[Federal Register Volume 69, Number 8 (Tuesday, January 13, 2004)]
[Rules and Regulations]
[Pages 1895-1904]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-585]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 7

[Docket No. 04-03]
RIN 1557-AC78


Bank Activities and Operations

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
publishing its final rule amending its visitorial powers regulation in 
order to clarify issues that have arisen in connection with the scope 
of the OCC's visitorial powers.

EFFECTIVE DATE: February 12, 2004.

FOR FURTHER INFORMATION CONTACT: For questions concerning the final 
rule, contact Andra Shuster, Counsel, or Mark Tenhundfeld, Assistant 
Director, Legislative and Regulatory Activities Division, (202) 874-
5090.

SUPPLEMENTARY INFORMATION: On February 7, 2003, the OCC published a 
notice of proposed rulemaking in the Federal Register (68 FR 6363) to 
implement the American Homeownership and Economic Opportunity Act of 
2000 (AHEOA) and clarify our visitorial powers regulation (NPRM). In 
addition, we proposed to amend parts 5, 7, 9, and 34 of our regulations 
for other purposes and to make various technical changes to correct 
citations or footnote numbering.
    On December 17, 2003, the OCC published a final rule that addressed 
all of the foregoing parts of the proposal except visitorial powers (68 
FR 70122). This final rule relates solely to the visitorial powers 
proposal (proposal).
    The OCC received 55 comments on the NPRM. Of these, 53 comments 
addressed the visitorial powers proposal. These comments included three 
from national banks, one from an operating subsidiary of a national 
bank, six from bank holding companies, five from banking trade 
associations, two from bank membership organizations, one from a 
community group association, two from non-profit consumer groups, one 
from a state bank supervisors' association, 30 from state bank 
supervisors' offices, one from a securities administrators' membership 
organization, and one from a law enforcement association.
    While many of the commenters supported the proposal, some were 
opposed, and many offered suggestions for changes. For the reasons 
discussed later in this preamble, we have adopted the visitorial powers 
provisions of the NPRM with certain modifications also described later.

A. Background

    Current 12 CFR 7.4000(a) provides that only the OCC or an 
authorized representative of the OCC may exercise visitorial powers 
with respect to national banks, subject to exceptions provided in 
Federal law. Section 7.4000(a) goes on to define the regulatory, 
supervisory, and enforcement actions included within our visitorial 
powers, while Sec.  7.4000(b) sets out several exceptions to our 
exclusive authority that are created by Federal law.\1\
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    \1\ Paragraph (c) of 12 CFR 7.4000 clarifies that the OCC owns 
reports of examination and addresses a bank's obligations with 
respect to these reports. This paragraph is unaffected by this 
rulemaking.
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    These provisions interpret and implement 12 U.S.C. 484. Paragraph 
(a) of that section states--

    No national bank shall be subject to any visitorial powers 
except as authorized by Federal law, vested in the courts of justice 
or such as shall be, or have been exercised or directed by Congress 
or by either House thereof or by any committee of Congress or of 
either House duly authorized.

Paragraph (b) of the statute then permits lawfully authorized state 
auditors or examiners to review a national bank's records ``solely to 
ensure compliance with applicable State unclaimed property or escheat 
laws upon reasonable cause to believe that the bank has failed to 
comply with such laws.''
    In recent years, various questions have arisen with respect to the 
scope of the OCC's visitorial powers over national banks. In general, 
the questions fall into two broad categories: First, what activities 
conducted by a national bank are subject to the OCC's exclusive 
visitorial powers? Second, what is the meaning of certain exceptions to 
the OCC's exclusive visitorial powers that are provided in the statute, 
specifically the exception for visitorial powers ``vested in the courts 
of justice?''
    The NPRM invited comments on proposed amendments to Sec.  7.4000 to 
clarify the application of section 484 to both areas.

B. Description of the Proposal

    The proposal contained two types of changes to Sec.  7.4000. First, 
we proposed to add a new paragraph (3) to Sec.  7.4000(a) that 
identifies the scope of the activities of national banks for which the 
OCC's visitorial powers are exclusive, pursuant to section 484. The 
proposal provided that the OCC has exclusive visitorial authority over 
national bank activities that are permissible under Federal law or 
regulation or OCC issuance or interpretation, including how those 
activities are conducted. Second, we proposed to revise Sec.  7.4000(b) 
to clarify the OCC's interpretation of the ``vested in the courts of 
justice'' exception. The proposal provided that national banks are 
subject to the visitorial power inherently vested in courts and that 
the ``vested in the courts of justice'' exception did not create or 
expand any authority of states or other governmental entities to 
regulate or supervise national banks. As we will discuss in greater 
detail later in this preamble, both of these changes serve to clarify 
that Federal law commits the supervision of national banks' Federally-
authorized banking business exclusively to the OCC, (except where 
Federal law provides otherwise), and does not apportion that 
responsibility among the OCC and the states; and that state authorities 
may not achieve indirectly by resort to judicial actions what section 
484 prohibits them from achieving directly through state regulatory or 
supervisory mechanisms. The proposal also added an exception in 
proposed new Sec.  7.4000(b)(vi) recognizing that functional regulators 
may exercise the authority over national banks conferred by the Gramm-
Leach-Bliley Act (GLBA).\2\
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    \2\ Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999). For 
example, section 301 of the GLBA (codified at 15 U.S.C. 6711) 
provides that national banks' insurance activities are functionally 
regulated by the states, subject to the applicability of state law 
provisions in section 104 of that law (codified at 15 U.S.C. 6701). 
Id. at section 301, 113 Stat. at 1407, codified at 15 U.S.C. 6711.
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C. Overview of Comments Received

    Many commenters supported the proposal, noting that the 
clarification of the visitorial powers regulations would be helpful. 
One commenter said that subjecting national banks' Federally-authorized 
activities to state regulation would be inconsistent with the purposes 
of the National Bank Act. Others noted that additional layers of state 
supervision would have the effect of making the operations of national 
banks less efficient and more costly. Commenters also stated that they 
supported the proposal's clarification of

[[Page 1896]]

the ``courts of justice'' exception. A number of commenters supporting 
the proposal suggested that, while the reference in the preamble is 
helpful, the OCC should add language to the regulation text to 
explicitly state that the OCC's exclusive visitorial authority applies 
to operating subsidiaries.
    We also received a number of comments that opposed the proposal. 
These commenters advanced four principal points: first, that the 
visitorial powers amendments are inconsistent with the fundamental 
tenets of the dual banking system, pursuant to which national banks are 
subject to state regulation; second, that the amendments are 
inconsistent with the presumptive applicability of state law to 
national banks, as endorsed by the Riegle-Neal Interstate Banking and 
Branching Efficiency Act of 1994 (the Riegle-Neal Act); \3\ third, that 
the OCC's visitorial power over national banks is not exclusive; and, 
finally, that the OCC lacks authority to prevent states from exercising 
visitorial powers over national bank operating subsidiaries. The 
following discussion addresses each of these points.
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    \3\ Pub. L. 103-328, 108 Stat. 2338 (Sept. 29, 1994).
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D. Discussion

1. The Exclusivity of the OCC's Visitorial Authority is Integral to--
Not Inconsistent With--the Dual Banking System

    Many commenters opposed to the proposal argued that the amendments 
would amount to a ``field preemption'' that would be inconsistent with 
what they aver to be a fundamental tenet of the dual banking system, 
namely, that states have the authority to regulate the business 
operations of all banks, including national banks, unless Congress 
preempts state law in specific areas.
    This argument mischaracterizes the essence of the dual banking 
system. Differences in national and state bank powers and in the 
supervision and regulation of national and state banks are not 
inconsistent with the dual banking system; rather they are the defining 
characteristics of it. As one noted commenter has observed, ``[t]he 
very core of the dual banking system is the simultaneous existence of 
different regulatory options that are not alike in terms of statutory 
provisions, regulatory implementation and administrative policy.''\4\ 
The Federal grant of national bank powers and the uniformity of the 
standards that govern their exercise, coupled with the OCC's exclusive 
visitorial authority, are fundamental distinctions between the national 
banking system and the system of state-chartered and regulated banks 
that comprises the other half of the dual banking system.
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    \4\ Kenneth E. Scott, The Dual Banking System: A Model of 
Competition in Regulation, 30 Stan. L. Rev. 1, 41 (1977).
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    Neither the case law nor scholarly literature recognizes a 
definition of dual banking incorporating the notion that national banks 
are subject to state supervision and regulation of activities they are 
authorized to conduct under Federal banking law.\5\ What the case law 
does recognize is that ``states retain some power to regulate national 
banks in areas such as contracts, debt collection, acquisition and 
transfer of property, and taxation, zoning, criminal, and tort law.'' 
\6\ Application of these laws to national banks and their 
implementation by state authorities typically does not affect the 
content or extent of the Federally-authorized business of banking 
conducted by national banks, but rather establishes the legal 
infrastructure that surrounds and supports the ability of national 
banks--and others--to do business.\7\ In other words, these state laws 
provide a framework for a national bank's ability to exercise powers 
granted under Federal law; they do not obstruct or condition a national 
bank's exercise of those powers.\8\
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    \5\ The following is typical of the way the dual banking system 
is described in recent scholarly articles:
    ``Depository financial institutions in the United States, 
including banks, credit unions, and thrifts, are unique in that 
their incorporators and/or management have a choice between state 
and federal charters, regulatory authorities, and governing 
statutes. No other industry has separate and distinct laws governing 
its powers, regulation, and organizational structure. This 
phenomenon is known as the `dual banking system'.''
    John J. Schroeder, ``Duel'' Banking Sytem? State Bank Parity 
Laws: An Examination of Regulatory Practice, Constitutional Issues, 
and Philosophical Questions, 36 Ind. L. Rev. 197, at 197 (2003), 
citing Arthur E. Wilmarth, Jr., The Dual Banking System--A Legal 
History (Sept. 30, 1991) (unpublished paper presented at the 
Education Foundation of State Bank Supervisors (EFSBS) Seminar for 
State Banking Department Attorneys).
    \6\ Bank of America v. City & County of San Francisco, 309 F.3d 
551, 559 (9th Cir. 2002).
    \7\ The OCC is publishing in the Federal Register today a final 
rule amending parts 7 and 34 of the OCC's regulations to clarify 
that these state ``infrastructure'' statutes would generally not be 
preempted by Federal law.
    \8\ See Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 
25, 33-34 (1996).
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    The argument that the proposed amendments generally amount to an 
impermissible ``field preemption'' is also misplaced. First, the 
regulatory proposal and the final regulation would not have the effect 
of preempting substantive state laws, but rather would clarify the 
appropriate agency for enforcing those state laws that are applicable 
to national banks. Concerns about ``field preemption'' are misplaced 
since the rule pertains only to state laws that would provide for state 
``visitation'' of national banks. The proposal and this final rule 
interpret the text of a Federal statute, 12 U.S.C. 484, that expressly 
confines the scope of permissible supervision over national banks to 
what is provided in Federal law, including the limited exception for 
state inspection of certain records that is contained in section 484. 
Thus, Congress has spoken to the issue. Our amendments to our 
visitorial powers rule seek to define the terms used in the statute in 
order to provide greater certainty to affected parties with regard to 
the specific issue of visitation.

2. No Presumption Against Preemption Applies in the Case of the 
National Banking Laws, a Conclusion That Is Confirmed by the Riegle-
Neal Act

    Commenters also argued that the amendments in the proposal are 
inconsistent with the presumptive application of state law to national 
banks, which they assert was specifically endorsed by Congress in the 
Riegle-Neal Act.\9\
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    \9\ Commenters rely on the legislative history of the Riegle-
Neal Act as support for their assertions. This history demonstrates 
that Congress intended that the Riegle-Neal Act would not disrupt 
the application of traditional principles of Federal preemption to 
questions involving national banks. We note, however, that under 
well-established principles of statutory construction, it is not 
necessary to resort to legislative history to determine the meaning 
of a statute unless the text of the statute is ambiguous, which is 
not the case here. See, e.g., Burlington Northern R.R. Co. v. 
Oklahoma Tax Commission, 481 U.S. 454, 461 (1987) (unless there are 
exceptional circumstances, judicial inquiry into the meaning of a 
statute is complete once the court finds that the terms of the 
statute are unambiguous.) (citation omitted); see also 2A Norman J. 
Singer, Sutherland, Statutes and Statutory Construction Sec.  48.01, 
at 410 (6th ed. 2000) (``Generally, a court would look to the 
legislative history for guidance when the enacted text was capable 
of two reasonable readings or when no one path of meaning was 
clearly indicated.'').
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    However, case law, whether decided before or after Riegle-Neal was 
enacted, is consistent in holding that there is no presumption against 
preemption in the national bank context. The Supreme Court has said 
that a presumption against preemption ``is not triggered when the State 
regulates in an area where there has been a history of significant 
federal presence.'' \10\ Courts have consistently held that the 
regulation of national banks is an area where there has been an 
extensive history of significant Federal presence. As recently observed 
by the U.S. Court

[[Page 1897]]

of Appeals for the Ninth Circuit, ``since the passage of the National 
Bank Act in 1864, the federal presence in banking has been 
significant.'' The court thus specifically concluded that ``the 
presumption against preemption of state law is inapplicable.'' \11\ 
Indeed, when analyzing national bank powers, the Supreme Court has 
interpreted ``grants of both enumerated and incidental `powers' to 
national banks as grants of authority not normally limited by, but 
rather ordinarily pre-empting, contrary state law.'' \12\
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    \10\ U.S. v. Locke, 529 U.S. 89, 108 (2000) (explaining Rice v. 
Santa Fe Elevator Corp., 331 U.S. 218 (1947)).
    \11\ Bank of America, 309 F.3d at 558-59 (citations omitted).
    \12\ Barnett, 517 U.S. at 32. The Barnett Court went on to 
elaborate:
    [W]here Congress has not expressly conditioned the grant of 
`power' upon a grant of state permission, the Court has ordinarily 
found that no such condition applies. In Franklin Nat. Bank, the 
Court made this point explicit. It held that Congress did not intend 
to subject national banks' power to local restrictions, because the 
federal power-granting statute there in question contained `no 
indication that Congress [so] intended * * * as it has done by 
express language in several other instances.'
    Id. at 34 (emphasis in original) (citations omitted).
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    The relevant text of the Riegle-Neal Act is fully consistent with 
these conclusions. In fact, it is entirely consistent with the proposal 
and final rule in providing that even when state law may be applicable 
to interstate branches of national banks, the OCC is to enforce such 
laws, i.e., the OCC retains exclusive visitorial authority:
(A) In general
    The laws of the host State regarding community reinvestment, 
consumer protection, fair lending, and establishment of intrastate 
branches shall apply to any branch in the host State of an out-of-State 
national bank to the same extent as such State laws apply to a branch 
of a bank chartered by that State, except--
    (i) When Federal law preempts the application of such State laws to 
a national bank; * * *
    (B) Enforcement of applicable State laws
    The provisions of any State law to which a branch of a national 
bank is subject under this paragraph shall be enforced, with respect to 
such branch, by the Comptroller of the Currency.\13\
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    \13\ 12 U.S.C. 36(f)(1) (emphasis added).
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    Thus, although Riegle-Neal section 36(f) clarifies that the laws of 
the host state regarding community reinvestment, consumer protection, 
and fair lending would be applicable to branches of an out-of-state 
national bank located in the host state, unless preempted, the Riegle-
Neal Act further and unambiguously provides that it is the OCC that has 
the authority to enforce such state laws to the extent they are not 
preempted.

3. Section 484 Grants Visitorial Authority to the OCC, to the Exclusion 
of the States

    Some commenters argued that the OCC's visitorial power is not 
exclusive because (1) the text of the statute does not contain an 
explicit grant of exclusive authority to the OCC; and (2) courts have 
permitted states to exercise concurrent authority to seek enforcement 
of state laws. These two contentions are addressed in turn.
a. The Text of Section 484
    Commenters who opposed the proposal argued that the OCC may not 
rely on 12 U.S.C. 484 as the basis for our exclusive jurisdiction 
because that section is silent on precisely who has visitorial powers 
over national banks. A review of the history of section 484 shows that 
this reading of the statute is fundamentally mistaken.
    In the Act of June 3, 1864, later named the National Bank Act, the 
visitorial powers provision appeared in the same section as the 
Comptroller's examination authority. In that context, it was clear that 
visitorial authority was exclusive to the Comptroller, subject to a 
single exception for powers ``vested in the several courts of law and 
chancery.'' Section 54 of the National Bank Act provided in relevant 
part:
    And be it further enacted, That the comptroller of the currency, 
with the approbation of the Secretary of the Treasury, as often as 
shall be deemed necessary or proper, shall appoint a suitable person or 
persons to make an examination of the affairs of every banking 
association. * * * And the association shall not be subject to any 
other visitorial powers than such as are authorized by this act, except 
such as are vested in the several courts of law and chancery.\14\
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    \14\ Act of June 3, 1864, c. 106, Sec.  54, 13 Stat. 116, 
codified at 12 U.S.C. 481-484.
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    These examination and visitorial provisions of section 54 were 
codified together in 1875 at section 5240 of the Revised Statutes of 
the United States. Section 5240 explicitly gave the OCC visitorial 
authority over national banks and precluded the exercise of visitorial 
authority by any other source, except insofar as expressly allowed by 
one of the exceptions, including the exception covering visitations 
``as authorized by Federal law.'' In context, the meaning of the text 
is unmistakable. The Comptroller is given the power to examine and 
supervise national banks--that is, to serve as the ``visitor'' of the 
bank--and that power, as well as any other ``visitorial'' power is 
denied to any other entity unless Federal law provides otherwise.
    The examination and visitorial provisions were split, slightly 
revised, then later reunited, in subsequent codifications,\15\ but 
Congress has never altered the original meaning of these grants of 
authority to the OCC. The visitorial provision has been substantively 
amended only twice, once in 1913 and once in 1982.\16\ Both times, the 
amendments were consistent with the exclusive grant of visitorial 
authority in the original enactment. In both cases, the legislative 
history, though sparse, contains no indication that Congress intended 
to change the exclusivity of its original grant of authority to the 
Comptroller. In fact, the 1982 amendment that added the exception 
allowing state authorities to review national bank records to ascertain 
compliance with state escheat or unclaimed property laws would have 
been unnecessary if the language of section 484 permitted state 
examination and enforcement of applicable state law. As codified today, 
the examination and visitorial provisions appear in separate sections 
of the United States Code. Substantive consequences do not attach to 
the placement of the provisions in the Code, however, and neither 
provision may be read in isolation to suggest a meaning that is 
inconsistent with the law as enacted by the Congress.
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    \15\ The examination provision is currently codified at 12 
U.S.C. 481.
    \16\ In 1913, the exception for Congress and its committees was 
added, the reference to the Act of June 3, 1864 changed to ``other 
than such as are authorized by law,'' and the word ``bank'' 
substituted for the word ``association.'' Amendments in 1982 added 
the exception allowing state authorities to review national bank 
records to ascertain compliance with state escheat or unclaimed 
property laws, added the word ``Federal'' before the word ``law,'' 
and changed ``bank'' to ``national bank.''
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    Moreover, exclusivity is inherent in the structure of the statute, 
both as originally enacted and today. The visitorial powers provision 
first sets forth a complete prohibition, then subjects that prohibition 
to certain exceptions.\17\ The inference to be drawn from this 
structure is that the prohibition applies unless a visitorial power is 
covered by one of the

[[Page 1898]]

enumerated exceptions. As noted above, the statute's description of the 
exceptions has changed--though the changes have been modest--over time. 
But none of these exceptions allows for the allocation of any general 
bank supervisory responsibility to the states.
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    \17\ Commenters cited to First Union Nat'l Bank v. Burke, 48 F. 
Supp. 2d 132 (D. Conn. 1999), in support of their contention that 
the OCC's visitorial power is not exclusive. We disagree that the 
court's opinion is dispositive of the issues considered here. The 
opinion did not analyze the purpose, plain language, and structure 
of section 484. Moreover, we note that the Burke court agreed that a 
state may not directly enforce state law against national banks.
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    As we discussed when we issued the visitorial powers proposal, any 
allocation of general supervisory authority over national banks to the 
states would be inconsistent with the history and purpose of the 
National Bank Act, as well as with the express language of the statute. 
Congress enacted the National Currency Act (Currency Act) in 1863 and 
the National Bank Act the year after for the purpose of establishing a 
new national banking system that would operate distinctly and 
separately from the existing system of state banks. The Currency Act 
and National Bank Act were enacted to create a uniform and secure 
national currency and a system of national banks designed to help 
stabilize and support the post-Civil War national economy.
    Both proponents and opponents of the new national banking system 
expected that it would supersede the existing system of state 
banks.\18\ Given this anticipated impact on state banks and the 
resulting diminution of control by the states over banking in 
general,\19\ proponents of the national banking system were concerned 
that states \20\ would attempt to undermine it. Remarks of Senator 
Sumner illustrate the sentiment of many legislators of the time: 
``Clearly, the bank must not be subjected to any local government, 
State or municipal; it must be kept absolutely and exclusively under 
that Government from which it derives its functions.'' \21\
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    \18\ Representative Samuel Hooper, who reported the bill to the 
House, stated in support of the legislation that one of its purposes 
was ``to render the law [i.e., the Currency Act] so perfect that the 
State banks may be induced to organize under it, in preference to 
continuing under their State charters.'' Cong. Globe, 38th Cong. 1st 
Sess. 1256 (Mar. 23, 1864). While he did not believe that the 
legislation was necessarily harmful to the state bank system, Rep. 
Hooper did ``look upon the system of State banks as having outlived 
its usefulness.'' Id. Opponents of the legislation believed that it 
was intended to ``take from the States * * * all authority 
whatsoever over their own State banks, and to vest that authority * 
* * in Washington.'' Cong. Globe, 38th Cong., 1st Sess. 1267 (Mar. 
24, 1864) (statement of Rep. Brooks). Rep. Brooks made that 
statement to support the idea that the legislation was intended to 
transfer control over banking from the states to the Federal 
government. Given that the legislation's objective was to replace 
state banks with national banks, its passage would, in Rep. Brooks's 
opinion, mean that there would be no state banks left over which the 
states would have authority. Thus, by observing that the legislation 
was intended to take authority over state banks from the states, 
Rep. Brooks was not suggesting that the Federal government would 
have authority over state banks; rather, he was explaining the bill 
in a context that assumed the demise of state banks. Rep. Pruyn 
opposed the bill stating that the legislation would ``be the 
greatest blow yet inflicted upon the States.'' Cong. Globe, 38th 
Cong., 1st Sess. 1271 (Mar. 24, 1864). See also John Wilson Million, 
The Debate on the National Bank Act of 1863, 2 J. Pol. Econ. 251, 
267 (1893-94) regarding the Currency Act. (``Nothing can be more 
obvious from the debates than that the national system was to 
supersede the system of state banks.'').
    \19\ See, e.g., Tiffany v. Nat'l Bank of Missouri, 85 U.S. 409, 
412-413 (1874) (``It cannot be doubted, in view of the purpose of 
Congress in providing for the organization of National banking 
associations, that it was intended to give them a firm footing in 
the different States where they might be located. It was expected 
they would come into competition with State banks, and it was 
intended to give them at least equal advantages in such competition. 
* * * National banks have been National favorites. They were 
established for the purpose, in part, of providing a currency for 
the whole country, and in part to create a market for the loans of 
the General government. It could not have been intended, therefore, 
to expose them to the hazard of unfriendly legislation by the 
States, or to ruinous competition with State banks.''); Beneficial 
Nat'l Bank v. Anderson, 123 S. Ct. 2058, 2064 (2003) (``[T]his Court 
has also recognized the special nature of federally chartered banks. 
Uniform rules limiting the liability of national banks and 
prescribing exclusive remedies for their overcharges are an integral 
part of a banking system that needed protection from `possible 
unfriendly State legislation.''') (citation omitted). See also Bray 
Hammond, Banks and Politics in America from the Revolution to the 
Civil War 725-34 (1957); Paul Studenski & Herman E. Krooss, 
Financial History of the United States 154-55 (1952).
    \20\ For ease of reference, we use the term ``state'' in this 
preamble in a way that includes other non-Federal governmental 
entities.
    \21\ Cong. Globe, 38th Cong., 1st Sess., at 1893 (Apr. 27, 
1864); see also Beneficial Nat'l Bank, 123 S.Ct. at 2064.
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    The allocation of any supervisory responsibility for the new 
national banking system to the states would have been inconsistent with 
this need to protect national banks from state interference.\22\ 
Congress, accordingly, established a Federal supervisory regime and 
created a Federal agency within the Department of Treasury--the OCC--to 
carry it out. Congress granted the OCC the broad authority ``to make a 
thorough examination into all the affairs of [a national bank],'' \23\ 
and solidified this Federal supervisory authority by vesting the OCC 
with exclusive visitorial powers over national banks. These provisions 
assured, among other things, that the OCC would have comprehensive 
authority to examine all the affairs of a national bank, and protected 
national banks from potential state hostility by establishing that the 
authority to examine and supervise national banks is vested only in the 
OCC, unless otherwise provided by Federal law.\24\
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    \22\ In a report of the Comptroller of the Currency made 
pursuant to the Currency Act, Hugh McCulloch, then Comptroller, 
discussed the need to protect national banks from variation in 
interest rates among the states by making a change in the law to 
provide for uniform interest rates. He referred to the Supreme Court 
decision in M'Culloch v. Maryland, 17 U.S. 316 (1819), which 
prohibited the state of Maryland from imposing taxes on the Bank of 
the United States under the Federal statute establishing the bank, 
as support for Congress having the authority to make this change by 
likening the Maryland taxation statute to a state statute on 
interest. Office of the Comptroller of the Currency, Report on the 
Finances, Nov. 28, 1863, at 52-53.
    \23\ Act of June 3, 1864, c. 106, Sec.  54, 13 Stat. 116, 
codified at 12 U.S.C. 481.
    \24\ Writing shortly after the Currency Act and National Bank 
Act were enacted, then-Secretary of the Treasury, and formerly the 
first Comptroller of the Currency, Hugh McCulloch observed that 
``Congress has assumed entire control of the currency of the 
country, and, to a very considerable extent, of its banking 
interests, prohibiting the interference of State governments.'' 
Letter of Secretary of the Treasury, serial set collection, CIS No. 
1239 S.misdoc.100, 39th Cong., 1st Sess., Misc. Doc. No. 100, at 2 
(Apr. 23, 1866).
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    Courts have consistently recognized the unique status of the 
national banking system and the limits placed on states by the National 
Bank Act. The Supreme Court stated in one of the first cases to address 
the role of the national banking system that ``[t]he national banks 
organized under the [National Bank Act] are instruments designed to be 
used to aid the government in the administration of an important branch 
of the public service. They are means appropriate to that end.'' \25\ 
Subsequent opinions of the Supreme Court have been equally clear about 
national banks' unique role and status.\26\
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    \25\ Farmers' & Mechanics' Nat'l Bank v. Dearing, 91 U.S. 29, 33 
(1875).
    \26\ See Marquette Nat'l Bank of Minneapolis v. First Omaha 
Service Corp., 439 U.S. 299, 314-315 (1978) (``Close examination of 
the National Bank Act of 1864, its legislative history, and its 
historical context makes clear that, . . . Congress intended to 
facilitate . . . a `national banking system'.'' (citation omitted)); 
Franklin Nat'l Bank of Franklin Square v. New York, 347 U.S. 373, 
375 (1954) (``The United States has set up a system of national 
banks as federal instrumentalities to perform various functions such 
as providing circulating medium and government credit, as well as 
financing commerce and acting as private depositories.''); Davis v. 
Elmira Sav. Bank, 161 U.S. 275, 283 (1896) (``National banks are 
instrumentalities of the Federal government, created for a public 
purpose, and as such necessarily subject to the paramount authority 
of the United States.'').
---------------------------------------------------------------------------

    In Guthrie v. Harkness,\27\ the Supreme Court recognized how the 
National Bank Act furthered the objectives of Congress:
---------------------------------------------------------------------------

    \27\ 199 U.S. 148, 159 (1905).

    Congress had in mind in passing this section [section 484] that 
in other sections of the law it had made full and complete provision 
for investigation by the Comptroller of the Currency and examiners 
appointed by him, and, authorizing the appointment of a receiver, to 
take possession of the business with a view to winding up the 
affairs of the bank. It was the intention that this statute should 
contain a full code of provisions upon the subject, and that no 
state law or enactment should undertake to exercise the right of 
visitation over a national corporation. Except in so far as such 
corporation was liable to control in the courts

[[Page 1899]]

---------------------------------------------------------------------------
of justice, this act was to be the full measure of visitorial power.

    The Supreme Court also has recognized the clear intent on the part 
of Congress to limit the authority of states over national banks 
precisely so that the nationwide system of banking that was created in 
the Currency Act could develop and flourish. For instance, in Easton v. 
Iowa,\28\ the Court stated that Federal legislation affecting national 
banks'--
---------------------------------------------------------------------------

    \28\ 188 U.S. 220, 229, 231-32 (1903) (emphasis added).

has in view the erection of a system extending throughout the 
country, and independent, so far as powers conferred are concerned, 
of state legislation which, if permitted to be applicable, might 
impose limitations and restrictions as various and as numerous as 
the states. * * * It thus appears that Congress has provided a 
symmetrical and complete scheme for the banks to be organized under 
the provisions of the statute. * * * [W]e are unable to perceive 
that Congress intended to leave the field open for the states to 
attempt to promote the welfare and stability of national banks by 
direct legislation. If they had such power it would have to be 
exercised and limited by their own discretion, and confusion would 
necessarily result from control possessed and exercised by two 
---------------------------------------------------------------------------
independent authorities.

And in Farmers' & Mechanics' National Bank, after observing that 
national banks are means to aid the government, the Court stated--

    Being such means, brought into existence for this purpose, and 
intended to be so employed, the States can exercise no control over 
them, nor in any wise affect their operation, except in so far as 
Congress may see proper to permit. Any thing beyond this is ``an 
abuse, because it is the usurpation of power which a single State 
cannot give.'' \29\
---------------------------------------------------------------------------

    \29\ 91 U.S. at 34 (citations omitted).

    Our proposed amendment clarifying the scope of the visitorial 
powers authorized to the OCC pursuant to section 484 is consistent with 
the historical meaning of the term ``visitation'' and with cases 
discussing section 484. The Supreme Court in Guthrie noted that the 
term ``visitorial'' as used in section 484 derives from English common 
law, which used the term ``visitation'' to refer to the act of a 
superintending officer who visits a corporation to examine its manner 
of conducting business and enforce observance of the laws and 
regulations.\30\ `` `Visitors of corporations have power to keep them 
within the legitimate sphere of their operations, and to correct all 
abuses of authority, and to nullify all irregular proceedings.' ''\31\ 
The Guthrie Court also noted that visitorial powers include bringing 
``judicial proceedings'' against a corporation to enforce compliance 
with applicable law.\32\
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    \30\ Guthrie, 199 U.S. at 158, citing First Nat'l Bank of 
Youngstown v. Hughes, 6 F. 737, 740 (C.C.D. Ohio 1881), appeal 
dismissed, 106 U.S. 523 (1883)). Because ``visitation'' assumes the 
act of a sovereign body, private actions brought by individuals 
against banks in pursuit of personal claims ordinarily are outside 
the scope of visitorial powers rules. This point is discussed 
further in the analysis of the arguments asserting concurrent 
jurisdiction between state and Federal courts over national banks, 
infra.
    \31\ Id. (citation omitted).
    \32\ Id. See also Peoples Bank of Danville v. Williams, 449 F. 
Supp. 254, 259 (W. D. Va. 1978) (visitorial powers involve the 
exercise of the right of inspection, superintendence, direction, or 
regulation over a bank's affairs). For a detailed discussion of the 
historical scope and content of visitorial powers generally, see 
Roscoe Pound, Visitatorial Jurisdiction Over Corporations in Equity, 
49 Harv. L. Rev. 369 (1935-36).
---------------------------------------------------------------------------

b. Concurrent Enforcement Jurisdiction
    Several commenters asserted that states retain jurisdiction 
concurrent with the OCC to enforce compliance with state laws against 
national banks in both state and Federal court.\33\ The cases cited by 
commenters in support of this contention are examples of the use of 
courts for private civil cases in pursuit of personal claims against 
national banks, which, unlike attempts by state authorities to exercise 
authority over national banks using the courts, do not amount to 
visitations.\34\ Other cases cited by commenters appear inapposite or 
outdated.\35\
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    \33\ We note that the National Bank Act did confer jurisdiction 
on both state and Federal courts over actions against national 
banks. See Act of June 3, 1864, Sec.  57. Nothing in the grant of 
jurisdiction says or implies that state authorities may use the 
judiciary as the medium to supervise, examine, or regulate the 
business of national banks, as commenters have asserted.
    \34\ First Nat'l Bank of Charlotte v. Morgan, 132 U.S. 141 
(1889) (private action for usury against national banks may be 
brought in state court); Bank of Bethel v. Pahquioque Bank, 81 U.S. 
383 (1872) (private creditors may sue national bank in state court).
    \35\ See, e.g., Guthrie, 199 U.S. 148 (private civil action by a 
stockholder to compel, by writ of mandamus, the directors of a 
national bank to permit a stockholder to inspect the bank's books; 
private civil action, no state executive visitation involved); 
Colorado Nat'l Bank of Denver v. Bedford, 310 U.S. 41 (1940) (action 
for declaratory judgment; consistent with the OCC's final 
regulation, which does not regard actions for declaratory judgment 
as visitorial); Waite v. Dowley, 94 U.S. 527 (1877) (substantive 
preemption case that did not involve visitorial powers); and First 
Nat'l Bank of Youngstown, 6 F. at 741 (no visitation involved where 
state taxation authorities used court to compel production of bank's 
records in aid of taxation of individual depositors; state actions 
did ``not contemplate inspection, supervision, or regulation of [the 
bank's] business, or an enforcement of its laws or regulations.'').
---------------------------------------------------------------------------

    A few commenters cited First National Bank in St. Louis v. Missouri 
\36\ to support their position that states may bring enforcement 
actions directly against national banks.\37\ In St. Louis, the court 
upheld a state's ability to preclude, through an action quo warranto, a 
national bank's exercise of a power that was not then authorized to it, 
namely, intrastate branching.
---------------------------------------------------------------------------

    \36\ 263 U.S. 640 (1924).
    \37\ In St. Louis, the state of Missouri brought a quo warranto 
action to stop a national bank from operating a branch in the state. 
The state had a law prohibiting branch banking. The Supreme Court 
held that the state statute was applicable to national banks and 
could be enforced by the state. Quo warranto is ``[a] common law 
writ designed to test whether a person exercising power is legally 
entitled to do so. An extraordinary proceeding, prerogative in 
nature, addressed to preventing a continued exercise of authority 
unlawfully asserted. * * * It is intended to prevent exercise of 
powers that are not conferred by law, and is not ordinarily 
available to regulate the manner of exercising such powers.'' 
Black's Law Dictionary (6th ed. 1990) (citation omitted). Today, 
such an issue would be raised via an action for a declaratory 
judgment.
---------------------------------------------------------------------------

    St. Louis presents a unique set of circumstances, now outdated, and 
did not discuss the scope of section 484; thus the case provides little 
help in construing section 484. The principal issue in the case was 
whether a national bank had the power to branch intrastate despite a 
state law prohibition on branching. The Court looked for express 
authority to branch intrastate in the text of the National Bank Act 
and, finding none, concluded that the activity was not authorized. The 
Court then went on to permit Missouri to enforce its intrastate 
branching prohibition against the national bank. To the extent that St. 
Louis is still relevant, the case holds that a state may enforce a 
prohibition against a national bank where: (a) the national bank is 
found to lack the fundamental authority to engage in an activity;\38\ 
(b) the state has a law prohibiting the activity entirely; and (c) no 
Federal enforcement mechanism is available to preclude the bank from 
violating the applicable state law.
---------------------------------------------------------------------------

    \38\ The power to branch intrastate was subsequently authorized 
for national banks by the McFadden Act in 1927. Act of February 25, 
1927, c. 191, Sec.  7, 44 Stat. 1228, codified at 12 U.S.C. 36.
---------------------------------------------------------------------------

    The principal means in use today for testing the application of 
state law to national banks--declaratory judgment--was unavailable to 
the states prior to the enactment of the Declaratory Judgment Act in 
1934, 28 U.S.C. 2201 through 2202. If this type of action had been 
available at the time of the St. Louis case, there would have been no 
need for the state to bring a quo warranto action. Subsequent cases 
concerning the power of national banks to branch have typically been 
brought as declaratory judgments.\39\
---------------------------------------------------------------------------

    \39\ See, e.g., Jackson v. First Nat'l Bank of Valdosta, 349 
F.2d 71 (5th Cir. 1965); State of Utah, ex rel., Dep't of Financial 
Institutions v. Zions First Nat'l Bank of Ogden, Utah, 615 F.2d 903 
(10th Cir. 1980).

---------------------------------------------------------------------------

[[Page 1900]]

    Moreover, the OCC has enforcement authority today that did not 
exist when St. Louis was decided. Congress authorized the OCC to bring 
enforcement actions predicated on, inter alia, violations of state law 
in 1966.\40\ Thus, if state law that would regulate an aspect of a 
national bank's Federally-authorized banking business is not preempted, 
it would be enforced by the OCC, not the states.\41\
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    \40\ Pub. L. 89-695, section 202, 80 Stat. 1028 (Oct. 16, 1966). 
For a violation of an applicable state law, the OCC may issue cease 
and desist orders, exercise its removal and prohibition authority, 
or impose civil money penalties. See 12 U.S.C. 1818(b), (e), and 
(i)(2).
    \41\ See Nat'l State Bank, Elizabeth, N.J. v. Long, 630 F.2d 
981, 988 (3rd Cir. 1980). See also State of Arizona v. Hispanic Air 
Conditioning and Heating, Inc., CV 2000-003625, Superior Court of 
Arizona, Ruling at 27-28, Conclusions of Law, paragraphs 46-55 (Aug. 
25, 2003). In this action involving a national bank defendant, the 
court found that restitution and remedial action ordered by OCC 
pursuant to its visitorial powers was comprehensive and 
significantly broader than that available through state court 
proceedings and that it provided more relief to consumers than the 
court found a legal basis for imposing under state law. The court 
also noted that ordering the remedies requested by the state would 
impermissibly affect the exercise of the OCC's administrative 
enforcement powers.
---------------------------------------------------------------------------

    The essential elements of St. Louis thus are entirely consistent 
with our construction of the ``courts of justice'' exception as 
proposed. Moreover, our construction is consistent with the text and 
history of section 484, the purpose of that section in the context of 
the national banking laws, and with other U.S. Supreme Court and lower 
Federal court precedents. The exception preserves the powers that are 
inherent in the courts. As we noted in the preamble to the proposal, 
Congress clearly did not intend to create new visitorial authority that 
could be exercised by state authorities when it recognized the 
authority of courts of justice. It would be completely contrary to the 
express purposes of section 484 to read the ``vested in the courts of 
justice'' exception as a new Federal authorization for state 
authorities to accomplish exactly what Congress deliberately and 
expressly intended states not to be able to do--namely, inspect and 
supervise the activities of national banks and compel their adherence 
to a variety of state-set standards.
    This purpose is effectuated by the plain language of the statute. 
The exception permits the exercise of ``visitorial powers'' that are 
``vested in the courts of justice,'' powers, in other words, that 
courts possess. Section 484 does not create new powers for state 
executive, legislative, or administrative authorities to supervise and 
regulate national banks. It grants no new authority and thus does not 
authorize states to bring suits or enforcement actions that they do not 
otherwise have the power to bring.
    To read the exception as an authorization to permit state 
authorities to inspect, regulate, supervise, direct, or restrict the 
activities of national banks simply by filing a complaint in a court 
would be to create a visitorial power that states do not otherwise 
possess under Federal law. Section 484 by its express terms simply does 
not create such boundless visitorial powers for state authorities. 
Where section 484 does recognize visitorial authority for states in 
section 484(b), by contrast, it is specific and narrow, and expressly 
stated as an exception to the general exclusivity of the OCC's 
visitorial powers recognized in section 484(a).
    Under this construction of section 484, states remain free to seek 
a declaratory judgment from a court as to whether a particular state 
law applies to the Federally-authorized business of a national bank or 
is preempted. However, if a court rules that a state law is not 
preempted, enforcement of a national bank's compliance with a law that 
would govern the content or the conditions for conduct of a national 
bank's Federally-authorized banking business is within the OCC's 
exclusive purview.\42\ In addition, it does not preclude actions 
brought by other governmental entities pursuant to a Federal grant of 
authority.\43\
---------------------------------------------------------------------------

    \42\ See Nat'l State Bank, Elizabeth, N.J., 630 F.2d at 988 
(``[W]e find ourselves unable to agree with the district court's 
determination that state officials have the power to issue cease and 
desist orders against national banks for violations of the [state's] 
antiredlining statute. Congress has delegated enforcement of 
statutes and regulations against national banks to the Comptroller 
of the Currency.''); see also First Union Nat'l Bank, 48 F. Supp. 2d 
at 145-46.
    \43\ See, e.g., Bank of America Nat'l Trust & Savings Ass'n v. 
Douglas, 105 F.2d 100 (D.C. Cir. 1939) (service of subpoenas on a 
national bank by the SEC in connection with an investigation under 
the Securities Exchange Act of 1934).
---------------------------------------------------------------------------

4. The OCC Has Exclusive Visitorial Authority Over National Bank 
Operating Subsidiaries to the Same Extent as It Has That Authority Over 
the Parent National Bank

    Commenters also asserted that the OCC lacks the authority to 
prevent states from exercising visitorial authority over national bank 
operating subsidiaries because they are state-chartered corporations 
and because section 484 does not specifically refer to operating 
subsidiaries. Some suggested that a curtailing of state authority over 
state corporations violates the 10th Amendment to the Constitution.\44\ 
These points are discussed in order, however, it is important to note 
that the issue of the application of state law to national bank 
operating subsidiaries is dealt with in a different, preexisting 
regulation, 12 CFR 7.4006, which we did not propose to change. For the 
reasons discussed below, we continue to hold the view that under 12 
U.S.C. 24(Seventh) and 12 CFR 7.4006, the standards of section 484 
apply to national bank operating subsidiaries to the same extent as 
their parent national bank, and such a result is entirely consistent 
with Constitutional principles.
---------------------------------------------------------------------------

    \44\ The Tenth Amendment reads as follows: ``The powers not 
delegated to the United States by the Constitution, nor prohibited 
by it to the States, are reserved to the States respectively, or to 
the people.'' U.S. Const. amend. X.
---------------------------------------------------------------------------

a. The OCC's Exclusive Visitorial Authority Over Operating Subsidiaries
    Pursuant to their authority under 12 U.S.C. 24(Seventh), national 
banks have long used separately incorporated entities as a means to 
engage in activities that the bank itself is authorized to conduct. 
When established in accordance with OCC regulations and approved by the 
OCC, an operating subsidiary is a Federally-authorized and Federally-
licensed means by which a national bank may conduct Federally-
authorized activities. Courts have consistently treated operating 
subsidiaries as equivalent to national banks in determining their 
powers and status under Federal law, unless Federal law requires 
otherwise.\45\ Operating subsidiaries are consolidated with--that is, 
their assets and liabilities are indistinguishable from--the parent 
bank for accounting purposes, regulatory reporting purposes, and for 
purposes of applying many Federal statutory or regulatory limits.\46\ 
They are, in essence, no more than incorporated departments of the bank 
itself.\47\
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    \45\ NationsBank of North Carolina, N.A. v. Variable Annuity 
Life Ins. Co., 513 U.S. 251 (1995) (sale of annuities by operating 
subsidiary); Clarke v. Securities Industry Ass'n, 479 U.S. 388 
(1987) (securities brokerage operating subsidiary); American Ins. 
Ass' v. Clarke, 865 F. 2d 278 (D.C. Cir. 1988) (bond insurance 
subsidiary); M & M Leasing Corp. v. Seattle First Nat'l Bank, 563 F. 
2d 1377 (9th Cir. 1977) (auto leasing subsidiary); and Valley Nat'l 
Bank v. Lavecchia, 59 F. Supp. 2d 432 (D. N.J. 1999) (title 
insurance subsidiary); Budnik v. Bank of America Mortgage, 2003 U.S. 
Dist. LEXIS 22542 (N.D. IL 2003) (mortgage subsidiary).
    \46\ See 12 CFR 5.34(e)(4) (requring application of, e.g., 
statutory lending limit and limit on investment in bank premises to 
a national bank and its operating subsidiaries on a consolidated 
basis).
    \47\ The authority of national banks to conduct business through 
operating subsidiaries has been recognized for many years. For 
example, rulings published in the Comptroller's Manual in the mid-
1960s permitted national banks to own, e.g., mortgage companies and 
finance companies. A July 30, 1965 letter by Comptroller James J. 
Saxon concluded that the prohibition on stock ownership by national 
banks in 12 U.S.C. Sec.  24 (Seventh) does not apply ``when such 
ownership is a proper incident to banking,'' as is the case with 
operating subsidiaries. See also 12 CFR 250.14, an interpretation by 
the Board of Governors of the Federal Reserve System adopted in 
1968, which reaches the same conclusion regarding state member 
banks.

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[[Page 1901]]

    As a matter of Federal law, operating subsidiaries conduct their 
activities subject to the same terms and conditions as apply to the 
parent bank, including being subject to the exclusive visitorial 
authority of the OCC.\48\ Where Congress wanted a different result, it 
specifically provided for it. For example, section 111 of GLBA makes 
provision for state regulation of functionally regulated bank 
subsidiaries conducting securities and insurance activities, treating 
such subsidiaries as if they were instead subsidiaries of the 
institution's holding company.\49\ Similarly, section 133 of GLBA seeks 
to clarify the status of bank and thrift subsidiaries and affiliates 
for purposes of any provisions of the Federal Trade Commission Act 
applied by the Federal Trade Commission.\50\
---------------------------------------------------------------------------

    \48\ 12 CFR 5.34(e)(3); 12 CFR 7.4006.
    \49\ 12 U.S.C. 1844(c)(4).
    \50\ 15 U.S.C. 41 note. See Minnesota v. Fleet Mortgage Corp., 
181 F. Supp. 2d 995 (D. Minn. 2001). In addition, in the case of 
national bank ``financial subsidiaries,'' which engage in activities 
beyond those permissable for the bank itself, Congress provided 
special standards regarding the application of state laws. Pub. L. 
106-102, section 104, 113 Stat. 1338, 1352 (1999), codified at 15 
U.S.C. 6701.
---------------------------------------------------------------------------

    Our regulations make clear that activities conducted in operating 
subsidiaries must be permissible for a national bank to engage in 
directly either as part of, or incidental to, the business of 
banking.\51\ Moreover, the operating subsidiary is acting ``pursuant to 
the same authorization, terms and conditions that apply to the conduct 
of such activities by its parent national bank.''\52\ This includes 
state laws that purport to govern the activities conducted in the 
operating subsidiary. OCC regulations specifically provide that 
``[u]nless otherwise provided by Federal law or OCC regulation, State 
laws apply to national bank operating subsidiaries to the same extent 
that those laws apply to the parent national bank.''\53\ Our 
regulations reflect express Congressional recognition in section 121 of 
the GLBA that national banks may own subsidiaries that engage ``solely 
in activities that national banks are permitted to engage in directly 
and are conducted subject to the same terms and conditions that govern 
the conduct of such activities by national banks.''\54\ The ``terms and 
conditions'' that govern the conduct of operating subsidiary activities 
referenced in this provision include how, and by whom, the operating 
subsidiary is examined and supervised. Thus, operating subsidiaries are 
licensed, examined and supervised by the same Federal banking agency--
the OCC--that examines and supervises national banks, using the same 
methodology as in the case of national banks.
---------------------------------------------------------------------------

    \51\ See 12 CFR 5.34(e)(1).
    \52\ 12 CFR 5.34(e)(3).
    \53\ 12 CFR 7.4006.
    \54\ Pub. L. 106-102, section 121, 113 Stat. 1338, 1373 (1999), 
codified at 12 U.S.C. 24a(g)(3)(A).
---------------------------------------------------------------------------

    Courts that have recently considered the issue have confirmed this 
conclusion. In Wells Fargo Bank, N.A. v. Boutris,\55\ a Federal 
district court issued a permanent injunction enjoining the California 
Department of Corporations from exercising visitorial powers over a 
national bank operating subsidiary. The court noted the existing case 
law and concluded that the OCC's operating subsidiary regulation is 
within the agency's authority delegated to it by Congress and is a 
reasonable interpretation.\56\
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    \55\ 265 F. Supp. 2d 1162 (E.D. Cal. 2003).
    \56\ See also National City Bank of Indiana v. Boutris, 2003 WL 
215367818 (E.D. Cal. July 2, 2003) (also enjoining California 
officials from exercising visitorial powers over a national bank 
operating subsidiar); Budnik supra note 45, at 5-7 citing the Wells 
Fargo case with approval.
    Moreover, the Office of Thrift Supervision (OTS) takes the same 
approach with respect to operating subsidiaries of Federal thrifts 
that we take for national banks. 12 CFR 559.3(n) of the OTS 
regulations provides that state law applies to Federal savings 
associations' operating subsidiaries to the extent that the law 
applies to the parent thrift. This OTS regulation has been upheld by 
both Federal and state courts. See WFS Financial Inc. v. Dean, 79 F. 
Supp. 2d 1024 (W.D. Wis. 1999); see also Chaires v. Chevy Chase 
Bank, F.S.B., 748 A.2d 34, 44 (Md. App. 2000).
---------------------------------------------------------------------------

    Section 7.4006 of our rules already provides that State law applies 
to national bank operating subsidiaries to the same extent as it 
applies to the parent bank.\57\ Thus, state laws purportedly forming 
the basis for the exercise of state regulatory or supervisory authority 
over national bank operating subsidiaries, which are inapplicable to 
the parent national bank, are similarly inapplicable to the bank's 
operating subsidiary. This conclusion is reinforced by the holdings of 
the court in the Wells Fargo and National City cases, just described.
b. The Tenth Amendment
    Recent case law also confirms that the final rule does not conflict 
with the 10th Amendment. In the Wells Fargo case, supra, the California 
commissioner argued that the OCC was interfering with the state's 
sovereignty under the 10th Amendment by taking away its power to 
regulate and enforce laws against state-chartered corporations. The 
court held that once the OCC authorized the operating subsidiary of the 
national bank, it ceased being subject to the visitorial power of the 
state commissioner and that this change was not shown to infringe on 
California's rights under the 10th Amendment. The court noted that 
``the Constitution authorizes Congress to establish national banks'' 
and that ``[t]he National Bank Act's effect of `carving out from state 
control supervisory authority' over an OCC-authorized operating 
subsidiary of a national bank does not violate California's Tenth 
Amendment rights.''\58\
---------------------------------------------------------------------------

    \57\ 12 CFR 7.4006.
    \58\ Wells Fargo, 265 F. Supp. 2d at 1170, (citing M'Culloch, 17 
U.S. at 424-25 and First Union Nat'] Bank, 48 F. Supp. 2d at 148 
(emphasis added). See also Nat'l City Bank of Indiana, 2003 WL 
21536818 at 3 and 4.
---------------------------------------------------------------------------

    A few commenters cite Hopkins Federal Savings & Loan Association v. 
Cleary,\59\ as support for the assertion that the 10th Amendment 
prohibits the Federal government from interfering with a state's 
jurisdiction over corporations created under that state's laws. In that 
case, the court held that a Federal statute (HOLA), which permitted the 
conversion of state savings associations into Federal savings 
associations notwithstanding state law to the contrary, was 
unconstitutional because it conflicted with the 10th Amendment.
---------------------------------------------------------------------------

    \59\ 296 U.S. 315(1935).
---------------------------------------------------------------------------

    The essence of the Hopkins case was that Congress had attempted to 
confer rights on a state-chartered entity that were greater than those 
conferred by the state, namely a more liberal voting requirement for a 
conversion. As stated by the Hopkins Court, ``[t]he critical question 
[was] whether along with such a power [of the U.S. Congress to create 
Federal building and loan associations] there goes the power also to 
put an end to corporations created by the states and turn them into 
different corporations created by the nation.''\60\ The Court's 
characterization of the issue highlights the distinction between the 
state-chartered building and loan associations in the Hopkins case and 
national bank operating subsidiaries. The Court found the law--
unconstitutionally--attempted to displace a preexisting state interest 
by permitting the abandonment of a state bank charter notwithstanding 
contrary state law. After discussing why the state should retain the 
right to determine

[[Page 1902]]

when and how a state thrift is dissolved, the court noted that it would 
be ``an intrusion for another government to regulate by statute or 
decision, except when reasonably necessary for the fair and effective 
exercise of some other and cognate power explicitly conferred.'' \61\
    Hopkins is thus factually inapposite for two reasons. First, 
nothing in this final rule addresses changes in charter type or 
corporate status by state-chartered entities. Second, as we have 
explained, once it is established or acquired, a national bank 
operating subsidiary is a means by which the national bank exercises 
Federally authorized powers. The operating subsidiary conducts its 
activities pursuant to a license granted under OCC regulations, which 
also constitutes a Federal ``license'' under the Administrative 
Procedure Act.\62\ In contrast to the state-chartered thrift 
institutions in Hopkins, its operation and activities are thus properly 
within the purview of Federal regulation.\63\
---------------------------------------------------------------------------

    \60\ Id. at 336.
    \61\ Id. at 337 (emphasis added).
    \62\ Under the Administrative Procedure Act, Federal agencies 
may grant licenses after following certain procedures. 5 U.S.C. 
558(c). National banks must comply with licensing requirements 
contained in 12 CFR 5.34(b) in order to establish or acquire an 
operating subsidiary. These requirements are consistent with the 
Administrative Procedure Act.
    \63\ Where a state entity is not within the purview of Federal 
regulations, the OCC's rules require consideration of state law 
before any approval or changes in corporate form. For example, where 
a state-chartered nonbank affiliate of a national bank wishes to 
merge with a national bank (with the resulting entity being a 
national bank), the law of the state in which the nonbank affiliate 
is organized must permit the state entity to engage in the merger. 
See 12 CFR 5.33(g)(4)(i) as set forth in a final rule published on 
December 17, 2003, 68 FR 70122.
---------------------------------------------------------------------------

    Later, the Court stated ``[w]e are not concerned at this time with 
the applicable rule in situations where the central government is at 
liberty (as it is under the commerce clause when such a purpose is 
disclosed) to exercise a power that is exclusive as well as paramount * 
* * No question is here as to the scope * * * of the power to regulate 
transactions affecting interstate or foreign commerce.''\64\ Thus, 
Hopkins explicitly does not address the limits of state and Federal 
government authority, respectively, when a state corporation is engaged 
in activities that are carried out under Federal law subject to Federal 
authority.
---------------------------------------------------------------------------

    \64\ Hopkins, 296 U.S. at 338, 343 (emphasis added) (citations 
omitted).
---------------------------------------------------------------------------

    Case law since Hopkins has clarified the interplay between the 10th 
Amendment and the Commerce Clause. As noted by the Supreme Court in 
United States v. Lopez, 514 U.S. 549 (1995), the Supreme Court in the 
first half of the 19th century viewed the Commerce Clause as a limit on 
state legislation that discriminated against interstate commerce. Now, 
however, the Commerce Clause is viewed more as a grant of authority to 
Congress. Id. at 556. That power has its limits; it ``may not be 
extended so as to embrace effects upon interstate commerce so indirect 
and remote that to embrace them, in view of our complex society, would 
effectually obliterate the distinction between what is national and 
what is local and create a completely centralized government.'' Id. at 
557, quoting NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 37 
(1937). But if an activity fits within one of the categories of 
activity that Congress may regulate under its commerce power,\65\ or 
other Constitutional authority, the regulation will be upheld.
---------------------------------------------------------------------------

    \65\ Those categories were articulated in Lopez as follows: 
``First Congress may regulate the use of the channels of interstate 
commerce. Second, Congress is empowered to regulate and protect the 
instrumentalities of interstate commerce, or persons or things in 
interstate commerce, even though the threat may come only from 
intrastate activities. Finally, Congress' commerce authority 
includes the power to regulate those activities having a substantial 
relation to interstate commerce, i.e., those activities that 
substantially affect interstate commerce. Id. at 558-59 (citiations 
omitted)
---------------------------------------------------------------------------

    This year the U.S. Supreme Court affirmed per curiam that the 
Commerce Clause permits Congress to regulate activity affecting 
intrastate lending. In Citizens Bank v. Alafabco Inc., 123 S. Ct. 2037 
(2003), the Court found that a debt restructuring agreement, involving 
a national bank located in Alabama and an Alabama corporation, had a 
sufficient nexus with interstate commerce to make an arbitration 
provision in that agreement enforceable under the Federal Arbitration 
Act, 9 U.S.C. 2. The Court stated, ``Congress' Commerce Clause power 
`may be exercised in individual cases without showing any specific 
effect upon interstate commerce' if in the aggregate the economic 
activity in question would represent ``a general practice * * * subject 
to federal control.' '' Citizens Bank, 123 S. Ct. at 2040 (emphasis in 
original) (citations omitted). After articulating the reasons why the 
debt restructuring agreements involved commerce within the meaning of 
the Commerce Clause, the Court stated ``[n]o elaborate explanation is 
needed to make evident the broad impact of commercial lending on the 
national economy or Congress' power to regulate that activity pursuant 
to the Commerce Clause.''\66\
---------------------------------------------------------------------------

    \66\ Citizens Bank, 123 St. 2041. See also Lewis v. BT 
Investments Managers, Inc. 447 U.S. 27, 38-39(1980), (``[B]anking 
and related financial activities are of profound local concern * * * 
Nonetheless, it does not follow that these same activities lack 
important interstate attributes''); Perez v. United States, 402 U.S. 
146, 154 (1971) ``Extortionate credit transactions, though purely 
intrastate, may in the judgment of Congress affect interstate 
commerce'').
---------------------------------------------------------------------------

    Clearly, national bank operating subsidiaries, licensed by the OCC, 
engaging in activities permissible for their parent national banks and 
subject to the same terms and conditions are on the same footing for 
purposes of the 10th Amendment. Given that they, like their parent 
banks, engage in activities that have a substantial effect on 
interstate commerce, regulation of the subsidiaries' activities would 
be within Congress' authority under the 10th Amendment.

E. Description of the Final Rule

    Based upon the foregoing discussion and analysis, the OCC has 
adopted the final rule with certain modifications that do not alter the 
fundamentals of the rule as proposed. We have amended the language in 
Sec.  7.4000(a)(3) slightly to simplify it. In addition, we have 
amended the regulation text in the final rule in Sec.  7.4000(b)(2). 
This provision no longer makes reference to the specific powers of the 
courts of justice ``to issue orders or writs compelling the production 
of information or witnesses'' since this is implicit. In addition, we 
have simplified the language which states that the exception for courts 
of justice does not authorize states or other governmental entities to 
exercise visitorial powers over national banks.

F. Regulatory Analysis

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b) (RFA), the regulatory flexibility analysis otherwise 
required under section 604 of the RFA is not required if the agency 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities and publishes its certification 
and a short, explanatory statement in the Federal Register along with 
its rule.
    Pursuant to section 605(b) of the RFA, the OCC hereby certifies 
that this final rule will not have a significant economic impact on a 
substantial number of small entities. Accordingly, a regulatory 
flexibility analysis is not needed. The amendments to the regulations 
simply identify the scope of activities for which the agency's 
visitorial powers are exclusive and clarify how an exception to such 
powers applies. These amendments do not impose any new requirements or 
burdens. As such, they will not result in any adverse economic impact.

[[Page 1903]]

Executive Order 12866

    The OCC has determined that this final rule is not a significant 
regulatory action under Executive Order 12866.

Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (2 U.S.C. 1532) (Unfunded Mandates Act), requires that an agency 
prepare a budgetary impact statement before promulgating any rule 
likely to result in a Federal mandate that may result in the 
expenditure by State, local, and tribal governments, in the aggregate, 
or by the private sector of $100 million or more in any one year. If a 
budgetary impact statement is required, section 205 of the Unfunded 
Mandates Act also requires an agency to identify and consider a 
reasonable number of regulatory alternatives before promulgating a 
rule. The OCC has determined that this final rule will not result in 
expenditures by State, local, and tribal governments, or by the private 
sector, of $100 million or more in any one year. Accordingly, this 
rulemaking is not subject to section 202 of the Unfunded Mandates Act.

Executive Order 13132

    Executive Order 13132, entitled ``Federalism,'' (Order) requires 
Federal agencies, including the OCC, to certify their compliance with 
that Order when they transmit to the Office of Management and Budget 
any draft final regulation that has Federalism implications. Under the 
Order, a regulation has Federalism implications if it has ``substantial 
direct effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government.'' In the case 
of a regulation that has Federalism implications and that preempts 
state law, the Order imposes certain consultation requirements with 
state and local officials; requires publication in the preamble of a 
Federalism summary impact statement; and requires the OCC to make 
available to the Director of the Office of Management and Budget any 
written communications submitted by state and local officials. By the 
terms of the Order, these requirements apply to the extent that they 
are practicable and permitted by law and, to that extent, must be 
satisfied before the OCC promulgates a final regulation.
    In the proposal, we noted that the regulation may have Federalism 
implications. It is not clear that the Order applies in situations 
where an agency is implementing a statute that has preemptive effect. 
Nevertheless, in formulating the proposal and the final rule, the OCC 
has adhered to the fundamental Federalism principles and the Federalism 
policymaking criteria.
    Moreover, the OCC has satisfied the requirements set forth in the 
Order for regulations that have Federalism implications and preempt 
state law. The steps taken to comply with these requirements are set 
forth below.
    Consultation. The Order requires that, to the extent practicable 
and permitted by law, no agency shall promulgate any regulation that 
has Federalism implications and that preempts state law unless, prior 
to the formal promulgation of the regulation, the agency consults with 
state and local officials early in the process of developing the 
proposed regulation. We have consulted with state and local officials 
on the issues addressed herein through the rulemaking process. 
Following the publication of the proposed rule, representatives from 
the Conference of State Bank Supervisors (CSBS) met with the OCC to 
clarify their understanding of the proposal and, subsequently, the CSBS 
submitted a detailed comment letter regarding the proposal. Thirty-two 
additional comments were also submitted on the proposal by other state 
and local officials and state banking regulators. Pursuant to the 
Order, we will make these comments available to the Director of the 
OMB. Subsequent public statements by representatives of the CSBS have 
restated their concerns, and CSBS representatives have further 
discussed these concerns with the OCC on several additional occasions.
    The Order requires a Federalism summary impact statement which 
addresses the following in addition to the consultation discussed 
above:
    Nature of concerns expressed. The Order requires a summary of the 
nature of the concerns of the state and local officials and the 
agency's position supporting the need to issue the regulation. The 
nature of the state and local official commenters' concerns and the 
OCC's position supporting the need to issue the regulation are set 
forth in the preamble, but may be summarized as follows. Broadly 
speaking, the states disagree with our interpretation of the applicable 
law, they are concerned about the impact the proposal will have on the 
dual banking system, and they are concerned about the ability of the 
OCC to protect consumers adequately.
    Extent to which the concerns have been addressed. The Order 
requires a statement of the extent to which the concerns of state and 
local officials have been met. The concerns are addressed in order.
    a. There is fundamental disagreement between state and local 
officials and the OCC regarding the meaning of section 484 as well as 
the Congressional intent behind the statute. The nature of the 
disagreement is discussed at length in the materials that precede this 
Federalism impact statement. For the reasons set forth in those 
materials, we believe that the language of section 484, its legislative 
history, and the application of that section by courts lead to the 
conclusion that the OCC has exclusive visitorial authority to enforce 
applicable state laws. The concerns of the state and local officials 
could only be fully met if the OCC were to take a position that is 
contrary to the express provisions of the statute and judicial 
precedent. Nevertheless, to respond to some of the issues raised, the 
language in the final regulation has been refined, and this preamble 
further explains that the OCC's visitorial powers are exclusive with 
respect to the Federally-authorized banking business of national banks.
    b. Similarly, we fundamentally disagree with the state and local 
officials about whether this proposal will undermine the dual banking 
system. As set forth in the preamble, differences in national and state 
bank powers and in the supervision and regulation of national and state 
banks are not inconsistent with the dual banking system; rather they 
are the defining characteristics of it. The dual banking system is 
universally understood to refer to the chartering and supervision of 
state-chartered banks by state authorities and the chartering and 
supervision of national banks by Federal authority, the OCC. Thus, we 
believe that the final rule preserves, rather than undermines, the dual 
banking system.
    c. Finally, we stand ready to work with the states in the 
enforcement of applicable laws. The OCC has extended invitations to 
state Attorneys General and state banking departments to enter into 
discussions that would lead to a memorandum of understanding about the 
handling of consumer complaints and the pursuit of remedies, and we 
remain eager to do so.
    We believe the OCC has the resources to enforce applicable laws, as 
is evidenced by the enforcement actions that have generated hundreds of 
millions of dollars for consumers in restitution, that have required 
national banks to disassociate themselves from payday lenders, and that 
have ordered national banks to stop abusive practices. These actions 
are listed on the OCC's Web site at http://www.occ.treas.gov/

[[Page 1904]]

enforce/enf--search.htm. Indeed, as recently observed by the Superior 
Court of Arizona, Maricopa County, in an action brought by Arizona 
against a national bank, among others, the restitution and remedial 
action ordered by the OCC in that matter against the bank was 
``comprehensive and significantly broader in scope than that available 
through [the] state court proceedings.'' State of Arizona v. Hispanic 
Air Conditioning and Heating, Inc., CV 2000-003625, Ruling at 27, 
Conclusions of Law, paragraph 50 (Aug. 25, 2003). Thus, the OCC has 
ample legal authority and resources to ensure that consumers are 
adequately protected.

List of Subjects in 12 CFR Part 7

    Credit, Insurance, Investments, National banks, Reporting and 
recordkeeping requirements, Securities, Surety bonds.

Authority and Issuance

0
For the reasons set forth in the preamble, the OCC amends part 7 of 
chapter I of title 12 of the Code of Federal Regulations as follows:

PART 7--BANK ACTIVITIES AND OPERATIONS

0
1. The authority citation for part 7 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq., 71, 71a, 92, 92a, 93, 93a, 481, 
484, 1818.

Subpart D--Preemption

0
2. In Sec.  7.4000:
0
a. Add a new paragraph (a)(3); and
0
b. Revise paragraph (b) to read as follows:


Sec.  7.4000  Visitorial powers.

    (a) * * *
    (3) Unless otherwise provided by Federal law, the OCC has exclusive 
visitorial authority with respect to the content and conduct of 
activities authorized for national banks under Federal law.
    (b) Exceptions to the general rule. Under 12 U.S.C. 484, the OCC's 
exclusive visitorial powers are subject to the following exceptions:
    (1) Exceptions authorized by Federal law. National banks are 
subject to such visitorial powers as are provided by Federal law. 
Examples of laws vesting visitorial power in other governmental 
entities include laws authorizing state or other Federal officials to:
    (i) Inspect the list of shareholders, provided that the official is 
authorized to assess taxes under state authority (12 U.S.C. 62; this 
section also authorizes inspection of the shareholder list by 
shareholders and creditors of a national bank);
    (ii) Review, at reasonable times and upon reasonable notice to a 
bank, the bank's records solely to ensure compliance with applicable 
state unclaimed property or escheat laws upon reasonable cause to 
believe that the bank has failed to comply with those laws (12 U.S.C. 
484(b));
    (iii) Verify payroll records for unemployment compensation purposes 
(26 U.S.C. 3305(c));
    (iv) Ascertain the correctness of Federal tax returns (26 U.S.C. 
7602);
    (v) Enforce the Fair Labor Standards Act (29 U.S.C. 211); and
    (vi) Functionally regulate certain activities, as provided under 
the Gramm-Leach-Bliley Act, Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 
1999).
    (2) Exception for courts of justice. National banks are subject to 
such visitorial powers as are vested in the courts of justice. This 
exception pertains to the powers inherent in the judiciary and does not 
grant state or other governmental authorities any right to inspect, 
superintend, direct, regulate or compel compliance by a national bank 
with respect to any law, regarding the content or conduct of activities 
authorized for national banks under Federal law.
    (3) Exception for Congress. National banks are subject to such 
visitorial powers as shall be, or have been, exercised or directed by 
Congress or by either House thereof or by any committee of Congress or 
of either House duly authorized.
* * * * *

John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 04-585 Filed 1-12-04; 8:45 am]
BILLING CODE 4810-33-P