[Federal Register Volume 68, Number 236 (Tuesday, December 9, 2003)]
[Rules and Regulations]
[Pages 68493-68499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29997]


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FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-1092]


Bank Holding Companies and Change in Bank Control

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is amending Regulation Y to expand the ability of 
all bank holding companies, including financial holding companies, to 
process, store and transmit nonfinancial data in connection with their 
financial data processing, storage and transmission activities. 
Specifically, the Board is raising the revenue limit that currently 
applies to the nonfinancial data processing activities of bank holding 
companies from 30 percent to 49 percent. The Board also announced that 
it will consider proposals by a financial holding company to engage in, 
or acquire a company engaged in, other nonfinancial data processing, 
information portal, and technology-related activities that the 
financial holding company believes are complementary to financial 
activities on a case-by-case basis in accordance with the procedures 
established by section 4(j) of the Bank Holding Company Act.

EFFECTIVE DATE: The final rule is effective January 8, 2004.

FOR FURTHER INFORMATION CONTACT: Scott G. Alvarez, Associate General 
Counsel (202-452-3583), or Kieran J. Fallon, Managing Senior Counsel 
(202-452-5270), Legal Division; David Reilly, Senior Supervisory 
Financial Analyst (202-452-5214), 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 for the Deaf (``TDD'') only, call 202-263-4869.

SUPPLEMENTARY INFORMATION:

A. Background

    The Bank Holding Company Act (12 U.S.C. 1841 et seq.) (BHC Act), as 
amended by the Gramm-Leach-Bliley Act (GLB Act),\1\ permits all bank 
holding companies to engage in any nonbanking activity that the Board 
had determined, by order or regulation prior to November 12, 1999, to 
be ``so closely related to banking as to be a proper incident thereto'' 
under section 4(c)(8) of the BHC Act.\2\ The GLB Act requires bank 
holding companies to conduct these activities subject to the terms and 
conditions contained in the Board's regulation or order authorizing the 
activity, unless the Board modifies those terms or conditions.\3\
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    \1\ Pub. L. 106-102, 113 Stat. 1338 (1999).
    \2\ See 12 U.S.C. 1843(c)(8).
    \3\ See id.
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    The GLB Act also permits a bank holding company or foreign bank 
that has made an effective election to become a financial holding 
company (FHC) to engage in a broader range of activities that the GLB 
Act defines as being financial in nature or incidental to a financial 
activity, including the sale of insurance as principal or agent, full-
scope securities underwriting and dealing, and merchant banking.\4\ 
FHCs also may engage in any other activity that the Board, in 
consultation with the Secretary of the Treasury, determines to be 
financial in nature or incidental to a financial activity.\5\ The text 
and legislative history of the GLB Act indicate that the ``financial in 
nature'' test was intended to be broader and more flexible than the 
``closely related to banking'' standard that previously governed the 
scope of permissible nonbanking activities under section 4(c)(8) of the 
BHC Act.\6\ Moreover, the factors that the Board is directed to 
consider in determining whether an activity is financial in nature or 
incidental to financial activities indicates that the scope of 
financial and incidental activities may expand over time in light of, 
among other things, changes in the marketplace in which FHCs 
compete.\7\
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    \4\ See 12 U.S.C. 1843(k)(4)(B), (E) and (H).
    \5\ See 12 U.S.C. 1843(k)(1)(A), (2) and (4).
    \6\ See H. Rept. No. 106-434 at 153 (1999) (``Permitting banks 
to affiliate with firms engaged in financial activities represents a 
significant expansion from the current requirement that bank 
affiliates may only be engaged in activities that are closely 
related to banking.'').
    \7\ The GLB Act directs the Board to consider a variety of 
factors in considering whether an activity is financial in nature or 
incidental thereto, including (1) The purposes of the BHC Act and 
the GLB Act; (2) changes and reasonably expected changes in the 
marketplace in which FHCs compete and in the technology for 
delivering financial services; and (3) whether the activity is 
necessary or appropriate to allow FHCs to compete effectively with 
other companies providing financial services, to deliver efficiently 
information and services that are financial in nature through the 
use of technological means, including any application necessary to 
protect the security or efficacy of systems for the transmission of 
data or financial transactions, and to offer customers any available 
or emerging technological means for using financial services or for 
the document imaging of data. See 12 U.S.C. 1843(k)(3).
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    The GLB Act also permits an FHC to engage in a nonfinancial 
activity if the Board determines that the activity is ``complementary 
to a financial activity and does not pose a substantial risk to the 
safety and soundness of depository institutions or the financial system 
generally.''\8\ This authority was intended to permit the Board to 
authorize an FHC to engage, to a limited extent, in activities that 
appear to be commercial if a meaningful connection exists between the 
proposed commercial activity and the FHC's financial activities and the 
proposed commercial activity would not pose undue risks to the safety 
and soundness of the FHC's affiliated depository institutions or the 
financial system. The GLB Act requires an FHC to obtain the Board's 
approval under section 4(j) of the BHC Act prior to engaging in an 
activity that the FHC believes is complementary to financial 
activities.\9\
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    \8\ See id. at section 1843(k)(1)(B).
    \9\ See 12 U.S.C. 1843(j)(1)(A) and (E).
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B. Board Proposal

    Following passage of the GLB Act, several FHCs, represented by 
their trade associations, requested that the Board authorize FHCs to 
engage in, or invest in companies engaged in, a wide range of data 
processing, technology, communication and e:commerce-related 
activities. In response to these requests, the Board took several 
steps. In December 2000, the Board adopted a final rule that authorizes 
FHCs to act as a ``finder'' through electronic or other means and 
thereby bring together buyers and sellers of financial and nonfinancial 
products for transactions that the parties themselves negotiate and 
consummate.\10\ The Board's Finder Rule addressed several of the 
activities requested by the FHCs and permits FHCs, among other things, 
to--
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    \10\ See 65 FR 80735, Dec. 22, 2000 (Finder Rule). The Board, in 
consultation with the Secretary of the Treasury, determined that 
acting as finder, as defined in the rule, is an activity that is 
incidental to financial activities.

    [sbull] Host an electronic marketplace on the FHC's Internet Web 
site that provides hypertext links to the Web sites of third parties;
    [sbull] Host the Web site of a merchant that

[[Page 68494]]

provides information concerning the merchant and its products and 
permits buyers to submit orders for such products or services; and
    [sbull] Operate an Internet Web site that allows multiple buyers 
and sellers to exchange information concerning the products and 
services that they are willing to purchase or sell, locate potential 
counterparties for transactions and enter into transactions between 
themselves.

    To address other aspects of the FHCs' requests, the Board in 
December 2000, requested comment on a proposed rule that would modify 
the limits imposed by the Board on the amount of nonfinancial data 
processing activities that a bank holding company may conduct in 
connection with its financial data processing activities.\11\ 
Regulation Y currently permits all bank holding companies to provide 
data processing and data transmission services, facilities (including 
data processing and data transmission hardware, software, 
documentation, or operating personnel), data bases, advice and access 
to such services, facilities and data to any customer if the data 
processed or furnished are financial, banking or economic in 
nature.\12\ Regulation Y also currently permits a bank holding company 
or nonbank subsidiary engaged in processing financial data to provide 
data processing services for nonfinancial data so long as the annual 
revenues derived by the company or subsidiary from its nonfinancial 
data processing activities does not exceed 30 percent of the total 
annual revenue derived by the company or subsidiary from providing data 
processing services under section 225.28(b)(14).\13\ The Board proposed 
increasing this limit on nonfinancial data processing activities from 
30 percent to 49 percent.
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    \11\ See 65 FR 80384, Dec. 21, 2000.
    \12\ See 12 CFR 225.28(b)(14)(i). The phrases ``data processing 
services'' and ``data processing activities'' used herein refer 
collectively to the broad array of data processing and data 
transmission services and functions described above that a bank 
holding company may perform under section 225.28(b)(14).
    \13\ See id. at section 225.28(b)(14)(ii); Letter from Scott G. 
Alvarez, Associate General Counsel of the Board, to Bryan G. 
Handlos, Esq., dated March 8, 1999.
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    The proposal also requested comment on whether the Board should 
authorize an FHC to invest, as a complementary activity, up to 5 
percent of its Tier 1 capital in companies that provide (1) Data 
storage services for any type of data, so long as the company also 
provided data storage services for financial data; (2) general data 
processing services for any type of data, so long as the company 
derived at least 20 percent of its total revenues from financial data 
processing activities, providing data processing services to depository 
institutions and their affiliates, and the sale of other financial 
products and services; and (3) information portal services over 
electronic networks.\14\ The Board indicated that an FHC would be 
expected to market and provide financial products or services through 
any information portal owned under the proposed authority. The Board 
asked for comment on whether the connections described above between 
the acquired company's nonfinancial and financial activities were 
sufficient to ensure that the acquired company's nonfinancial 
activities were complementary to financial activities within the 
meaning of the GLB Act. Consistent with the GLB Act, the Board also 
proposed to require that FHCs obtain the Board's prior approval under 
section 4(j) of the BHC Act for any proposed investment under these 
complementary authorities.\15\
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    \14\ Electronic information portal services involve providing or 
facilitating the search, exchange, consolidation, screening, 
filtering or aggregation of any type of information over electronic 
networks, and may include acting as an Internet service provider and 
providing on-line search engines, bulletin boards, newsgroup 
services and ``chat'' rooms.
    \15\ See 12 U.S.C. 1843(j)(1)(A) and (E).
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    The Board also solicited the public's views on whether the Board 
should develop a proposal that would authorize FHCs to invest in 
companies engaged in developing new technologies that might support the 
marketing or sale of financial products or services, providing 
communication links, or selling and distributing financial and 
nonfinancial products and services through electronic means. The Board 
asked commenters supporting further Board action with respect to these 
investments to provide detailed arguments and data that would support a 
finding that investments in companies engaged in these activities are 
financial in nature or incidental or complementary to financial 
activities. The Board also sought comment on a variety of other 
potential issues associated with these investments, including whether 
authorizing such investments would be consistent with the intent of the 
GLB Act to maintain the general separation of banking and commerce, and 
whether investments in such companies, if permitted, should be limited 
to non-controlling positions.

C. Overview of Public Comments

    The Board received thirteen comments on the proposal from banks, 
bank holding companies, and trade associations that represent banking 
organizations, securities firms and other financial service providers. 
All of the commenters supported Board action in this area and the 
Board's efforts to expand the range of activities permissible for bank 
holding companies and FHCs. Several commenters also stated that the 
proposal was consistent with Congress's desire, as expressed in the GLB 
Act, to allow FHCs to engage in an expanded range of financially 
related activities. Commenters also indicated that the proposal would 
allow bank holding companies to develop additional sources of revenue 
and would not present significant safety and soundness concerns.

1. Amending Existing Limits on Nonfinancial Data Processing Activities

    Commenters strongly supported the Board's proposal to increase, 
from 30 percent to 49 percent, the amount of data processing revenues 
that a bank holding company or nonbank subsidiary engaged in financial 
data processing activities may derive from processing nonfinancial 
data. Commenters stated that there are no operational or functional 
differences between processing financial and nonfinancial data and that 
the proposal would allow bank holding companies to use more efficiently 
the systems, expertise and resources that they have developed for 
processing financial data. Commenters also stated that bank holding 
companies have gained experience in processing nonfinancial data under 
the more limited authority currently available under Regulation Y, and 
that the proposal would allow bank holding companies to meet the needs 
of their customers more effectively.
    Also, customers increasingly are seeking data processing services 
that can satisfy both the financial and nonfinancial data processing 
needs of the customer. For example, some hospitals that previously 
sought only billing, payroll and accounting data processing services 
from bank holding companies now seek a more complete package of data 
processing services that include medical record organization, storage 
and retrieval, as well as billing, payroll and accounting services.

2. General Data Processing, Storage and Portal Services by FHCs

    Commenters also supported the proposal to allow FHCs to invest in 
companies engaged in general data storage, general data processing, or 
electronic information portal activities. Commenters offered several 
reasons why the Board should find such investments to be financial in 
nature,

[[Page 68495]]

incidental to financial activities or complementary to financial 
activities. For example, some commenters argued that data processing 
and data storage activities are, by their nature, financial activities 
regardless of the type of data involved. Others argued that the 
proposed activities were similar to, or an appropriate extension of, 
the existing data processing activities of bank holding companies or 
the ``finder'' activities permissible for FHCs.\16\ Similarly, some 
commenters contended that general data storage activities are 
functionally similar to the safe deposit and custody services that 
banks have traditionally offered to their customers.
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    \16\ A few commenters asserted that the Board should reclassify 
acting as a ``finder'' as an activity that is financial in nature, 
or should expand the types of services that an FHC may provide when 
acting as a finder. Such actions are outside the scope of this 
rulemaking.
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    Alternatively, commenters asserted that the connections required by 
the proposed rule between the acquired company's nonfinancial 
activities and financial activities were sufficient to demonstrate that 
the investments were complementary to financial activities for purposes 
of the GLB Act. Some, however, argued that the proposed investments 
should be deemed incidental to financial activities if the acquired 
company engaged in any financial data processing activities or did so 
to a substantial extent. Similarly, some commenters argued that 
investing in a company providing information portal services should be 
deemed to be incidental to financial activities if the portal was used 
to sell financial products or services, or if the company operating the 
portal derived a certain portion of its revenues (e.g. 50 percent) from 
financial activities.
    Several commenters opposed the proposed 5 percent Tier 1 capital 
limit on investments made by FHCs in companies providing general data 
processing, data storage or information portal services. These 
commenters argued that the 5 percent investment limit was too low, was 
unnecessary to address any potential safety and soundness issues, or 
would force FHCs to sell profitable investments or engage in these 
activities only through separate subsidiaries.\17\
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    \17\ A few commenters also stated that no special regulatory 
capital charge should be imposed on the proposed complementary 
investments.
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    Some commenters also asserted that the 60-day prior notice 
requirement for complementary investments would impede the ability of 
FHCs to respond quickly to investment opportunities and marketplace 
developments, and asked the Board to consider establishing a 
streamlined notice procedure for complementary investments. One 
commenter, however, asserted that the prior approval process was 
appropriate and would allow the Board to review and address on an 
individualized basis the issues associated with proposals by FHCs to 
engage in complementary activities.

3. Broad technology, communication and e:commerce investments by FHCs

    Commenters generally favored allowing FHCs to invest in companies 
engaged in developing new technology, providing communication links, or 
marketing or selling financial and nonfinancial products or services 
through electronic means and encouraged the Board to take steps to 
determine that these types of investments are financial in nature or 
incidental or complementary to financial activities. Only a few 
commenters, however, addressed specifically this aspect of the proposal 
and the Board's questions concerning these types of investments. 
Commenters generally asserted that the financial industry increasingly 
relies on technology, communication systems, and electronic sales 
channels to support the marketing and sale of financial products and 
services. Commenters also asserted that new technologies, systems and 
networks often are developed and operated to support a wide range of 
financial and nonfinancial applications, and that companies providing 
these services may seek equity (rather than contractual) partners. In 
light of these developments, commenters argued that FHCs must be able 
to invest in companies developing or operating new technologies, 
communication systems and electronic sales channels to ensure that 
these technologies, systems and networks will meet the needs of the 
financial industry, and to ensure that FHCs do not become reliant on 
third parties for the tools and delivery channels that may be used in 
the marketing and sale of financial products and services. Some 
commenters also noted that while FHCs may invest in technology-related 
companies under the GLB Act's merchant banking authority,\18\ the 
cross-marketing restrictions imposed on merchant banking investments by 
the GLB Act may diminish the ability of FHCs to compete for these 
investments.
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    \18\ See 12 U.S.C. 1843(k)(4)(H).
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D. Explanation of Final Rule

    After carefully considering the comments received on the proposal, 
the Board has adopted a final rule that amends the limitations 
previously imposed by the Board to allow all bank holding companies 
additional flexibility to process, store and transmit nonfinancial data 
in connection with their financial data processing, storage and 
transmission activities. The Board believes that the final rule will 
enhance the ability of bank holding companies to compete in the market 
for data processing services and respond to the financial and 
nonfinancial data processing needs of their customers. The Board also 
believes that amending the limitations in this manner would not 
negatively affect the safety and soundness of bank holding companies 
and their depository institution subsidiaries.
    As discussed further below, the Board also believes that there are 
a variety of ways that additional nonfinancial data processing, 
information portal and other technology-related investments and 
activities may be complementary to the financial activities of an FHC 
within the meaning of the GLB Act. However, the factors and 
relationships that may demonstrate that a proposed activity or 
investment by an FHC is complementary to the financial activities of 
the FHC may vary based on the facts and circumstances associated with 
the proposal. In light of these facts, and the limited record developed 
during this rulemaking, the Board believes it is appropriate at this 
time to review proposals by FHCs to engage in, or acquire a company 
engaged in, a complementary activity on a case-by-case basis in 
accordance with the prior notice procedures established by section 4(j) 
of the BHC Act. The Board expects to revisit whether it would be 
appropriate to propose a rule permitting FHCs generally to engage in, 
or invest in companies engaged in, additional nonfinancial data 
processing, information portal or other technology-related activities 
after the Board has gained experience in reviewing requests by 
individual FHCs to engage complementary activities.

1. Expanded Nonfinancial Data Processing Authority for All Bank Holding 
Companies

    Section 225.28(b)(14) of Regulation Y currently permits bank 
holding companies, including FHCs, to provide data processing services 
(including software, hardware, advice and personnel) to any customer if 
the data to be processed is financial, banking or economic in 
nature.\19\ The authority to

[[Page 68496]]

engage in financial data processing activities permits bank holding 
companies to provide their customers with a wide range of data 
processing services, including data processing related to payroll, 
accounts receivable and accounts payable processing; bill preparation 
and bill payment; processing credit card, debit card and ATM 
transactions and other electronic funds transfers; loan processing; 
credit analysis; tax planning; accounting and bookkeeping services; 
economic forecasting; and data processing services to support the 
customer's marketing, sale and delivery of financial products and 
services over the Internet or other electronic networks, such as home 
banking or securities brokerage services.\20\
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    \19\ See 12 CFR 225.28(b)(14)(i). Any hardware provided must be 
offered only in conjunction with software designed and marketed for 
the processing and transmission of financial, banking or economic 
data, and any general purpose hardware may not constitute more than 
30 percent of the cost of any packaged offering. See 12 CFR 
225.28(b)(14)(i)(B).
    \20\ See The Toronto-Dominion Bank, 83 Federal Reserve Bulletin 
335 (1997); Royal Bank of Canada, 83 Federal Reserve Bulletin 135 
(1997); Compagnie Financiere de Paribas, 82 Federal Reserve Bulletin 
348 (1996); BNCCORP, INC., 81 Federal Reserve Bulletin 294 (1995); 
The Bank of New York Company, Inc., 80 Federal Reserve Bulletin 1107 
(1994); Bank One Corporation, 80 Federal Reserve Bulletin 139 
(1994); see also Letter from J. Virgil Mattingly, General Counsel of 
the Board, to Thomas A. Plant, Esq., dated Nov. 25, 1997.
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    Regulation Y also currently permits a company engaged in financial 
data processing activities under section 225.28(b)(14) to process 
nonfinancial data so long as the annual revenue derived by the company 
from its nonfinancial data processing activities does not exceed 30 
percent of the company's total annual data processing revenues. As 
noted above, the Board proposed to raise this 30 percent limit on the 
nonfinancial data processing activities of bank holding companies to 49 
percent. Commenters strongly supported this change for the reasons 
outlined above.
    The Board has amended its regulatory limitation governing the 
conduct of data processing activities previously authorized for bank 
holding companies under section 4(c)(8) of the BHC Act to raise the 
threshold on nonfinancial data processing services as proposed.\21\ In 
accordance with the GLB Act, all bank holding companies, including 
FHCs, may take advantage of the expanded data processing authority 
granted by the final rule.
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    \21\ See 12 U.S.C. 1843(c)(8). At the time the Board adopted the 
current 30-percent revenue limit on nonfinancial data processing 
activities, the Board specifically noted that it reserved the 
authority to review and adjust this limit as appropriate. See 62 FR 
9290, 9304, Feb. 28, 1997.
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    The Board believes that the final rule will allow all bank holding 
companies to leverage more effectively the experience and resources 
they have developed from engaging in financial data processing 
activities. In addition, by allowing bank holding companies to process 
additional amounts of nonfinancial data for their customers, the final 
rule should allow bank holding companies to achieve additional 
economies of scale and compete more effectively with nonbank providers 
of data processing services.
    The 49-percent revenue limit included in the final rule ensures 
that the data processing subsidiaries of bank holding companies 
operating under section 4(c)(8) of the BHC Act remain predominantly 
engaged in processing financial, banking or economic data. The Board 
believes this limit provides reasonable assurances that any 
nonfinancial data processing activities conducted by a bank holding 
company under section 225.28(b)(14) will remain incidental to the 
company's financial data processing for purposes of section 4(c)(8) of 
the BHC Act.
    Bank holding companies that provide data processing services to 
customers should take appropriate steps to maintain the security, 
integrity and confidentiality of the customer's data.\22\ In addition, 
bank holding companies must take appropriate steps to ensure compliance 
with all applicable federal and state laws governing the privacy of 
consumer data processed by the bank holding company on behalf of third 
parties.
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    \22\ See Federal Financial Institutions Examination Council, IT 
Examination Handbook--Information Security (Dec. 2002).
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    Several commenters asked the Board to clarify the ability of bank 
holding companies to provide data storage, retrieval and imaging 
services as part of their data processing activities under section 
225.28(b)(14). Data storage, retrieval and imaging are functions that 
are an integral and often necessary part of data processing and data 
transmission activities. Accordingly, the Board previously has 
indicated that the data processing services that bank holding companies 
may provide under section 225.28(b)(14) include data storage, imaging 
and retrieval.\23\ In light of the commenters' requests, the Board has 
included language in the final rule that clarifies that bank holding 
companies may provide data storage, imaging and retrieval services for 
financial, economic or banking data without limit, and may provide such 
services for nonfinancial data to the extent permitted by the 49-
percent revenue limit adopted by the final rule.\24\
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    \23\ See Royal Bank of Canada, 83 Federal Reserve Bulletin 135 
(1997); BNCCORP, INC., 81 Federal Reserve Bulletin 295 (1995); State 
Street Boston Corporation, 81 Federal Reserve Bulletin 1049 (1995).
    \24\ A few commenters expressed concern that any revenue-based 
limit on nonfinancial data processing activities may be difficult to 
monitor or may cause pricing distortions in the market for data 
processing services. These commenters did not present any evidence 
indicating that the existing 30-percent test, which also is based on 
revenue, has caused significant compliance or pricing difficulties, 
and the Board notes that other measures of activity (such as one 
based on the quantity of financial and nonfinancial data processed) 
likely would be even more difficult for bank holding companies to 
monitor than the existing revenue-based test.
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    A few commenters also asserted that the Board should allow a bank 
holding company to use any excess capacity that may exist in the 
company's data processing systems to process nonfinancial data. The 
Board previously has indicated that bank holding companies may use any 
excess capacity that results in good faith from the bank holding 
company's financial data processing activities under section 
225.28(b)(14) to process nonfinancial data, and bank holding companies 
may continue to use their excess capacity in this manner subject to the 
Board's regulations and policies governing these activities.\25\ The 
Board also previously has indicated that revenue derived by a bank 
holding company from the use of excess capacity is not included for 
purposes of determining the company's compliance with the rule's 
revenue limit on nonfinancial data processing activities.\26\
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    \25\ See 12 CFR 225.123(e)(1); Citicorp, 68 Federal Reserve 
Bulletin 505, 510 (1982). These policies prohibit a bank holding 
company from acquiring equipment solely for the purpose of creating 
excess capacity and limit the ability of bank holding companies to 
provide hardware and software in connection with their sale or 
provision of excess data processing capacity. See 12 CFR 
225.123(e)(1).
    \26\ See 62 FR 9290, 9304 at n.5, Feb. 28, 1997.
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    A bank holding company may use any currently available or newly 
developed technological means, including dedicated or shared electronic 
facilities, the Internet and optical technology, to provide its 
customers permissible data processing services. In addition, a bank 
holding company may provide its customers data processing services 
either as a stand-alone service or in conjunction with other products 
and services that the bank holding company is authorized to provide 
under the BHC Act.
    The Board notes, however, that the authority to provide data 
processing services for financial and nonfinancial data does not 
authorize bank holding companies to engage in an activity simply 
because it involves the use of a computer or the transmission of data 
in electronic form. Section 225.28(b)(14)

[[Page 68497]]

permits a bank holding company to provide data processing services to 
third-party customers to support the functions or activities of the 
customer. Where the bank holding company's data processing activities 
represent the conduct of a separate or different activity by the bank 
holding company itself, the bank holding company must have the 
authority to engage in that activity under other provisions of 
Regulation Y. For example, while a bank holding company may provide 
data processing support to an unaffiliated insurance agency under 
section 225.28(b)(14), such as, for example, by processing customer 
payments and optically scanning and storing the insurance policies 
issued by the agency, a bank holding company may not itself sell 
insurance (through electronic means or otherwise) under section 
225.28(b)(14).
    A few commenters asked that the Board permit bank holding companies 
to determine their compliance with the 49-percent revenue limit on 
nonfinancial data processing activities on a business line or 
organization-wide basis. The Board recognizes that there may be 
situations where a bank holding company has bona fide operational 
reasons for conducting its financial and related nonfinancial data 
processing activities through separately incorporated subsidiaries. 
Accordingly, bank holding companies may request permission to 
administer the 49-percent revenue limit on a business-line or multiple-
entity basis in appropriate circumstances. The Board has delegated 
authority to its General Counsel, in consultation with the Director of 
the Division of Banking Supervision and Regulation, to review and act 
on these requests. Such requests should describe the structure of the 
holding company's data processing operations, the methodology the 
holding company proposes to use to administer the revenue test, and the 
reasons why the holding company believes the proposed methodology is 
appropriate. The General Counsel or the Board where appropriate will 
consider any request in light of all the facts and circumstances, 
including the inter-relationships between the data processing 
activities conducted by the bank holding company's separate 
subsidiaries, the holding company's business or operational reasons for 
conducting its data processing activities in different subsidiaries, 
and the level of the holding company's ownership interest in the 
individual subsidiaries.
    The Board will revisit whether it would be appropriate to authorize 
all bank holding companies to monitor compliance with the revenue limit 
on a consolidated or business-line basis based on the experience gained 
from reviewing any such requests.

2. General Data Storage, Data Processing, Electronic Information 
Portal, Technology, Communication and E:Commerce Investments

    In response to requests from FHCs, the Board also requested comment 
on whether the Board should adopt a rule permitting FHCs to invest, as 
a complementary activity, in any company that provides (1) Data storage 
services for nonfinancial data without regard to the revenue 
limitations discussed above, so long as the company provided data 
storage services for some financial data; (2) data processing services 
for nonfinancial data, so long as the company derived at least 20 
percent of its total revenues from processing financial data, 
processing data for depository institutions, or the sale of other 
financial products or services; or (3) electronic information portal 
services.\27\ The Board proposed limiting the aggregate carrying value 
of an FHC's investments in companies engaged in these activities to 5 
percent of the FHC's Tier 1 capital. FHCs also had requested authority 
to invest in companies that develop technology that might support the 
marketing or sale of financial products or services in the future; 
provide communication linkages for any type of information; or market 
and sell nonfinancial and financial products or services through 
electronic means.
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    \27\ The Board indicated that it expected an FHC to market or 
provide financial products or services through any electronic 
information portal service owned under this proposed authority.
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    The Board notes that much of the need expressed by FHCs for 
authority to make these types of investments may be addressed by the 
Board's decision to raise the revenue limit on the nonfinancial data 
processing activities of bank holding companies to 49 percent. In 
addition, the Board notes that FHCs currently have the authority to 
make investments in data processing companies that do not comply with 
the 49 percent revenue limit and other technology-related companies 
under the GLB Act's merchant banking authority. Although some 
commenters noted that the cross-marketing restrictions applicable to 
merchant banking investments may diminish the attractiveness of this 
investment authority, the Board notes that these restrictions apply 
only to the depository institution subsidiaries of an FHC (and not to 
the FHC itself or its nonbank affiliates) and Congress currently is 
considering legislation that would loosen these restrictions in several 
important respects.\28\ Commenters also presented little evidence that, 
in the Board's view, indicates why data processing, information portal 
and the other technology-related activities, without limit on the type 
of data processed or amount of nonfinancial data processed, should, in 
all circumstances, be found to be financial in nature or incidental to 
a financial activity.
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    \28\ See Financial Services Regulatory Relief Act of 2003, 
section 501, H.R. 1375, 108 Cong., 1st Sess. (2003); H. Rept. 108-
152, Part 1, 108 Cong., 1st Sess. (2003).
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    The GLB Act does permit an FHC to engage in, or acquire a company 
engaged in, a nonfinancial activity if the Board determines that the 
activity is complementary to financial activities and does not pose a 
substantial risk to the safety and soundness of depository institutions 
or the financial system. As noted above, this authority was intended to 
provide the Board a mechanism to allow an FHC to engage to a limited 
degree in commercial activities if the proposed commercial activities 
would meaningfully complement or enhance the financial activities of 
the FHC, and the proposed activities would not present undue risks to 
the subsidiary depository institutions of the FHC or the financial 
system.
    The Board believes that there are a variety of relationships or 
connections between a commercial activity or investment and an FHC's 
financial activities that may indicate that the activity or investment 
is complementary to the FHC's activities within the meaning of the GLB 
Act. Ultimately, the determination whether a commercial activity or 
investment is complementary will depend on the nature of the activity 
and the level and quality of the many types of connections that may 
exist between the proposed activity or investment and the FHC's 
financial activities.
    The Board does not believe that the limited record developed during 
this rulemaking provides the Board a sufficient basis for determining, 
by rule, that nonfinancial data processing and information portal 
activities are as a general matter financial in nature, incidental to a 
financial activity, or complementary to the financial activities of 
FHCs. The Board also does not believe that the record is sufficient at 
this time to warrant developing a formal proposal requesting comment on 
whether the Board should determine, by rule, that the other technology-
related

[[Page 68498]]

investments suggested by the initial FHC requestors are as a general 
matter financial in nature, incidental to a financial activity, or 
complementary to the financial activities of FHCs.
    In light of the foregoing, the Board believes it is appropriate to 
review proposals by FHCs to engage in, or acquire a company engaged in, 
general data processing and electronic information portal activities, 
as well as other nonfinancial technology-related activities, on a case-
by-case basis under section 4(j) of the BHC Act. This approach is 
consistent with the procedure established by the GLB Act for FHCs to 
engage in complementary activities.\29\ This process will allow an FHC 
to present, and the Board to review, all the connections that may 
demonstrate that a proposed investment or activity is complementary to 
the FHC's financial activities for purposes of the GLB Act. Moreover, 
because the proposed rule would have required FHCs to obtain the 
Board's approval under section 4(j) prior to making any complementary 
investment under the proposal, the procedural approach adopted by the 
Board does not impose any additional filing burden on FHCs.
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    \29\ See 12 U.S.C. 1843(j)(A) and (E).
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    FHCs that believe a proposed investment or activity is 
complementary to the FHC's financial activities should submit a notice 
to the Board in accordance with section 4(j) of the BHC Act and section 
225.89 of the Board's Regulation Y (12 CFR 225.89). The notice should, 
among other things, identify and define the proposed complementary 
activity, identify the financial activity to which the proposed 
complementary activity would be complementary, and describe the 
relationships and connections between the proposed activity and the 
identified financial activity that the FHC believes support a finding 
that the proposed activity is complementary.\30\ In addition, the 
notice should explain why the proposed complementary activity or 
investment would not pose undue risks to the safety and soundness of 
the FHC's subsidiary depository institutions or the financial system 
and what, if any, limits would be appropriate to ensure that the 
investment or activity remains small in relation to the FHC's financial 
activities.
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    \30\ See 12 CFR 225.89(a).
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Regulatory Flexibility Act

    In accordance with section 4(a) of the Regulatory Flexibility Act 
(5 U.S.C. 604(a)), the Board must publish a final regulatory 
flexibility analysis with this rulemaking. The final rule expands the 
ability of bank holding companies of all sizes to process, store and 
transmit nonfinancial data in connection with their financial data 
processing activities. The Board specifically requested comment on the 
likely burden that the proposed rule would have on bank holding 
companies of all sizes, including small bank holding companies.\31\ 
Commenters noted that the rule should enhance the ability of bank 
holding companies of all sizes to compete with other providers of data 
processing services, achieve additional economies of scale and utilize 
more efficiently their existing data processing resources and 
expertise. In response to comments received, the Board also has 
clarified the ability of bank holding companies to engage in data 
storage, imaging and retrieval activities in connection with their 
permissible data processing activities, and to use any excess capacity 
that may result, in good faith, from the bank holding company's 
financial data processing activities to process, store and transmit 
nonfinancial data.
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    \31\ For purposes of the Regulatory Flexibility Act, small 
entities are defined to include bank holding companies that have 
$150 million or less in assets. See 13 CFR 121.201. As of March 31, 
2003, there were 3117 bank holding companies with consolidated total 
assets of $150 million or less.
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    A few commenters asked that the Board permit bank holding companies 
to derive more than 49 percent of their data processing revenues from 
processing, storing or transmitting nonfinancial data, or to apply the 
rule's revenue limit on nonfinancial data processing activities on a 
business-line or organization-wide basis. For the reasons discussed in 
the supplementary information above, the Board does not believe such 
actions would generally be appropriate or consistent with section 
4(c)(8) of the BHC Act. The Board, however, has established a process 
whereby any bank holding company, including small bank holding 
companies, may obtain permission to administer the rule's revenue limit 
on nonfinancial data processing activities on a multiple-entity or 
consolidated basis. This process will permit bank holding companies, 
including small bank holding companies, to administer the revenue test 
in a more flexible manner when such action would be consistent with the 
BHC Act.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board has reviewed the final rule 
under the authority delegated to the Board by the Office of Management 
and Budget (``OMB''). The Federal Reserve may not conduct or sponsor, 
and an organization is not required to respond to, an information 
collection unless it displays a currently valid OMB control number.
    As discussed in the SUPPLEMENTARY INFORMATION above, bank holding 
companies may request permission to administer the 49-percent revenue 
limit on nonfinancial data processing activities adopted by the final 
rule on a business-line or multiple-entity basis in appropriate 
circumstances. Such requests should be directed to the Board's General 
Counsel and should describe the structure of the holding company's data 
processing operations, the methodology the holding company proposes to 
use to administer the revenue test, and the reasons why the holding 
company believes the proposed methodology is appropriate. It is 
estimated that there will be 5 respondents per year with an estimated 
burden of 2 hours per response. Therefore the total amount of annual 
burden is estimated to be 10 hours. There is estimated to be $200 
annual cost burden over the annual hour burden. An OMB control number 
for this information collection will be obtained.
    A request may be filed in letter form and there will be no 
reporting form for this information collection. The agency form number 
for the notice will be the FR 4021. A bank may request confidentiality 
for the information contained in the notice in accordance with the 
Freedom of Information Act and the Board's Rules Regarding the 
Availability of Information. See 5 U.S.C. 552; 12 CFR part 261.
    As required by the GLB Act, section 225.89 of the Board's 
Regulation Y currently requires an FHC to obtain the Board's approval 
prior to engaging in, or acquiring a company engaged in, an activity 
that the FHC believes is complementary to a financial activity. See 12 
CFR 225.89. Section 225.89 also describes the information that must be 
included in any request to engage in, or acquire a company engaged in, 
a complementary activity. The Board previously has reviewed and 
approved this information collection in accordance with the 
requirements of the Paperwork Reduction Act. See Requests for Approval 
to Engage in an Activity that is Complementary to a Financial Activity 
(FR 4012; OMB No. 7100-0292).
    The Board has a continuing interest in the public's opinions of the 
Federal Reserve's collections of information. At any time, comments 
regarding the burden estimate, or any other aspect of this information 
collection, including suggestions for reducing the burden,

[[Page 68499]]

may be sent to: Secretary, Board of Governors of the Federal Reserve 
System, 20th and C Streets, NW., Washington, DC 20551; and to the 
Office of Management and Budget, Paperwork Reduction Project, 
Washington, DC 20503.

Use of Plain Language

    Section 722 of the GLB Act requires the Board to use ``plain 
language'' in all proposed and final rules published after January 1, 
2000. The Board requested comment on whether there were ways to make 
the proposed rule easier to understand. One commenter suggested that 
the Board reformat the portion of the proposed rule relating to the 
complementary general data processing activities of FHCs (Sec.  
225.89(d)(1)(B) of the proposed rule) to make the rule easier to 
understand. For the reasons discussed above, the Board has determined 
not to adopt that section of the proposed rule. The Board also believes 
that the final rule is written plainly and presented clearly.

List of Subjects in 12 CFR Part 225

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

Authority and Issuance

0
For the reasons set forth in the preamble, Title 12, Chapter II, of the 
Code of Federal Regulations is amended as follows:

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

0
1. The authority citation for part 225 continues to read as follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1843(k); 1844(b), 1972(1), 2903, 3106, 3108, 3310, 3331-
3351, 3907, and 3909; 15 U.S.C. 6801 and 6805.

0
2. Section 225.28(b)(14) is revised to read as follows:


Sec.  225.28  List of permissible nonbanking activities.

* * * * *
    (b) * * *
    (14) Data processing. (i) Providing data processing, data storage 
and data transmission services, facilities (including data processing, 
data storage and data transmission hardware, software, documentation, 
or operating personnel), databases, advice, and access to such 
services, facilities, or data-bases by any technological means, if:
    (A) The data to be processed, stored or furnished are financial, 
banking or economic; and
    (B) The hardware provided in connection therewith is offered only 
in conjunction with software designed and marketed for the processing, 
storage and transmission of financial, banking, or economic data, and 
where the general purpose hardware does not constitute more than 30 
percent of the cost of any packaged offering.
    (ii) A company conducting data processing, data storage, and data 
transmission activities may conduct data processing, data storage, and 
data transmission activities not described in paragraph (b)(14)(i) of 
this section if the total annual revenue derived from those activities 
does not exceed 49 percent of the company's total annual revenues 
derived from data processing, data storage and data transmission 
activities.

    Dated: November 26, 2003.

    By order of the Board of Governors of the Federal Reserve System
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 03-29997 Filed 12-8-03; 8:45 am]
BILLING CODE 6210-01-P