13\ Specifically, Regulation W creates a rebuttable presumption 
that states ``[a] company or shareholder that owns or controls 
instruments (including options or warrants) that are convertible or 
exercisable, at the option of the holder or owner, into securities'' 
will be deemed to control the securities. 12 CFR 223.3(g)(4). 
Options or warrants are subject to the rebuttable presumption even 
though the holder may not exercise the option or warrant 
immediately. 67 FR 76560, at 76568. OTS's comparable provision at 12 
CFR 574.2(u)(3) includes convertible securities as voting stock 
where the holder has ``the preponderant economic risk in the 
underlying voting stock.''
    In addition, final Regulation W establishes a rebuttable 
presumption that control includes ownership or control of 25 percent 
or more of a company's ``equity'' capital. 12 CFR 223.3(g)(5). The 
comparable references to ownership of equity capital in OTS's rules 
either: (1) Refer to the contribution of more than 25 percent of the 
capital of the company and, thus, address only direct purchases from 
an issuer rather than secondary market purchases (12 CFR 
574.4(a)(2)(vi)); or (2) require the controlling person to also hold 
at least 10 percent of any class of voting stock or 25 percent any 
class of stock (12 CFR 574.4(b)(1)(i) and (ii), and 574.4(c)(2)).
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    Several regulations cross-reference the definition of ``affiliate'' 
at Sec.  563.41. These rules include: 12 CFR 560.93(a) (loans to one 
borrower restrictions); 562.4 (regulatory reporting standards); and 
563.142 (capital distributions). As a result of changes in this final 
rule, the coverage of these other rules also will change.\14\
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    \14\ The definition of ``subsidiary'' in OTS's loans to insider 
rule at 12 CFR 563.43(d) includes cross-references to the 
definitions of ``control'' and ``subsidiary' in 12 CFR 563.41. OTS 
is examining whether it should revise Sec.  563.43(d) to more 
closely follow the FRB's loan's to insiders rule at 12 CFR part 215, 
and may undertake a separate rulemaking proposing changes. To avoid 
confusion to the industry in the interim, OTS has not revised the 
substance of this definition.
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2. Financial Subsidiaries
    Regulation W defines affiliate to include a financial subsidiary of 
a member bank. 12 CFR 223.2(a)(8). A financial subsidiary generally is 
any subsidiary of a member bank that ``engages, directly or indirectly, 
in any activity that national banks are not permitted to engage in 
directly or that is conducted on terms and conditions that differ from 
those that govern the conduct of such activity by national banks.'' 
\15\
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    \15\ 12 CFR 223.3(p). FRB has provided several exceptions to 
this definition.
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    In the preamble to the interim rule, OTS addressed whether a 
savings association subsidiary would be considered to be financial 
subsidiary and, thus, an affiliate under section 23A of the FRA. OTS 
concluded that there is no statutory or supervisory basis for applying 
affiliate restrictions to savings association subsidiaries by 
classifying them as financial subsidiaries. The one commenter who 
addressed this issue agreed with OTS's conclusion regarding financial 
subsidiaries.
    For the reasons stated in the preamble to the interim rule, the 
final rule at Sec.  563.41(b) continues to state that savings 
association subsidiaries do not meet the statutory definition of 
financial subsidiary. As a result, Regulation W references to financial 
subsidiaries do not apply.

B. Prohibition of Loans and Extensions of Credit to Affiliates Engaged 
in Non-Bank Holding Company Activities

    As noted above, section 11 of the HOLA applies two prohibitions to 
a savings association's transactions with its affiliates in addition to 
the section 23A and 23B limitations. Commenters raised several issues 
regarding OTS's implementation of section 11(a)(1)(A) of the HOLA, 
which prohibits a savings association from making a loan or other 
extension of credit to an affiliate unless the affiliate is engaged 
only in activities that a bank holding company may conduct.
1. Reverse Repurchase Agreements
    The interim rule retained a provision on repurchase agreements that 
was adopted in a final rule published August 13, 1998 (63 FR 43292). 
Specifically, the interim rule states that a purchase of assets that is 
subject to the affiliate's agreement to repurchase (reverse repurchase 
agreement) \16\ is a loan or extension of credit for the purposes of 
the section 11 loan prohibition. As a result, a savings association may 
not generally enter into reverse repurchase agreements with an 
affiliate that engages in non-bank holding company activities. The 
interim rule exempted certain agreements that involve United States 
Treasury securities and that meet other specified requirements. OTS 
specifically requested comment whether it should retain the repurchase 
agreement provisions.
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    \16\ A sale of assets subject to an agreement to repurchase is 
known as a ``reverse repurchase agreement'' when a bank or thrift is 
the purchaser of the assets. See M. Stigum, The Repo and Reverse 
Markets 4 (1989).
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    Both commenters responded to this request. One urged OTS to delete 
the repurchase agreement prohibition. The commenter asserted that 
``loan or extension of credit,'' as used in section 11 of the HOLA, 
does not encompass reverse repurchase agreements. At a minimum, both 
commenters urged OTS to retain the current exemption for transactions 
in United States Treasury securities.
    Upon further review, OTS has decided to delete the repurchase 
agreement prohibition. In the preamble to the 1998 rule, OTS noted that 
section 11 of the HOLA does not define ``loan or other extension of 
credit,'' and does not compel a legal conclusion that purchases of 
assets that are subject to an affiliate's agreement to repurchase are, 
or are not, prohibited by statute.
    While the text of section 11 does not ``compel'' either legal 
conclusion, upon further review, OTS now believes that other factors 
strongly suggest that Congress did not intend for such transactions to 
be included as loans or extensions of credit under this section. OTS 
has two bases for this conclusion.
    First, the definition of ``covered transaction'' in section 23A of 
the FRA treats repurchase agreements as asset purchases, rather than as 
loans or extensions of credit. Specifically, section 23A(b)(7)(C) of 
the FRA defines purchases of assets to include ``assets subject to an 
agreement to repurchase'' rather than a loan or extension of credit 
under section 23A(b)(7)(A). Based upon the language of the statute, FRB 
staff has informally indicated that it considers reverse repurchase 
agreements to be purchases of assets and not extensions of credit.\17\
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    \17\ As a general rule, the interim rule applies all Regulation 
W definitions to the additional section 11 prohibitions. The 
treatment of repurchase agreements was an exception to this general 
rule.
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    Second, the legislative history of the statutes governing thrift 
transactions with affiliates reinforces the conclusion that reverse 
repurchase agreements should not be treated as loans or extensions of 
credit under section 11(a)(1)(A). Before the Financial Institutions 
Reform, Recovery, and Enforcement Act of 1989, Public Law 101-73 
(FIRREA), a savings association's transactions with affiliates were 
governed by section 408 of the National Housing Act (NHA). 12 U.S.C. 
1730a. Under section 408(p) of the NHA, thrift transactions with 
affiliates engaged only in bank holding company activities were subject 
to sections 23A and 23B of the FRA. Section 408(d) of the NHA addressed 
transactions with affiliates engaged in non-bank holding company 
activities. This section specifically prohibited six types of 
transactions and, like current section 23A, listed loans and extensions 
of credit separately from the ``purchase [of] securities or other 
assets or obligations under repurchase agreement from any affiliate.'' 
Compare section 408(d)(3) with (d)(4). The successor statute addressing 
transactions with affiliates engaged in non-bank holding company 
activities at section 11(a)(1)(A) of the HOLA, however, specifically 
prohibits only transactions within one of the original six categories--
loans and extensions of credit. This suggests that Congress did not 
intend to prohibit transactions with affiliates that engage in non-bank 
holding companies activities to the extent that the transactions fell 
within one of the other five categories.
    The 1998 rule on repurchase agreements treated reverse repurchase

[[Page 57794]]

agreements as loans because these transactions bear some of the 
economic characteristics of a loan.\18\ However, the typical reverse 
repurchase agreement structured in conformity with general market 
practices has economic attributes that distinguish it from other loans 
and extensions of credit. For example, such agreements typically 
involve an institution's purchase of a security, subject to an 
agreement by the counterparty to repurchase the same or a similar 
security at a fixed price at a later date. In these transactions, the 
``purchaser'' of the securities takes title to the securities and can 
trade, sell or pledge the security during the term of the contract. The 
reverse repurchase agreement merely imposes a contractual obligation to 
deliver identical securities on the settlement date set by the 
contract. This unique feature makes it far more flexible than a 
standard collateralized loan, where the lender cannot obtain access to 
the collateral in the absence of a default.\19\
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    \18\ The savings association transfers funds to the affiliate, 
expecting to be repaid when the company repurchases the assets. The 
purchased assets essentially amount to collateral because the 
savings association is required to return the assets at the time of 
repurchase. The savings association earns a pre-determined amount 
under the agreement. The principal risk to the savings association 
and the deposit insurance fund is credit risk--the possibility that 
the affiliate will default on its obligation to make the repurchase. 
These types of agreements are generally considered to be the 
functional equivalent of a loan. See amendments to Federal Financial 
Institution Examination Counsel Policy Statement on Repurchase 
Agreements of Depository Institutions with Securities Dealers and 
Others (FFIEC Policy Statement), 63 FR 6935 (Feb. 11, 1998).
    \19\ In addition, the bankruptcy code permits the purchaser 
under the agreement to liquidate securities without being subject to 
an automatic stay or similar delay. 11 U.S.C. 362(b)(7).
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    OTS may, of course, impose additional restrictions on transactions 
with affiliates under section 11(a)(4) of the HOLA if it determines 
that the restriction is necessary to protect the safety and soundness 
of savings associations. OTS believes that the quantitative limits, 
safety and soundness requirements, and low-quality asset prohibitions 
contained in section 23A, and the arms-length requirements in section 
23B sufficiently address the safety and soundness concerns raised by 
repurchase agreements. To the extent that a particular savings 
association may attempt to evade the lending prohibition through artful 
restructuring of a prohibited loan as a reverse repurchase agreement, 
Sec.  563.41(c)(1) (discussed below) provides OTS with sufficient 
authority to address the circumvention. Accordingly, the final rule 
treats reverse repurchase agreements as purchases of assets, and not as 
extensions of credit.
2. Attribution of Transactions and Activities
a. Third-party Attribution Rule
    Sections 23A(a)(2) and 23B(a)(3) of the FRA require a member bank 
(and, thus, a savings association) to treat a transaction with any 
person as a transaction with an affiliate to the extent that the 
proceeds are used for the benefit of, or transferred to, an 
affiliate.\20\ The text of section 11(a)(1)(A) of the HOLA does not 
specify a similar third party attribution requirement for the loan 
prohibition, and OTS has declined to infer such a requirement. To 
clarify this matter, the interim rule specifically stated that a loan 
or extension of credit to a third party is not prohibited under section 
11(a)(1)(A) of the HOLA ``merely because proceeds of the transaction 
are used for the benefit of, or transferred to, an affiliate.'' Interim 
rule at Sec.  563.41(c)(1).
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    \20\ Regulation W addresses the ``third party attribution rule'' 
at 12 CFR 223.16 and 223.52(b).
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    The preamble to the interim rule noted that OTS may, nonetheless, 
attribute a loan to a third party to an affiliate, for example, where a 
savings association attempts to circumvent the loan prohibition through 
sham transactions.\21\ OTS requested comment whether it should include 
this additional guidance in the final rule. One commenter responded 
asserting that further guidance was not needed.
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    \21\ 67 FR 77909, at 77914. Op. OTS Chief Counsel (Dec. 22, 
1991) and Op. OTS Chief Counsel (Mar. 13, 1992).
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    The final regulation continues to state that a loan or extension of 
credit to a third party is not prohibited under section 11(a)(1)(A) 
merely because proceeds of the transaction are used for the benefit of, 
or transferred to, an affiliate. However, OTS is concerned that savings 
associations and their affiliates may misinterpret this provision and 
incorrectly conclude that the third party attribution rule will not 
apply to the loan prohibition under any circumstances. Accordingly, OTS 
clarified the final rule to state that OTS may inform the savings 
association that a particular transaction is prohibited if OTS 
determines that the transaction is, in substance, a loan or extension 
of credit to an affiliate that is engaged in non-bank holding company 
activities, or OTS has other supervisory concerns concerning the 
transaction. OTS will make such a determination, for example, if a loan 
is a prearranged step in a series of transactions designed to channel 
funds to an affiliate engaged in non-bank holding company activities, 
or is otherwise designed to circumvent the loan prohibition. If OTS 
determines that a particular transaction is prohibited it may direct 
the savings association to divest the loan, unwind the transaction, or 
take other appropriate action.
b. Attribution of Activities Among Affiliates
    When OTS originally issued its transactions with affiliates rule in 
1991, it considered whether a savings association would be barred from 
extending credit to an affiliate that directly engaged only in 
activities permissible for a bank holding company, but the affiliate 
owned or controlled subsidiaries engaged in impermissible activities. 
OTS determined that activities must be attributed from a subsidiary to 
a parent affiliate in a vertical ownership chain up to, but not 
including, a controlling holding company in the corporate 
structure.\22\ The preamble to the 1991 rule suggests that this 
attribution determination was intended to prevent savings associations 
from evading the section 11 loan prohibition by structuring 
transactions through ``strawmen'' affiliates.\23\
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    \22\ 56 FR 34005, at 34009. See also, Op. OTS Chief Counsel 
(Nov. 13, 1990). Activities of a parent were not, however, 
attributed downward to its subsidiaries.
    \23\ See 56 FR 34005, at 34008. (Discussion of attribution of 
transactions).
---------------------------------------------------------------------------

    OTS specifically requested comment whether this interpretation 
should be included in the final rule. One commenter urged OTS to 
withdraw the guidance.
    Upon reconsideration, OTS has decided to withdraw its 1991 
guidance. Section 11 does not specifically require the attribution of 
activities from affiliated subsidiaries to their parent companies and, 
in the absence of information suggesting that this interpretation is 
necessary to protect the safety and soundness of savings associations, 
OTS is disinclined to interpret section 11 in a way that imposes 
additional burdens on savings associations. Rather than unduly restrict 
all savings associations, OTS believes that it can best address 
attempts at circumvention on a case-by-case basis. As noted above, the 
final rule states that OTS may prohibit a transaction if it determines 
that the transaction is, in substance, a loan or extension of credit to 
an affiliate that is engaged in non-bank holding company activities or 
OTS has other supervisory concerns concerning the transaction. Under 
this provision, OTS will prohibit a loan, for example, if it is a 
prearranged step in a

[[Page 57795]]

series of transactions designed to channel funds to an affiliate 
engaged in non-bank holding company activities, or is otherwise 
designed to circumvent the loan prohibition.

C. Other Matters

    OTS also wishes to clarify other guidance contained in its 1991 
rulemaking. In the preamble to the 1991 final rule, OTS considered 
whether, for the purposes of calculating a savings association's 
aggregate amount of covered transactions with a particular affiliate, 
the savings association must include covered transactions with 
subsidiaries of the affiliate. To prevent savings associations from 
circumventing the 10 percent limit imposed under section 23A, OTS 
concluded that attribution of transactions was appropriate and 
necessary. Accordingly, OTS stated that, when computing the aggregate 
amount of transactions with a particular affiliate, a savings 
association must aggregate the amount of its covered transactions with 
all subsidiaries directly or indirectly controlled by the affiliate. 
OTS did not, however, require a savings association to attribute 
transactions to any holding company that controls the savings 
association or to attribute transactions by a parent downward to any 
subsidiary.\24\
---------------------------------------------------------------------------

    \24\ 56 FR 34005, at 34008.
---------------------------------------------------------------------------

    FRB has not issued similar guidance regarding the attribution of 
transactions. To the contrary, the preamble to final Regulation W 
states that the 10 percent limit would prohibit a bank from engaging in 
a covered transaction with an affiliate only when the aggregate amount 
of covered transactions between the bank and that affiliate would 
exceed 10 percent of the bank's capital. 67 FR 76560, at 76572. Nothing 
in section 11 of the HOLA requires the attribution of transactions 
among affiliates.\25\ OTS may impose additional restrictions on savings 
associations if it determines that a restriction is necessary to 
protect the safety and soundness of savings associations. However, 
there is no reason to impose additional burdens on savings 
associations, particularly in light of other safeguards in sections 23A 
and 23B, including the overall 20 percent quantitative limits, 
qualitative restrictions, and other supervisory tools available to 
OTS.\26\
---------------------------------------------------------------------------

    \25\ For purposes of determining whether an institution has 
reached the 10 and 20 percent quantitative limits on covered 
transactions, however, the covered transactions of a depository 
institution and its non-affiliate subsidiaries are combined.
    \26\ OTS has received a few inquiries concerning the continuing 
validity of previously issued opinion letters on transactions with 
affiliates. The inquirers observed that some of this guidance may be 
invalid based on the interpretations announced in final Regulation 
W. OTS will continue to handle these inquiries on a case-by-case 
basis and will examine whether other appropriate action is 
necessary. In the interim, savings associations that continue to 
rely on these prior opinions should carefully review whether the 
opinions have been affected by Regulation W or this final rule, and 
should consult with OTS if they have any questions.
---------------------------------------------------------------------------

    Finally, in addition to the changes discussed above, OTS has made 
technical and clarifying changes to the interim rule. For example, the 
final rule clarifies that a savings association must comply with 
sections 23A and 23B of the FRA and Regulation W ``as if it were a 
member bank,'' and indicates that most references to the FRB or 
appropriate bank federal banking agency in Regulation W should be read 
to refer only to OTS.\27\ The latter change clarifies that OTS, rather 
than the FRB, has the responsibility for administering and enforcing 
transaction with affiliates restrictions with respect to savings 
associations. See 12 U.S.C. 1468(c).
---------------------------------------------------------------------------

    \27\ The references to the FRB at 12 CFR 223.2(a)(9)(iv), 
223.3(h), 223.14(c)(4), 223.43, and 223.55 are unchanged.
---------------------------------------------------------------------------

    The final rule also clarifies Regulation W's definition of ``well 
capitalized.'' The sole use of this definition is in 12 CFR 
223.41(d)(7), which states that a holding company and all of its 
subsidiary depository institutions must be ``well capitalized'' in 
order for a member bank to qualify for the internal corporate 
reorganization transaction exception. Section 223.3(kk) states that 
well capitalized has the same meaning as in 12 CFR 225.2, which 
prescribes various capital ratios and other capital-related 
requirements for bank holding companies, insured depository 
institutions, and uninsured depository institutions.
    This requirement is not meaningful for many savings and loan 
holding companies. Although the activities of holding companies 
regulated by the FRB have expanded since GLBA, some savings and loan 
holding companies currently engage in a much broader range of 
activities. Because the universe of thrift holding companies is so 
diverse, the adequacy of holding company capital cannot be determined 
on the basis of a one-size-fits-all numeric formula or standard. 
Instead, OTS has found that specified capital ratios can be 
simultaneously too lax to support the activities of some holding 
companies and too restrictive for others. To recognize the diversity of 
the holding company universe, OTS does not impose a single consolidated 
or unconsolidated numerical capital requirement or ratio applicable to 
all holding companies. Rather, its analysis of the capital adequacy of 
savings and loan holding companies is a case-by-case process that 
reflects the overall risk profile of the organization.
    To require savings associations and their holding companies to 
engage in a burdensome exercise merely to comply with specifications 
designed to address a more homogenous universe of holding companies, 
would serve no purpose. Rather, such a requirement would unduly 
obstruct some savings associations' ability to take advantage of the 
corporate reorganization exception, contrary to the stated intent of 
the FRB.\28\ In addition, other savings and loan holding companies 
associations might attempt to claim the exception, even though their 
capital would be less than the amount OTS believed necessary to support 
their higher risk. Accordingly, to apply the internal corporate 
reorganization exception to savings associations in the same manner and 
to the same extent as to member banks OTS has clarified the ``well 
capitalized'' definition in light of the purposes of the exemption.
---------------------------------------------------------------------------

    \28\ 67 FR 76560, at 76562 fn. 13 (``An insured savings 
association * * * may take advantage of Regulation W's exemptions as 
if it were a member bank.'')
---------------------------------------------------------------------------

    The stated purpose of the well capitalized requirement is to 
``prevent banking companies from abusing their banking units in 
reorganization transactions'' \29\ by ensuring that holding companies 
engaging in such transactions are appropriately capitalized and remain 
appropriately capitalized following the transaction. In light of the 
diverse activities engaged in by savings and loan holding companies, 
OTS believes that its case-by-case capital analysis best serves this 
goal. Accordingly, the final rule clarifies that for a savings and loan 
holding company, well-capitalized means that a holding company 
significantly exceeds OTS expectations for the amount of capital needed 
to adequately support the holding company's risk profile, as determined 
by OTS on a case-by-case basis. OTS emphasizes that this clarification 
does not substitute a relaxed standard for savings associations that 
avail themselves of the corporate reorganization exception. Rather, the 
clarification is intended to apply Regulation W meaningfully to savings 
associations while simultaneously recognizing the differences between 
bank and savings and loan holding companies and the

[[Page 57796]]

goals of the corporate reorganization exemption.\30\
---------------------------------------------------------------------------

    \29\ 67 FR 76560, at 76590.
    \30\ OTS is aware that the FRB also defined well capitalized 
with respect to a ``holding company that is not a bank holding 
company'' by reference to the capital requirements at Sec.  225.2. 
By its own terms, Regulation W applies only to member banks. 67 FR 
76560, at 76561. A holding company that is not a bank holding 
company would include, for example, holding companies of OCC-
chartered credit card companies or trust companies.
---------------------------------------------------------------------------

III. Executive Order 12866

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

IV. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) does not apply to a rule for 
which an agency is not required to publish a notice of proposed 
rulemaking. 5 U.S.C. 603. In issuing the interim rule, OTS concluded, 
for good cause, that it was not required to publish a notice of 
proposed rulemaking. Accordingly, the RFA does not require an initial 
or final regulatory flexibility analysis.
    Nonetheless, OTS considered the likely impact of this final rule on 
small businesses and believes that the rule will not have a significant 
impact on a substantial number of small entities. OTS has had 
comprehensive regulations implementing section 11 of the HOLA since 
1991. Today's final rule updates these provisions to incorporate 
Regulation W, interprets Regulation W to the extent necessary to apply 
the FRB rule to savings associations, clarifies the relationship 
between section 11(a)(1) of the HOLA and Regulation W, and sets out the 
additional restrictions imposed under section 11(a)(4) of the HOLA. In 
light of these preexisting rules, OTS does not believe that the final 
rule will significantly increase the applicable burdens for small or 
large savings associations. Accordingly, a regulatory flexibility 
analysis is not required.

V. Unfunded Mandates Act of 1995

    The Unfunded Mandates Reform Act of 1995, Public Law 104-4 
(Unfunded Mandates Act) applies only when an agency is required to 
issue a notice of proposed rulemaking or issues a final rule for which 
a notice of proposed rulemaking was published. 2 U.S.C. 1532. As noted 
above, OTS determined that a notice of proposed rulemaking was not 
required for the interim final rule. Accordingly, OTS concluded that 
the Unfunded Mandates Act does not require an analysis of this final 
rule.
    Nonetheless, OTS has considered the impact of the final rule under 
the Unfunded Mandates Act and has concluded that the final rule will 
not result in expenditures by state, local, or tribal governments or by 
the private sector of $100 million or more. OTS has had comprehensive 
regulations implementing section 11 of the HOLA since 1991. Today's 
final rule merely updates these provisions to incorporate Regulation W, 
interprets Regulation W to the extent necessary to apply the FRB rule 
to savings associations, interprets Regulation W to the extent 
necessary to apply the FRB rule to savings associations, clarifies the 
relationship between section 11(a)(1) of the HOLA and Regulation W, and 
sets out the additional restrictions imposed under section 11(a)(4) of 
the HOLA. In light of these preexisting rules, OTS does not believe 
that the final rule will significantly increase the applicable burdens 
for savings associations and will not result in increased expenditures 
by these institutions. Accordingly, OTS did not prepare a budgetary 
impact statement or specifically address the regulatory alternatives 
considered.

VI. Effective Date

    Under 12 U.S.C. 4802(b), final rules that impose additional 
reporting, disclosure, or other new requirements on insured depository 
institutions must take effect on the first day of a calendar quarter 
that begins on or after the date of publication. The Administrative 
Procedure Act (5 U.S.C. 553(d)(APA) provides that a final rule cannot 
be made effective less than 30 days after its publication. Together, 
these two statutes would require OTS to establish a January 1, 2004 
effective date for this final rule.
    Both statutes, however, permit the OTS to find good cause for 
establishing an earlier effective date. Today's rule changes generally 
relieve burdens or recognize exceptions to requirements imposed under 
the interim final rule. For example, the final rule revises OTS's 
definition of control, generally narrowing the definition of affiliate; 
removes repurchase agreements from the scope of the section 11 loan 
prohibition; and clarifies previously issued guidance on the 
attribution of activities and the calculation of quantitative limits. 
While the final rule applies slightly broader presumptions of control 
for convertible securities and nonvoting equity securities and, thus, 
expands the definition of affiliate in these areas, OTS believes that 
this change should have only a marginal impact on the regulatory 
burdens imposed on savings associations as a whole. Accordingly, OTS 
finds good cause not to delay making this rule effective until the 
calendar quarter beginning January 1, 2004.
    On the other hand, institutions will need some time to understand 
and adapt to the revised final rule. Consistent with the requirements 
of the APA, OTS believes that it is appropriate to delay the effective 
date of this rule for at least 30 days from publication. The effective 
date of this rule will be November 6, 2003.

VII. Paperwork Reduction Act of 1995

    The information collection requirements in the OTS rules were 
previously approved under OMB control number 1550-0078. The final rule 
incorporates these requirements at Sec.  563.41(c)(3) and (4), and does 
not make any changes that materially affect the overall burden of 
compliance.

List of Subjects

12 CFR Part 559

    Reporting and recordkeeping requirements, Savings associations, 
Subsidiaries.

12 CFR Part 562

    Accounting, Reporting and recordkeeping requirements, Savings 
associations.

12 CFR Part 563

    Accounting, Advertising, Crime, Currency, Investments, Reporting 
and recordkeeping requirements, Savings associations, Securities, 
Surety bonds.

0
Accordingly, the Office of Thrift Supervision adopts as final the 
interim rule published on December 20, 2002 at 67 FR 77909, amending 
parts 559, 562, and 563 in Title 12, Chapter V, Code of Federal 
Regulations, with the following changes:

PART 559--SUBORDINATE ORGANIZATIONS

0
1. The authority citation for part 559 continues to read as follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828.

0
2. Amend Sec.  559.3 by revising paragraph (l) to read as follows:


Sec.  559.3  What are the characteristics of, and what requirements 
apply to, subordinate organizations of Federal savings associations?

* * * * *

[[Page 57797]]



------------------------------------------------------------------------
                              Operating subsidiary   Service corporation
------------------------------------------------------------------------
 
                              * * * * * * *
(l) How do the transactions   (1) Section 563.41    (2) Section 563.41
 with affiliates (TWA)         of this chapter       of this chapter
 regulations (Sec.   563.41    explains how TWA      explains how TWA
 of this chapter) apply?       applies. Generally,   applies. Generally,
                               an operating          a service
                               subsidiary is not     corporation is not
                               an affiliate,         an affiliate,
                               unless it is a        unless it is a
                               depository            depository
                               institution; is       institution; is
                               directly controlled   directly controlled
                               by another            by another
                               affiliate of the      affiliate of the
                               savings association   savings association
                               or by shareholders    or by shareholders
                               that control the      that control the
                               savings               savings
                               association; or is    association; or is
                               an employee stock     an employee stock
                               option plan, trust,   option plan, trust,
                               or similar            or similar
                               organization that     organization that
                               exists for the        exists for the
                               benefit of            benefit of
                               shareholders,         shareholders,
                               partners, members,    partners, members,
                               or employees of the   or employees of the
                               savings association   savings association
                               or an affiliate. A    or an affiliate. If
                               non-affiliate         a savings
                               operating             association
                               subsidiary is         directly or
                               treated as a part     indirectly controls
                               of the savings        a service
                               association and its   corporation and the
                               transactions with     service corporation
                               affiliates of the     is not otherwise an
                               savings association   affiliate under
                               are aggregated with   Sec.   563.41 of
                               those of the          this chapter, the
                               savings association.  service corporation
                                                     is treated as a
                                                     part of the savings
                                                     association and its
                                                     transactions with
                                                     affiliates of the
                                                     savings association
                                                     are aggregated with
                                                     those of the
                                                     savings
                                                     association.
 
                              * * * * * * *
------------------------------------------------------------------------

PART 563--SAVINGS ASSOCIATIONS--OPERATIONS

0
3. The authority citation for part 563 continues to read as follows:

    Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 
1817, 1820, 1828, 1831o, 3806; 42 U.S.C. 4106.

0
4. Revise Sec.  563.41 to read as follows:


Sec.  563.41  Transactions with affiliates.

    (a) Scope. (1) This section implements section 11(a) of the Home 
Owners' Loan Act (12 U.S.C. 1468(a)). Section 11(a) applies sections 
23A and 23B of the FRA (12 U.S.C. 371c and 371c1) to every savings 
association in the same manner and to the same extent as if the 
association were a member bank; prohibits certain types of transactions 
with affiliates; and authorizes OTS to impose additional restrictions 
on a savings association's transactions with affiliates.
    (2) For the purposes of this section, ``savings association'' is 
defined at section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
1813), and also includes any savings bank or any cooperative bank that 
is a savings association under 12 U.S.C. 1467a(l). A non-affiliate 
subsidiary of a savings association as described in paragraph (b)(11) 
of this section is treated as part of the savings association.
    (b) Sections 23A and 23B of the FRA/Regulation W. A savings 
association must comply with sections 23A and 23B of the Federal 
Reserve Act and the implementing regulations at 12 CFR part 223 
(Regulation W) as if it were a member bank, except as described in the 
following chart. In addition, a savings association should read all 
references to ``the Board'' or ``appropriate federal banking agency'' 
to refer only to ``OTS,'' except for references at 12 CFR 
223.2(a)(9)(iv), 223.3(h), 223.14(c)(4), 223.43, and 223.55.

------------------------------------------------------------------------
       Provision of Regulation W                   Application
------------------------------------------------------------------------
(1) 12 CFR 223.1--Authority, purpose,    Does not apply. Section
 and scope.                               563.41(a) addresses these
                                          matters.
(2) 12 CFR 223.2(a)(8)--``Affiliate''    Does not apply. Savings
 includes a financial subsidiary.         association subsidiaries do
                                          not meet the statutory
                                          definition of financial
                                          subsidiary.
(3) 12 CFR 223.2(a)(12)--Determination   Read to include the following
 that ``affiliate'' includes other        statement: ``Affiliate also
 types of companies.                      includes any company that OTS
                                          determines, by order or
                                          regulation, to present a risk
                                          to the safety and soundness of
                                          the savings association.''
(4) 12 CFR 223.2(b)(1)(ii)--             Does not apply. Savings
 ``Affiliate'' includes a subsidiary      association subsidiaries do
 that is a financial subsidiary.          not meet the statutory
                                          definition of financial
                                          subsidiary.
(5) 12 CFR 223.3(d)--Definition of       Does not apply. Capital stock
 ``capital stock and surplus.''.          and surplus means ``unimpaired
                                          capital and unimpaired
                                          surplus,'' as defined in 12
                                          CFR 560.93(b)(11).
(6) 12 CFR 223.3(h)(1)--Section 23A      Read to incorporate Sec.
 covered transactions include an          563.41(c)(1), which prohibits
 extension of credit to the affiliate.    loans or extensions of credit
                                          to an affiliate, unless the
                                          affiliate is engaged only in
                                          the activities described at 12
                                          U.S.C. 1467a(c)(2)(F)(i), as
                                          defined in Sec.   584.2-2 of
                                          this chapter.
(7) 12 CFR 223.3(h)(2)--Section 23A      Read to incorporate Sec.
 covered transactions include a           563.41(c)(2), which prohibits
 purchase of or investment in             purchases and investments in
 securities issued by an affiliate.       securities issued by an
                                          affiliate, other than with
                                          respect to shares of a
                                          subsidiary.
(8) 12 CFR 223.3(k)--Definition of       Read to include the following
 ``depository institution.''.             statement: ``For the purposes
                                          of this definition, a non-
                                          affiliate subsidiary of a
                                          savings association is treated
                                          as part of the depository
                                          institution.''
(9) 12 CFR 223.3(p)--Definition of       Does not apply. Savings
 ``financial subsidiary.''.               association subsidiaries do
                                          not meet the statutory
                                          definition of financial
                                          subsidiary.
(10) 12 CFR 223.3(w)--Definition of      Read to include the following
 ``member bank.''.                        statement: ``Member bank also
                                          includes a savings
                                          association. For purposes of
                                          this definition, a non-
                                          affiliate subsidiary of a
                                          savings association is treated
                                          as part of the savings
                                          association.''

[[Page 57798]]

 
(11) 12 CFR 223.3(aa)--Definition of     Does not apply. Other OTS
 ``operating subsidiary.''.               regulations include a
                                          conflicting definition of this
                                          same term. Instead, OTS uses
                                          the phrase ``non-affiliate
                                          subsidiary.'' A non-affiliate
                                          subsidiary is a subsidiary of
                                          a savings association other
                                          than a subsidiary described at
                                          12 CFR 223.2(b)(1)(i), (iii)
                                          through (v).
(12) 12 CFR 223.3(ii)--Definition of     Read to include the following
 ``subsidiary.''.                         statement: ``A subsidiary of a
                                          savings association means a
                                          company that is controlled by
                                          the savings association.''
(13) 12 CFR 223.3(kk)--Definition of     Read to include the following
 ``well capitalized.''.                   statement: ``For a savings and
                                          loan holding company, however,
                                          well-capitalized means that
                                          the holding company
                                          significantly exceeds OTS
                                          expectations for the amount of
                                          capital needed to adequately
                                          support the holding company's
                                          risk profile, as determined by
                                          OTS on a case-by-case basis.''
(14) 12 CFR 223.31--Application of       Read to refer to ``a non-
 section 23A to an acquisition of an      affiliate subsidiary'' instead
 affiliate that becomes an operating      of ``operating subsidiary.''
 subsidiary.
(15) 12 CFR 223.32--Rules that apply to  Does not apply. Savings
 financial subsidiaries of a bank.        association subsidiaries do
                                          not meet the statutory
                                          definition of financial
                                          subsidiary.
(16) 12 CFR 223.42(f)(2)--Exemption for  Read to refer to ``Thrift
 purchasing certain marketable            Financial Report'' instead of
 securities.                              ``Call Report.'' References to
                                          ``state member bank'' are
                                          unchanged.
(17) 12 CFR 223.42(g)(2)--Exemption for  Read to refer to ``Thrift
 purchasing municipal securities.         Financial Report'' instead of
                                          ``Call Report.'' References to
                                          ``state member bank'' are
                                          unchanged.
(18) 12 CFR 223.61--Application of       Does not apply to savings
 sections 23A and 23B to U.S. branches    associations or their
 and agencies of foreign banks.           subsidiaries.
------------------------------------------------------------------------

    (c) Additional prohibitions and restrictions. A savings association 
must comply with the additional prohibitions and restrictions in this 
paragraph. Except as described in paragraph (b) of this section, the 
definitions in 12 CFR part 223 apply to these additional prohibitions 
and restrictions.
    (1) Loans and extensions of credit. (i) A savings association may 
not make a loan or other extension of credit to an affiliate, unless 
the affiliate is solely engaged in the activities described at 12 
U.S.C. 1467a(c)(2)(F)(i), as defined in Sec.  584.2-2 of this chapter. 
A loan or extension of credit to a third party is not prohibited merely 
because proceeds of the transaction are used for the benefit of, or are 
transferred to, an affiliate.
    (ii) If OTS determines that a particular transaction is, in 
substance, a loan or extension of credit to an affiliate that is 
engaged in activities other than those described at 12 U.S.C. 
1467a(c)(2)(F)(i), as defined in Sec.  584.2-2 of this chapter, or OTS 
has other supervisory concerns concerning the transaction, OTS may 
inform the savings association that the transaction is prohibited under 
this paragraph (c)(1), and require the savings association to divest 
the loan, unwind the transaction, or take other appropriate action.
    (2) Purchases or investments in securities. A savings association 
may not purchase or invest in securities issued by any affiliate other 
than with respect to shares of a subsidiary. For the purposes of this 
paragraph (c)(2), subsidiary includes a bank and a savings association.
    (3) Recordkeeping. A savings association must make and retain 
records that reflect, in reasonable detail, all transactions between 
the savings association and its affiliates and any other person to the 
extent that the proceeds of a transaction are used for the benefit of, 
or transferred to, an affiliate. At a minimum, these records must:
    (i) Identify the affiliate;
    (ii) Specify the dollar amount of the transaction and demonstrate 
that this amount is within the quantitative limits in 12 CFR 223.11 and 
223.12, or that the transaction is not subject to those limits;
    (iii) Indicate whether the transaction involves a low-quality 
asset;
    (iv) Identify the type and amount of any collateral involved in the 
transaction and demonstrate that this collateral meets the requirements 
in 12 CFR 223.14 or that the transaction is not subject to those 
requirements;
    (v) Demonstrate that the transaction complies with 12 CFR part 223, 
subpart F or that the transaction is not subject to those requirements;
    (vi) Demonstrate that all loans and extensions of credit to 
affiliates comply with paragraph (c)(1) of this section; and
    (vii) Be readily accessible for examination and supervisory 
purposes.
    (4) Notice requirement. (i) OTS may require a savings association 
to notify the agency before the savings association may engage in a 
transaction with an affiliate or a subsidiary (other than exempt 
transactions under 12 CFR part 223). OTS may impose this requirement 
if:
    (A) The savings association is in troubled condition as defined at 
Sec.  563.555 of this part;
    (B) The savings association does not meet its regulatory capital 
requirements;
    (C) The savings association commenced de novo operations within the 
past two years;
    (D) OTS approved an application or notice under 12 CFR part 574 
involving the savings association or its holding company within the 
past two years;
    (E) The savings association entered into a consent to merge or a 
supervisory agreement within the past two years; or
    (F) OTS or another banking agency initiated a formal enforcement 
proceeding against the savings association and the proceeding is 
pending.
    (ii) OTS must notify the savings association in writing that it has 
imposed the notice requirement and must identify the circumstance 
listed in paragraph (c)(4)(i) of this section that supports the 
imposition of the notice requirement.
    (iii) If OTS has imposed the notice requirement under this 
paragraph, a savings association must provide a written notice to OTS 
at least 30 days before the savings association may enter into a 
transaction with an affiliate or a subsidiary. The written notice must 
include a full description of the transaction. If OTS does not object 
during the 30-day period, the savings association may proceed with the 
proposed transaction.

0
5. Amend Sec.  563.43 by revising paragraphs (d) and (e) to read as 
follows:


Sec.  563.43  Loans by savings associations to their executive 
officers, directors, and principal shareholders.

* * * * *
    (d) The term subsidiary includes a savings association that is 
controlled by a company (including for this purpose

[[Page 57799]]

an insured depository institution) that is a savings and loan holding 
company. A company has control over a saving association if it: 
directly or indirectly, or acting through one or more other persons 
owns, controls, or has the power to vote 25 percent or more of any 
class of voting securities; or would be deemed to control the company 
under Sec.  574.4(a) of this chapter or presumed to control the company 
under Sec.  574.4(b) of this chapter, and in the latter case, control 
has not been rebutted. Notwithstanding any other provision of this 
section, no company shall be deemed to own or control another by virtue 
of its ownership or control of shares in a fiduciary capacity. When 
used to refer to a subsidiary of a savings association, the term 
subsidiary means a ``subsidiary'' that is controlled by the savings 
association within the meaning of 12 CFR part 574 of this chapter.
    (e) References to the Reserve Bank or the Comptroller shall be 
deemed to include the Director of OTS; and
* * * * *

    Dated: September 29, 2003.

    By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 03-25217 Filed 10-6-03; 8:45 am]
BILLING CODE 6720-01-P