[Federal Register Volume 69, Number 52 (Wednesday, March 17, 2004)]
[Proposed Rules]
[Pages 12571-12580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5928]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 69, No. 52 / Wednesday, March 17, 2004 / 
Proposed Rules  

[[Page 12571]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 303 and 324

RIN 3064-AC78


Filing Procedures; Transactions With Affiliates

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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

SUMMARY: Insured State nonmember banks are subject to the restrictions 
and limitations on transactions by member banks with affiliates found 
in sections 23A and 23B of the Federal Reserve Act ``in the same manner 
and to the same extent'' as though they were member banks. The Board of 
Governors of the Federal Reserve System (FRB) adopted 12 CFR 223 
(``Regulation W'') governing sections 23A and 23B. The FDIC is 
proposing to add a new part to title 12 of the CFR that would cross 
reference Regulation W to make it clear that insured State nonmember 
banks are subject to the restrictions and limitations, and may take 
advantage of the exemptions, contained in Regulation W. FDIC's 
regulation would also make it clear that the FDIC administers the 
restrictions and limitations contained in Regulation W as to insured 
State nonmember banks, may grant case-by-case exemptions from those 
restrictions and limitations, and is the appropriate agency to make 
other determinations under Regulation W. The proposal would also amend 
part 303 of FDIC's regulations governing filing and hearing procedures 
by adding a new section that would govern requests for exemptions from 
new part 324 and hearings that are held for the purpose determining 
whether a shareholder or company exercises a controlling influence over 
another company.

DATES: Written comments must be received on or before May 3, 2004.

ADDRESSES: You may submit comments, identified by RIN number by any of 
the following methods:
     Agency Web Site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for 
submitting comments on the Agency Web site.
     E-mail: [email protected]. Include the RIN 
number in the subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, 
Attention: Comments, Federal Deposit Insurance Corporation, 550 17th 
Street, NW., Washington, DC 20429.
     Hand Delivery/Courier: Guard station at rear of 
the 550 17th Street Building (located on F Street) on business days 
between 7 a.m. and 5 p.m.
    Instructions: All submissions received must include the agency name 
and RIN for this rulemaking. All comments received will be posted 
without change to http://www.fdic.gov/regulations/laws/federal/propose.html including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Curtis Vaughn, Senior Examination 
Specialist, Division of Supervision and Consumer Protection, (202) 898-
6759 or [email protected], Kenyon T. Kilber, Senior Examination 
Specialist, Division of Supervision and Consumer Protection, (202) 898-
8935 or [email protected] or Pamela E.F. LeCren, Counsel, Legal 
Division, (202) 898-3730 or [email protected], Federal Deposit Insurance 
Corporation, 550 17th Street, NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Background

    Section 18(j)(1) of the Federal Deposit Insurance Act (12 U.S.C. 
1828(j)(1) (``FDI Act'') provides that ``Sections 371c and 371c-1 of 
[title 12] shall apply with respect to every nonmember insured bank in 
the same manner and to the same extent as if the nonmember insured bank 
were a member bank.'' Sections 371c and 371c-1 of title 12 (12 U.S.C. 
371c, 371c-1) are respectively sections 23A and 23B of the Federal 
Reserve Act (FRA). They establish restrictions and limitations with 
respect to transactions between member banks and their affiliates. The 
purpose of those restrictions is to protect member banks from suffering 
losses when entering into transactions with affiliates.
    Section 23A (1) establishes limits on the amount of ``covered 
transactions'' between a member bank and its affiliates (any one 
affiliate and in the aggregate as to all affiliates); (2) requires that 
all covered transactions between a member bank and its affiliates be on 
terms and conditions that are consistent with safe and sound banking 
practices; (3) prohibits the purchase of low quality assets from an 
affiliate; and (4) requires that extensions of credit by a member bank 
to an affiliate, and guarantees on behalf of affiliates, be secured by 
statutorily defined amounts of collateral. Section 23B (1) requires 
that transactions (covered transactions as well as other identified 
transactions such as the sale of assets to an affiliate) between a 
member bank and its affiliates be on market terms (on terms and under 
circumstances that are substantially the same, or at least as favorable 
to the bank, as those prevailing at the time for comparable 
transactions with nonaffiliates); (2) prohibits purchases of assets 
from an affiliate as fiduciary unless one of several exceptions are 
met; (3) prohibits purchases of securities during the existence of an 
underwriting or selling syndicate if the principal underwriter of the 
securities is an affiliate; and (4) prohibits any advertisements or 
agreements by a member bank suggesting that the bank is responsible for 
the obligations of an affiliate.
    The FDIC interprets and enforces the restrictions and requirements 
of sections 23A and 23B of the FRA as to FDIC insured State banks that 
are not members of the Federal Reserve System (insured State nonmember 
banks) and has done so for many years. Until recently neither the FRB 
nor the FDIC had adopted, or proposed, a regulation on the restrictions 
of sections 23A or 23B as applicable to the depository institutions 
over which each is given responsibility under the FRA and FDI Act 
respectively. Both agencies relied, rather, upon the language of the 
FRA and careful coordination of their interpretations of the statutory 
restrictions. On May 11, 2001, the FRB published a proposed regulation 
(Regulation W) designed to implement sections 23A and 23B of the FRA if 
that proposal were adopted in final. (66 FR 24186). The FDIC filed a 
formal comment on the proposal. On December 12, 2002, the FRB published 
Regulation W as a final rule. (67 FR 76560). It became effective on 
April 1, 2003, and is codified at 12 CFR 223. The preamble accompanying 
Regulation W as adopted in final form indicated that member

[[Page 12572]]

banks would be given certain time periods to bring outstanding 
transactions into compliance with the new regulation.
    Regulation W defines terms; restates the statutory prohibitions 
found in section 23A and 23B; establishes a number of exemptions to 
those restrictions; explains how to value credit transactions and asset 
purchases for purposes of complying with the limits on covered 
transactions; sets out rules on when covered transactions arise for 
purposes of Regulation W; sets out rules with respect to derivative 
transactions and how section 23A and 23B apply to foreign branches; 
defines the term ``financial subsidiary'' for purposes of Regulation W; 
and sets out the standards under which the FRB will grant requests for 
exemptions on a case-by-case basis.
    In keeping with section 18(j)(1) of the FDI Act, the FDIC is 
proposing to add a new part to title 12 of the CFR. The purpose of this 
new part is to make clear that insured State nonmember banks must 
comply with the restrictions and limitations contained in Regulation W 
in order to comply with sections 23A and 23B of the FRA and section 
18(j)(1) of the FDI Act. As previously stated, section 18(j)(1) of the 
FDI Act provides that sections 23A and 23B shall apply to insured State 
nonmember banks ``in the same manner and to the same extent'' as if the 
nonmember banks are member banks. This requirement in the FDI Act means 
that the substantive requirements and restrictions set out in 
Regulation W apply equally to insured State nonmember banks. The FDIC 
has taken those requirements and restrictions into consideration in 
interpreting and applying sections 23A and 23B to insured State 
nonmember banks since the adoption of Regulation W. The FDIC is now 
proposing to add part 324, which will expressly incorporate through 
cross reference the substantive provisions of Regulation W. The part 
also identifies the FDIC as the appropriate agency for State nonmember 
banks in the administration and interpretation of those requirements 
and in granting exemption requests.

Discussion

Description of Proposal

    Proposed part 324 is divided into six sections. Section 324.1 sets 
out the authority under which the FDIC is proposing to act and 
describes the purpose and scope of the regulation. Section 324.2 
provides that the restrictions and limitations of Regulation W apply to 
insured State nonmember banks and contains an exemption for certain 
subsidiary relationships that were entered into prior to the date on 
which the FDIC's proposed part was published for public comment. 
Section 324.3 informs insured State banks that they are to follow the 
FDIC's procedures set forth in part 303 of the FDIC's regulations when 
requesting a hearing or making any filing under part 324. Section 324.4 
makes it clear that ``member bank'' should be read as ``insured State 
nonmember bank'', ``Board'' should be read as ``FDIC'' and 
``appropriate Federal banking agency'' should be understood to mean 
``FDIC'' wherever those terms appear in Regulation W. Section 324.4 
also contains a definition of ``State nonmember bank''. Section 324.5 
provides that insured State nonmember banks may obtain an exemption 
from the restrictions and limitations of this part concerning section 
23A if the FDIC determines that such an exemption is in the public 
interest and is consistent with the purposes of section 23A. Procedures 
for filing exemption requests are proposed in this section and would, 
if adopted, be added to part 303 of FDIC's regulations (Filing 
Procedures) as new Sec.  303.251. Finally, Sec.  324.6 provides that 
determinations that a shareholder or company exercises a controlling 
influence over another company will only be made after notice and 
opportunity for hearing. Hearings would be conducted in accordance with 
the proposed amendments to part 303 that are set out as part of this 
rulemaking. Proposed part 324, and the accompanying proposed amendments 
to part 303, are discussed in more detail below.

Section 324.1 Authority, Purpose and Scope

    The FDIC derives the authority from section 9 (Tenth) of the FDI 
Act (12 U.S.C. 1819 (Tenth)) to adopt rules implementing sections 23A 
and 23B of the FRA as made applicable to insured State nonmember banks. 
Section 9 (Tenth) of the FDI Act authorizes the FDIC to issue rules and 
regulations ``to carry out the provisions of this chapter or of any 
other law which it has the responsibility of administering or 
enforcing''.
    The FDIC has the responsibility of administering and enforcing 
section 18(j)(1) of the FDI Act as to state nonmember banks. The 
language in section 9 (Tenth) of the FDI Act limits the FDIC's 
authority to adopt regulations governing a particular area only if 
``authority to issue such rules and regulations has been expressly and 
exclusively granted to any other regulatory agency''. Nothing in the 
text of section 23A or section 23B or the legislative history of those 
sections indicates that the FRB has the ``exclusive'' rulemaking 
authority with respect to those sections as they apply to institutions 
other than member banks.\1\
---------------------------------------------------------------------------

    \1\ Congress could have amended the FRA to refer to ``bank'' 
rather than ``member bank'' if it wanted to provide the FRB with 
exclusive rulemaking authority with regard to sections 23A and 23B 
but it did not do so. Instead Congress amended the FDI Act, not once 
but twice, by incorporating a cross reference first to section 23A 
and then to section 23B after that section was added to the FRA. The 
fact that Congress chose to amend the FDI Act and not the FRA 
signals an intent to provide the FDIC with a role in the 
administration and interpretation of sections 23A and 23B.
---------------------------------------------------------------------------

    The text of sections 23A and 23B itself bear out the proposition 
that the FDIC is free to adopt regulations in this area. Sections 23A 
and 23B do not parcel out responsibility between the FRB and the 
appropriate Federal banking agencies as is the case with sections 22(g) 
and 22(h) of the FRA, both of which are also made applicable to insured 
State nonmember banks by section 18(j) of the FDI Act ``in the same 
manner and to the same extent'' as though they were member banks. 
Section 23A and 23B's silence with respect to what role the other 
Federal banking agencies are to play shows that the FRA does not 
operate as a constraint on the authority the FDIC derives from its own 
statute to establish rules implementing section 23A and 23B and the 
FDIC's ability to make decisions in applying those sections to insured 
State nonmember banks. The only restraint placed on the FDIC by the FDI 
Act is that all of the restrictions and limitations of section 23A and 
23B be applied ``in the same manner and to the same extent'' as those 
restrictions and limitations are applied to member banks. As discussed 
below, the FDIC will in fact be applying Regulation W and section 23A 
and 23B to State nonmember banks in the same way as those provisions 
apply to member banks.

Section 324.2 Affiliate Transactions

    General Requirements--Paragraph (a) of Sec.  324.2 of the proposal 
cross references Regulation W and restates the requirement found in 
section 18(j)(1) of the FDI Act that sections 23A and 23B of the FRA 
apply to insured State nonmember banks as though they were member 
banks. The purpose of paragraph (a) is to clarify that insured State 
nonmember banks must comply with the substantive provisions of 
Regulation W in order to comply with section 18(j)(1) of the FDI Act 
and part

[[Page 12573]]

324. The effect going forward of the cross reference in Sec.  324.2(a) 
to Regulation W is that State nonmember banks will automatically be 
subject to any changes made to Regulation W by the FRB without the need 
for the FDIC to take any action to amend its own regulation.
    Exception to General Requirements--The FDIC is proposing to adopt a 
regulatory exemption to the general rule set out in paragraph (a) of 
Sec.  324.2 of the proposal that insured State nonmember banks are 
subject to the restrictions and requirements of Regulation W.\2\ 
Paragraph (b) of Sec.  324.2 would exempt from the restrictions of part 
324 certain subsidiary relationships that were established prior to the 
date on which the FDIC's proposal is published for comment. If a 
subsidiary relationship predates that date and that subsidiary 
relationship was not considered by the FDIC to be subject to section 
23A and 23B prior to December 12, 2002 (i.e., the subsidiary was not 
considered to be an affiliate for purposes of section 23A and 23B as it 
was interpreted and applied by the FDIC) but is subject to section 23A 
and 23B after that date (is considered an affiliate relationship under 
Regulation W) the subsidiary will not be treated as an affiliate for 
purposes of part 324. Under the exemption, the bank's investment in the 
company, and its other covered transactions, if any, with the company, 
will not count toward the quantitative amount limitations that would 
otherwise apply under part 324 and outstanding transactions with the 
company do not need to be brought into compliance with part 324. It 
also means that, going forward, the bank is not subject to the 
restrictions of part 324 whenever it deals with that subsidiary 
company, e.g., any future extensions of credit to, or investments in, 
the subsidiary will not count toward the limits on covered transactions 
with affiliates to which the bank is subject. The exemption only 
applies, however, for so long as the subsidiary's activities are 
limited to those that were approved by the FDIC by regulation or order, 
or which are covered by an exception in section 24 of the FDI Act (12 
U.S.C. 1831a) (``section 24''), and were conducted as of the date on 
which the FDIC's proposal is published for comment. If, for example, 
the subsidiary changes its line of business in such a way that under 
Regulation W a newly established subsidiary of the bank doing the same 
thing would be considered an affiliate, the subsidiary will be treated 
as an affiliate from that point forward. The effect of the loss of the 
exemption is that, going forward, covered transactions between the bank 
and the subsidiary will be subject to part 324. Although the exemption 
would no longer apply, the outstanding investment in the subsidiary, 
any outstanding extensions of credit to the subsidiary and any other 
prior transactions with the subsidiary would not be affected by the 
loss of the exemption.
---------------------------------------------------------------------------

    \2\ The FDIC has the authority to adopt by regulation or order 
exemptions from the restrictions of section 23A if the FDIC 
determines that the exemption is in the public interest and is 
consistent with the purposes of the section 23A of the FRA.
---------------------------------------------------------------------------

    The exemption provided for under the proposal is intended to cover 
several categories of subsidiaries. The first category is those 
subsidiaries that, prior to the date on which the FDIC's proposal was 
issued for comment, were established after the FDIC issued an approval 
order under section 24 of the FDI Act and 12 CFR 362 (``section 24 
subsidiaries''). Such subsidiaries are by definition engaged in 
activities that are not permissible for a subsidiary of a national 
bank. The exemption is not limited, however, to State nonmember banks 
that applied for and obtained consent to establish a subsidiary under 
12 CFR 362. It also covers section 24 subsidiaries that were 
established prior to the date on which the FDIC's proposal was 
published for comment that were (1) established after filing a notice 
under part 362,\3\ or (2) established pursuant to a provision of part 
362 that permits State nonmember banks to establish certain 
subsidiaries without filing notice or making application to the 
FDIC.\4\ Finally, the exemption also is intended to cover subsidiaries 
established prior to the relevant date pursuant to a statutory 
exception in section 24 of the FDI Act which is restated in 12 CFR 362.
---------------------------------------------------------------------------

    \3\ 12 CFR 362 permits state nonmember banks to establish 
certain subsidiaries after filing a notice with the FDIC provided 
that certain conditions and requirements are met. In each such 
instance the conditions include affiliate transaction restrictions.
    \4\ 12 CFR 362 permits an insured state nonmember bank to 
establish a subsidiary that invests in bank stock (Sec.  
362.4(b)(4)(ii)); engages in certain leasing activities (Sec.  
362.4(b)(6)); invests in adjustable rate preferred stock, money 
market preferred stock and similar instruments (Sec.  362.4(b)(7)); 
and holds a control interest in a company that engages in insurance 
agency activities, any national bank permissible activity, real 
estate leasing, or that invests in adjustable rate and money market 
preferred stock (Sec.  362.4(b)(3)(ii)) without filing an 
application or a notice.
---------------------------------------------------------------------------

    As proposed, the subsidiary relationship exemption may be over 
inclusive to the extent that some of the section 24 subsidiaries 
described above fall within an exception to the definition of financial 
subsidiary found in Regulation W and thus are not considered to be 
affiliates. As it may be possible to construe the exceptions to the 
definition of financial subsidiary found in Regulation W narrowly, the 
FDIC has opted to draft the proposed exemption broadly so as to avoid 
any undue confusion or ambiguity as to how insured State nonmember 
banks with existing section 24 subsidiaries are affected by the 
adoption of FRB Regulation W.
    The FDIC intends to limit the exemption to the types of section 24 
subsidiaries described above. Comment is invited on whether the 
regulatory text is sufficiently clear as to its scope or has broader 
effect than intended. In addition, comment is requested on whether the 
FDIC should consider narrowing the scope of the exemption or making it 
broader.
    It has been the FDIC's practice to include in section 24 approval 
orders conditions on the manner and extent to which an insured State 
nonmember bank may interact with its subsidiary that engages in 
activities that are not permissible for a subsidiary of a national 
bank.\5\ Those conditions are very similar but not identical to the 
restrictions found in section 23A and 23B and Regulation W. In 
addition, the FDIC's regulations which provide that a bank may simply 
file a notice before establishing a certain type of subsidiary require 
in most instances that a bank must abide by certain affiliate 
transaction restrictions when interacting with the subsidiary if a bank 
wants to take advantage of the notice procedure. The affiliate 
transaction restrictions that apply in the case of a notice are the 
same restrictions which have been imposed by the FDIC by order on a 
case-by-case basis. Banks that are eligible for the subsidiary 
relationship exemption but which are subject by order or regulation to 
conditions placing restrictions on the bank's transactions with its 
subsidiary would still be subject to those conditions (i.e., the 
proposed exemption would not supercede or invalidate those conditions).
---------------------------------------------------------------------------

    \5\ Section 24 of the FDI Act requires the FDIC to determine 
that the activities to be engaged in by the subsidiary do not 
present a significant risk to the fund. The FDIC can, and typically 
has, determined that a particular activity does not present a 
significant risk to the fund provided that the activity is 
conditioned in such a way as to make any risk associated with the 
conduct of that activity by the subsidiary acceptable.
---------------------------------------------------------------------------

    As indicated above, the FDIC may, by regulation or order, exempt 
transactions or relationships from the requirements and restrictions of 
sections 23A and 23B of the FRA if the FDIC finds that the exemption is 
in the public interest and consistent with the purposes of the

[[Page 12574]]

FRA. The proposed subsidiary relationship exemption should not have an 
adverse impact on the public interest or be inconsistent with the 
purposes of section 23A and 23B as most banks that have subsidiaries 
that are eligible for the exemption are already subject to affiliate 
transaction conditions very similar to those found in Regulation. The 
exemption would not affect those conditions. The majority of the 
section 24 subsidiaries which have been approved by the FDIC involved 
either real estate subsidiaries or subsidiaries that invest in equity 
securities.\6\ The majority of the real estate subsidiaries are subject 
to affiliate transaction restrictions similar to those found in 
Regulation W and many of those that are not subject to such 
restrictions are approvals to hold certain real estate investments 
pending their liquidation. The FDIC carefully reviewed the requests for 
consent to engage in equity securities investments through a 
subsidiary. Although many of the equity securities applications were 
not made subject to affiliate transaction restrictions, the 
applications that were approved were made subject to whatever 
conditions the Board found necessary in its best judgment to protect 
the deposit insurance funds from risk given the facts and circumstances 
of each application. (Section 24 requires the FDIC to determine that 
the conduct of business by subsidiaries such as these does not present 
a significant risk before the FDIC may give its consent to acquisition 
or establishment of the subsidiary.) The majority of the equity 
subsidiaries that were approved involved small investments (less than 
10% of tier one capital) and in many cases the equities in which those 
subsidiaries sought consent to invest were bank holding companies and 
other similar firms. Most of the approvals were conditioned in such a 
way as to limit lending to the subsidiaries and to limit the amount of 
the investments that the subsidiaries may in turn make. Given the 
Board's initial review and determination and the conditions to which 
the approvals are subject, the FDIC does not believe that 
grandfathering these subsidiaries will be contrary to the public 
interest. What is more, the FDIC notes that these equity investment 
securities are in many ways similar to private equity funds (the 
vehicle through which financial holding companies may invest in equity 
securities) which are provided special treatment under Regulation W.
---------------------------------------------------------------------------

    \6\ A summary of requests approved by the FDIC's Board of 
Directors can be viewed at http://www.fdic.gov/regulations/resources/approved/index.html.
---------------------------------------------------------------------------

    Section 324.2(b) of the proposal does not exempt transactions 
entered into by a State nonmember bank prior to the publication date of 
the proposal from compliance with Regulation W and part 324. All 
transactions with affiliates, regardless of when entered into, are 
governed by Regulation W and the phase-in periods adopted by the FRB in 
the case of member banks. Transactions entered into after December 12, 
2002, but before April 1, 2003, by member banks with their affiliates 
were required to comply with Regulation W as of April 1, 2003. 
Transactions entered into prior to December 12, 2002, were required to 
comply with Regulation W no later than July 1, 2003. State nonmember 
banks that entered into transactions with affiliates that would have 
been required to be in compliance with Regulation W by either April 1, 
2003, or July 1, 2003, if entered into by a member bank and which are 
not in compliance at this time will be cited for a violation of section 
23A and 23B and section 18(j)(1) of the FDI Act as appropriate. Comment 
is invited as to whether the FDIC should consider adopting some other 
treatment in part 324. For example, should the FDIC grant an additional 
compliance period or perhaps grandfather pre-existing transactions?

Section 324.3 Submissions and Requests for Hearing

    Section 324.3 informs insured State nonmember banks that all 
filings, submissions, requests for hearings and other requests made 
under this part are to be made in accordance with the procedures set 
out in 12 CFR 303. The intent of the provision is to eliminate any 
confusion that might arise as to the procedures to be followed by 
insured State nonmember banks (procedures found in Regulation W or 
elsewhere in FRB regulations or procedures found in the FDIC's 
regulations which might differ from those used by the FRB). This 
rulemaking would add a new Sec.  303.251 to 12 CFR 303 that would set 
out the applicable procedures for submissions, filings, and requests 
for hearing that are made under Sec. Sec.  324.5 and 324.6 of the 
proposal. The proposed procedures are discussed in more detail below.

Section 324.4 Definitions and Usage of Terms

    Section 324.4 of the proposal substitutes appropriate terminology 
for that found in Regulation W to make it clear that, for the purposes 
of compliance with section 18(j)(1) of the FDI Act and this part, 
``member bank'' should be understood to mean ``insured State nonmember 
bank''; ``Board'' should be understood to mean ``FDIC''; and 
``appropriate Federal banking agency'' should be understood to mean 
``FDIC'' wherever those words or phrases are used in Regulation W. The 
section also defines ``State nonmember bank'' by cross referencing the 
definition found in section 3 of the FDI Act (12 U.S.C. 1813(e)).
    Sections 324.2(a), 324.3 and 324.4 together accomplish two 
important things. They make clear that (1) the FDIC, as the Federal 
supervisor of insured State nonmember banks, is the appropriate party 
to whom insured State nonmember banks must look for guidance in 
interpreting the requirements of sections 23A and 23B of the FRA as 
they apply to insured State nonmember banks through section 18(j) of 
the FDI Act, and (2) it is the FDIC which exercises discretion in 
applying the restrictions and limitations found in Regulation W in 
those instances in which Regulation W provides for relief, calls for 
determinations, or provides for the exercise of discretion by the FRB. 
In short, by adopting the cross reference to Regulation W the FDIC is 
satisfying its obligation to ensure that insured State nonmember banks 
are subject to sections 23A and 23B as though they were member banks. 
It is only appropriate, and is in fact necessary to the effective 
accomplishment of the FDIC's charge to oversee the safety and soundness 
of insured State nonmember banks, for the FDIC to exercise the 
authority to make decisions with respect to particular insured State 
nonmember banks and their transactions with affiliates in the context 
of the overall facts and circumstances affecting those banks. The FDIC 
is the supervisor of these particular institutions and the Federal 
supervisory agency that is in the best position to evaluate the need 
for relief.
    As indicated above, part 324 makes it clear that the reference to 
the ``appropriate Federal banking agency'' as found in Regulation W 
means the FDIC. References to the FDIC in FDIC's regulations will 
normally be understood to refer to the FDIC's Board of Directors unless 
the Board of Directors has delegated the matter to some other 
individual within the agency. Regulation W contains several provisions 
that permit the ``appropriate Federal Banking agency'' to make certain 
decisions. For example, section 223.15(b)(3) of Regulation W provides 
that the appropriate Federal banking agency may set the amount by which 
a bank's share of a participation in a loan originated by an affiliate 
which is now a problem loan and which is being

[[Page 12575]]

renewed (or for which additional funds are extended) may exceed 5% of 
the bank's original exposure without the renewal constituting a 
purchase of a low quality asset. Insured State nonmember banks should 
note that it is the FDIC's present intent that the authority to make 
determinations under Regulation W that are to be made by the 
``appropriate Federal banking agency'' will be delegated to the 
Director of the Division of Supervision and Consumer Protection and the 
Director's designee.

Section 324.5 Exemption Requests

    Section 223.43 of Regulation W (12 CFR 223.43) provides that the 
FRB may, by regulation or order, at its discretion, exempt transactions 
or relationships from the requirements of section 23A if the FRB 
determines that the exemption is in the public interest and is 
consistent with the purposes of section 23A. FDIC's proposed Sec.  
324.5 provides that insured State nonmember banks may request an 
exemption from the requirements and restrictions of section of 23A, as 
implemented by Regulation W, by filing a written request with the FDIC. 
The FDIC may, in its discretion, grant an exemption if the FDIC 
determines that it is in the public interest to do so and the FDIC 
determines that granting the exemption is consistent with the purposes 
of section 23A. This provision is similar in purpose to Sec. Sec.  
324.2, 324.3 and 324.4 in that it makes clear that it is the FDIC which 
is the appropriate agency to grant relief in the case of an insured 
State nonmember bank.
    Exemptions from the restrictions of Regulation W are available for 
insured State nonmember banks under the same standards that apply to 
member banks, i.e., if the exemption is in the public interest and it 
is consistent with the purposes of section 23A. Exemptions are thus 
available to member and nonmember banks ``in the same manner'' (after 
filing a request for an exemption) and ``to the same extent'' (after 
the bank's request is evaluated based upon the same standards). The 
only difference is that it is the FDIC which, based on its unique 
supervisory perspective and familiarity with the institution in 
question, evaluates whether those standards are met and whether it is 
appropriate to grant an exemption.
    Past practice has been for insured State nonmember banks to apply 
to the FRB to obtain exemptions from the restrictions of section 23A. 
Usually the FRB consults with the FDIC prior to granting exemptions. 
Absent unusual circumstances, if the FDIC objects to the exemption 
request, it is not granted. Rather than continue the practice of 
allowing insured State nonmember banks to file exemption requests with 
the FRB, the FDIC is proposing to instruct insured State nonmember 
banks to file all exemption requests with the FDIC. Since FDIC is the 
primary Federal banking supervisor of insured State nonmember banks and 
is more familiar with the condition and overall management of those 
banks than the FRB, it is more appropriate for the FDIC to review and 
act on exemption requests from insured State nonmember banks. It is not 
only more appropriate to do so, but the FDIC expects that following 
this new procedure will result in more efficiency in the review of the 
requests which will in turn benefit banks. We anticipate that 
individual reviews will take less time even though it is the FDIC's 
intent to continue to coordinate with the FRB to ensure that the 
standards under which exemption requests are evaluated are consistently 
applied by the FDIC and the FRB. If adopted, the regulation would not 
have any effect on exemptions previously granted by the FRB. Those 
exemptions will continue to be valid and there would be no need for an 
insured State nonmember bank to seek an order from the FDIC affirming 
the prior exemption granted by the FRB.
    Procedures for filing exemption requests are proposed for comment 
and are discussed below under the heading ``Section 303.251 Affiliate 
Transactions''. If adopted, those procedures would be set out in a new 
Sec.  303.251.

Section 324.6 Controlling Influence Determinations

    Section 23A of the FRA requires a shareholder or a company to be 
given notice and opportunity for a hearing before the shareholder or 
company is determined to directly or indirectly exercise a controlling 
influence over the management or policies of another company. The 
impact of a determination that such influence is found to exist is that 
the shareholder or company is considered to control the other company, 
thus making the companies affiliates for the purposes of section 23A.
    Section 324.6 of the proposed regulation restates the statutory 
obligation for opportunity for a hearing prior to the control 
determination being made. It also makes it clear that the FDIC and not 
the FRB is the agency that affords the opportunity for a hearing and 
makes the final determination on the control issue when an insured 
State nonmember bank is involved. (See, Roque De La Feunte II v. FDIC, 
332 F.3d 1208 (9th Cir. 2003) (FDIC has the authority and obligation to 
afford opportunity for hearing and to conduct a control hearing). The 
standard under the proposal for determining if control exists is 
whether the shareholder or company has a controlling influence over the 
management or policies of the other company. This standard is identical 
to that found in section 23A of the FRA and is the same standard in FRB 
Regulation W.\7\
---------------------------------------------------------------------------

    \7\ The FDIC recognizes that it will be necessary to coordinate 
with the FRB to assure consistency as between the application of the 
standard to member banks and state nonmember banks. We note, 
however, that to date the FRB has never had a control hearing under 
the relevant provisions of section 23A of the FRA. At this time 
there is no existing prior FRB precedent resulting from a control 
hearing for the FDIC to take into consideration.
---------------------------------------------------------------------------

    If a hearing is requested by an insured State nonmember bank, or 
one of its shareholders, the hearing will be conducted in accordance 
with the procedures set out in 12 CFR 303. (See discussion below under 
the heading ``Section 303.251 Affiliate transactions'' for information 
regarding the hearing procedures that are proposed for comment.)

Proposed Amendments to 12 CFR 303

Section 303.251 Affiliate Transactions

    FDIC is proposing to amend part 303 governing filing procedures and 
certain hearings. Under the proposal, a new section would be added to 
subpart M-- ``Other Filings'' that would (1) set out the procedures for 
filing a request for an exemption from section 23A, and (2) set out the 
procedures governing hearings to determine whether or not a shareholder 
or company exercises a controlling influence over another company.
    Exemption requests--As proposed in Sec. 303.251(a), the procedures 
governing requests for an exemption from the restrictions of section 
23A would require the requesting bank to file a letter with the 
appropriate FDIC office that (1) describes in detail the relationship 
or transaction for which the bank is seeking an exemption, (2) 
identifies the requirements or restrictions from which the bank is 
seeking relief, and (3) sets out an explanation of why the exemption is 
in the public interest and is consistent with the purposes of section 
23A. The FDIC may request any additional information that is, in its 
opinion, necessary to properly evaluate the request. Banks that file 
exemption requests will receive written notification of the FDIC's 
decision. The proposed exemption procedures are substantially

[[Page 12576]]

the same as those adopted by the FRB in Regulation W for member banks 
with the exception that, unlike member banks, State nonmember banks 
would file requests with an FDIC regional office rather than with the 
agency's General Counsel. At the present time it is anticipated that 
the FDIC's Board of Directors will retain the authority to grant 
exemptions and will not delegate that responsibility.
    Controlling influence hearing requests--Procedures governing 
requests for hearings and the actual conduct of hearings to determine 
control are set out in proposed Sec.  303.251(b). Under the proposed 
procedures the FDIC is required to provide a shareholder or company 
written notice of an opportunity for hearing before the agency makes a 
determination that there is an affiliation based on the ability to 
exercise a controlling influence over the management or policies of 
another company. A company or shareholder that wants a hearing must 
respond to that effect no later than 10 days after receiving the 
written notice of opportunity for hearing by filing a request for a 
hearing with the ``appropriate FDIC office'' as that term is defined in 
12 CFR 303. Which FDIC office is the ``appropriate FDIC office'' is 
dependent upon whether the institution that is the subject of a filing 
is not part of a group of related institutions. If that is the case, 
the appropriate regional office for that institution, and any 
individual associated with the institution, is the FDIC region in which 
the institution is located. (See Sec.  303.2(g)(1) of current part 
303). If the institution that is the subject of a filing is part of a 
group of related institutions, the appropriate FDIC regional office for 
that institution, and any individual associated with that institution, 
is the FDIC region in which the group's major policy and decision 
makers are located (or any other region the FDIC designates on a case-
by-case basis). (See Sec.  303.2(g)(2) of current part 303).
    Requests for a control hearing will be acknowledged in writing. The 
date and time for hearings will be set by the FDIC solely in its 
discretion (``such time as FDIC determines to be reasonable''). In 
setting the date for the hearing the FDIC will take care to consider 
the convenience of the participants in addition to other factors such 
as the complexity of the issues and the potential effects of the timing 
of the hearing on associated matters such as a pending examination. The 
presiding officer will be the Director of the Division of Supervision 
and Consumer Protection or the Director's designee. The presiding 
officer is responsible for conducting the hearing, determining any 
procedural question that is not specifically addressed by Sec.  
303.251(b), and rendering a final determination within 20 days of the 
date on which the hearing record is closed. The participants will be 
notified in writing of the final disposition which will contain an 
explanation of the reasons for the final decision.
    The final determination may be appealed to the Board of Directors 
of the FDIC. To do so a request for review must be filed the Executive 
Secretary of the FDIC within 15 days of the date on which notification 
of the final decision is received.
    The proposal indicates that the procedures currently set out in 
Sec. Sec.  303.10(f) through 303.10(i), 303.10(k) and 303.10(m) will 
govern the conduct of the hearing. Section 303.10 is titled ``Hearings 
and other meetings''. Paragraph (f) governs participation in hearings. 
Paragraph (g) governs transcripts. Paragraph (h) governs presentations 
and information that may be submitted. It also identifies federal laws 
that are not applicable to hearings. Paragraph (i) governs the closing 
of the hearing record. Paragraph (k) governs the computation of time. 
Paragraph (m) provides that the Board of Directors may delegate by 
resolution to the presiding officer the authority to adopt different 
procedures in individual matters.

Request for Comments

    In addition to any other comments on the proposal, the FDIC 
specifically requests comment on the following.
    1. Is it advisable for the FDIC to adopt separate rules 
implementing section 18(j)(1) of the FDI Act and section 23A and 23B of 
the FRA as they apply to insured State nonmember banks?
    2. If the FDIC does adopt separate regulations, should the 
regulation set out the full text of Regulation W rather than adopt the 
proposed cross reference? If the FDIC adopted a full text version it 
would be identical to Regulation W with the exception that ``insured 
State nonmember bank'' would be substituted for ``member bank'; 
``FDIC'' would be substituted for ``Board'; ``FDIC'' would be 
substituted for ``appropriate Federal banking agency''; the definition 
of ``member bank'' would be replaced with a definition of ``State 
nonmember bank'' (definition would be the same as currently proposed) 
and the authority, purpose and scope paragraph as found in Regulation W 
would be modified to read as those paragraphs are proposed for comment.
    3. Should the FDIC continue its past practice of allowing the FRB 
to act on exemption requests by insured State nonmember banks or adopt 
the proposed change in practice which would direct insured State 
nonmember banks to file such requests with the FDIC, which would then 
grant or deny the request?
    4. If the FDIC adopts the practice of acting on exemption requests, 
are the proposed procedures for exemption requests sufficiently clear? 
Is the information that is required to be presented in an exemption 
request burdensome? Should the regulation require that additional, 
specifically identified information be included in the request? Should 
the regulation provide specifics on the time in which the FDIC will act 
on exemption requests?
    5. Are the proposed hearing procedures adequate? What additional 
procedures if any should be included? Should the regulation specify 
that the hearing will take place no later than a certain specified 
period of time after the request for hearing is submitted to the FDIC? 
Is it appropriate to apply the procedures found in Sec. Sec.  303.10(f) 
through 303.10(i), 303.10(k) and 303.10(m) to a controlling influence 
hearing?
    6. Should the Board of Directors delegate the authority to grant 
exemptions under the regulation or retain the authority to grant 
exemptions at the Board level?
    7. Should the Board of Directors delegate the authority to make a 
final control determination or should that authority be retained only 
at the Board level?
    8. If decision making authority with respect to control 
determinations is delegated, is it appropriate to allow an appeal of 
the decision and if so, to whom?
    9. Is the FDIC correct in its initial view that the proposed 
exemption for section 24 subsidiaries that were established prior to 
the publication of this proposal from part 324 will not adversely 
impact the public or be inconsistent with the purposes of section 23A 
and 23B?
    10. Should the FDIC draft the subsidiary exemption more narrowly? 
If so, why? Should the exemption be broader in scope? If so, why?
    11. Should the FDIC consider additional exemptions at this time?
    12. Should the FDIC consider granting a phase-in period for 
transactions that were entered into prior to the publication of the 
proposal? If so, should the phase-in period mirror the phase-in period 
the FRB adopted for

[[Page 12577]]

member banks (i.e., three months from the effective date of the rule) 
or would some other period be more appropriate?
    13. Should the FDIC consider exempting from part 324 transactions 
that were entered into prior to the publication of the proposal? If so, 
why? Would such an exemption pose safety and soundness issues?
    14. FDIC's view is that insured State branches, agencies, and 
commercial lending companies of foreign banks are subject to the 
substantive provisions of Regulation W and this part. Comment is 
requested on whether the proposed regulation is sufficiently clear in 
that regard and whether or not the FDIC is justified in its view.
    15. Are the proposed amendments to the FDIC's regulations written 
clearly and in ``plain language''? If not, what changes should be made 
to the proposed language to make it clearer and easier to understand?

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (44 U.S.C. 3501 et 
seq.), the FDIC may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid Office of Management and Budget (OMB) control number. 
The collection of information contained in this rule has been submitted 
to OMB for review.
    Written comments on the collection of information should be sent to 
the Joseph F. Lackey, FDIC desk officer: Office of Management and 
Budget, Office of Information and Regulatory Affairs, New Executive 
Office Building, Washington, DC 20503. Copies of comments should also 
be sent to: Thomas Nixon, Legal Division, FDIC, 550 17th Street, NW., 
Washington, DC 20429, (202) 898-8766. For further information on the 
Paperwork Reduction Act aspect of this rule, contact Thomas Nixon at 
the above address.
    Comment is solicited on:
    1. Whether the collection of information is necessary for the 
proper performance of FDIC functions, including whether the information 
will have practical utility;
    2. The accuracy of our estimate of burden of the proposed 
collection of information, including the validity of the methodology 
and assumptions used;
    3. The quality, utility, and clarity of the information to be 
collected;
    4. Ways to minimize the burden of the information collection on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, for example, 
permitting electronic submission of responses; and
    5. Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchases of services to provide information.
    Title of the collection: Transactions with affiliates.
    Summary of the collection: As discussed more fully in the preamble, 
the FDIC's 12 CFR part 324 will make clear that insured State nonmember 
institutions must conform to the standards of FRB's Regulation W and 
that the FDIC is responsible for administering Regulation W as it 
applies to such institutions, including receiving and acting on notices 
required by Regulation W.
    The notices required in this collection are required to evidence 
compliance with sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c and 371c-1) and section 18(j)(1) of the Federal Deposit 
Insurance Act (``FDI Act''). The respondents for part 324 will be 
insured State nonmember institutions.
    Regulation W established four notices at (12 CFR) sections 
223.15(b)(4), 223.31(d)(4), 223.41(d)(2) and 223.43(b). The FDIC will 
require insured state nonmember institutions to provide the first three 
of these notices to the FDIC by the part 324's cross-reference to 
Regulation W. The fourth Regulation W notice (223.43(b)) will not be 
required through the part 324 cross-reference. Instead, the FDIC 
equivalent of that notice will be required through 12 CFR 303.251.
    The first notice requirement, described in Regulation W's section 
223.15(b)(4), is a condition to an exemption for renewals of loan 
participations involving problem loans. Regulation W requires the 
participating depository institution to provide its appropriate Federal 
banking agency with written notice of the renewal or extension of 
additional credit not later than 20 days after consummation. The FDIC 
is the appropriate Federal banking agency to which insured State 
nonmember institutions are to provide this notice. There will be no 
reporting form associated with this information collection. The FDIC 
estimates that approximately three insured State nonmember institutions 
will file this notice annually and that it will take approximately two 
hours to prepare the notice.
    The second notice requirement, described in Regulation W's section 
223.31(d)(4), is a condition to an exemption for a depository 
institution's acquisition of an affiliate that becomes an operating 
subsidiary of the institution after the acquisition. Regulation W 
requires the institution to provide its appropriate Federal banking 
agency and the FRB with written notice of its intention to acquire the 
company at or before the time that the company becomes an affiliate of 
the institution. Through part 324's cross-reference, insured State 
nonmember institutions will provide that notice to the FDIC. There will 
be no reporting form associated with this information collection. The 
FDIC estimates that approximately three insured State nonmember 
institutions will file this notice annually and that it will take 
approximately six hours to prepare the notice.
    The third notice requirement, described in Regulation W's section 
223.41(d)(2), is a condition to an exemption for internal corporate 
reorganization transactions. Regulation W requires the depository 
institution to provide its appropriate Federal banking agency and the 
FRB with written notice of the transaction before consummation. Insured 
State nonmember institutions will provide notice to the FDIC. The 
notice must describe the primary business activities of the affiliate 
and indicate the proposed date of the reorganization. There will be no 
reporting form associated with this information collection. The FDIC 
estimates that approximately seven insured state nonmember institutions 
will file this notice annually and that it will take approximately six 
hours to prepare a notice.
    Finally, part 324 will not require insured state nonmember 
institutions to send a notice to the FDIC through a cross-reference to 
Regulation W's section 223.43(b). Instead, pursuant to Sec.  303.251, 
they must submit a request to the appropriate FDIC regional office. The 
request must describe in detail the transaction or relationship for 
which the institution seeks exemption; explain why the FDIC should 
exempt the transaction or relationship; and explain how the exemption 
would be in the public interest and consistent with the purposes of 
section 23A. There will be no reporting form associated with this 
information collection. The FDIC estimates that approximately two 
insured State nonmember institutions will file these requests annually 
and that it will take approximately 10 hours to prepare a request.
    Burden estimate: The total estimated annual burden for insured 
State nonmember institutions that must comply with the above-mentioned 
requirements is 86 hours. Based on a rate of $50 per hour, the total 
annual

[[Page 12578]]

cost to the public for these collections of information is estimated to 
be $4,300.

Regulatory Flexibility Act

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. 603(a)), the FDIC must publish an initial regulatory 
flexibility analysis with this rulemaking or certify that the proposed 
rule, if adopted, will not have a significant economic impact on a 
substantial number of small entities. For the purposes of the required 
analysis or certification, financial institutions with total assets of 
$150 million or less are considered to be ``small entities''. For the 
reasons set out below the FDIC hereby certifies pursuant to 5 U.S.C. 
605(b) that the proposed rule, if adopted, will not have a significant 
economic impact on a substantial number of small entities.
    Sections 23A and 23B of the FRA limit transactions between a member 
bank and its affiliates. The FDIC enforces sections 23A and 23B of the 
FRA as to insured State nonmember banks under section 18(j)(1) of the 
FDI Act which provides that insured State nonmember banks are subject 
to sections 23A and 23B of the FRA as though they were member banks. 
Section 9 (Tenth) of the FDI Act authorizes the FDIC to issue such 
regulations as may be necessary to administer and carry out the 
purposes of those sections. The proposed rule would make clear to 
insured State nonmember banks that in order to comply with section 
18(j)(1) of the FDI Act they must comply with the substantive 
provisions of FRB Regulation W which was adopted in final by the FRB on 
December 12, 2002 to implement the requirements and restrictions of 
sections 23A and 23B of the FRA as they apply to member banks. 
Regulation W is codified at 12 CFR 223. It appeared in volume 67 of the 
Federal Register at page 76560 (67 FR 76560). A full description of the 
reasons why the FRB considered and adopted Regulation W are set out in 
the Federal Register document which contained Regulation W as 
originally proposed for comment (66 FR 24186, May 11, 2001) and in 
Regulation W as adopted in final form. The FRB describes Regulation W 
as a regulation which, although designed to comprehensively implement 
sections 23A and 23B of the FRA, is a regulation that in large measure 
simply codifies the FRB's past practice and interpretations with 
respect to sections 23A and 23B. The reasons the FDIC is proposing to 
adopt a cross reference to Regulation W in its regulations and, is 
further proposing to amend its regulations to make clear that the FDIC 
is the appropriate agency to grant exemptions from sections 23A and 23B 
to insured State nonmember banks as well as to make other 
determinations under Regulation W, are set out more fully under the 
supplementary information section of this document. The proposed rule 
would apply to all insured State nonmember banks regardless of their 
size.
    Regulation W largely codifies the application of section 23A and 
23B of the FRA as to member and State nonmember banks as interpreted 
and applied before that rule's adoption. In most instances the 
differences between what a bank needed to do to comply with section 23A 
or 23B previously and what is required to be done in order to comply 
with section 23A or 23B post Regulation W are minimal. In many 
instances Regulation W actually grants relief from restrictions 
contained in the statute. Regulation W does contain some new notice 
requirements and sets out specifics as to filing requirements if a bank 
wishes to obtain an exemption from section 23A as to a particular 
transaction or relationship. Those requirements are discussed above 
under the heading ``Paperwork Reduction Act''. Of the requirements 
discussed under that heading, the requirements necessary to obtain an 
exemption are the most onerous. Based on FDIC's experience as to the 
number and size of State nonmember banks that have sought such 
exemptions in the past, we anticipate very few such requests and the 
institutions most likely to file an exemption request can be expected 
to be larger than $150 million in total assets. In 2003 only three 
insured State nonmember banks requested exemptions from section 23A. 
Only one of the three institutions was under $150 million in total 
assets. Regulation W also requires a notice in connection with 
corporate reorganizations that are exempted from some of the 
restrictions of section 23A and 23B without need of a case-by-case 
determination. Again based on our past experience we anticipate that 
banks that will take advantage of this exemption are likely to be 
larger than $150 million in total assets. Over the years, exemption 
requests have typically involved reorganization transactions and as 
stated above, banks that file exemption requests are more likely to be 
banks in excess of $150 million in total assets. Although we cannot 
come to the same conclusion with respect to the final two categories of 
notices described under the Paperwork Reduction Act heading, those 
notice requirements are minimal in terms of the information required to 
be filed. Banks will not require the services of attorneys, 
consultants, appraisers, accountants or other professionals to prepare 
and submit the notices nor do these notices require the use of 
sophisticated computer programs, statistical analysis, or other complex 
tracking or recordkeeping systems. While some aspects of Regulation W 
may require tracking or other compliance systems in order for a bank to 
comply with the requirements of the rule or to take advantage of 
certain exemptions contained in the rule, those systems as well as any 
burden arising out of FDIC's proposed rule would be present for State 
nonmember banks regardless of whether the FDIC adopts the proposal or 
not. The impact of the proposed rule is largely procedural in that its 
purpose is to clarify for State nonmember banks that it is the FDIC 
that administers the requirements of Regulation W as to insured state 
nonmember banks. The rule does not impose any new or different 
substantive requirement. In short, proposed part 324 does not itself 
impose any burden on small institutions that is not already imposed 
under Regulation W.

Impact on Families

    The FDIC has determined that this proposed rule will not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

List of Subjects

12 CFR Part 324

    Banks, banking, Safety and Soundness, Transactions with affiliates.

12 CFR Part 303

    Administrative practice and procedure, Authority delegations 
(Government agencies), Bank deposit insurance, Banks, banking, Bank 
merger, Branching, Foreign branches, Foreign investments, Gold 
parachute payments, Insured branches, Interstate branching, Reporting 
and recordkeeping requirements, Savings associations.

    The Board of Directors of the Federal Deposit Insurance Corporation 
hereby proposes to add a new part 324 to title 12 of the Code of 
Federal Regulations and amend part 303 of title 12 of the Code of 
Federal Regulations as follows:
    1. The authority citation for part 324 reads as follows:

    Authority: 12 U.S.C. 1819(tenth), 1828(j)(1).

    2. New part 324 is added to read as follows:

[[Page 12579]]

PART 324--TRANSACTIONS WITH AFFILIATES

Sec.
324.1 Authority, purpose and scope.
324.2 Affiliate transactions.
324.3 Filings, submissions, requests and hearings.
324.4 Definitions and usage of terms.
324.5 Exemptions.
324.6 Controlling influence determinations.


Sec.  324.1  Authority, purpose and scope.

    (a) Authority. This part is issued under the authority of sections 
9 (tenth) and 18(j)(1) of the Federal Deposit Insurance Act (FDI Act) 
(12 U.S.C. 1819 (tenth), 1828(j)(1)).
    (b) Purpose. This part implements section 18(j)(1) of the FDI Act 
and sections 23A and 23B of the Federal Reserve Act (FRA) (12 U.S.C. 
371c, 371c-1) as to insured State nonmember banks. Section 18(j)(1) of 
the FDI Act makes insured State nonmember banks subject to the 
restrictions of sections 23A and 23B of the FRA in the same manner and 
to the same extent as if insured State nonmember banks are member banks 
of the Federal Reserve System. Section 23A and 23B of the FRA establish 
certain quantitative limits and other prudential requirements for 
loans, purchases of assets, and certain other transactions between a 
member bank and its affiliates. Federal Reserve Board (FRB) Regulation 
W (12 CFR 223) implements sections 23A and 23B of the FRA as to member 
banks by defining terms used in sections 23A and 23B, explaining the 
requirements of those statutory provisions and exempting certain 
transactions from the restrictions and limitations of the FRA.
    (c) Scope. This part applies to insured State nonmember banks.


Sec.  324.2  Affiliate transactions.

    (a) General. Insured State nonmember banks are subject to the 
restrictions and limitations contained in section 23A and 23B of the 
FRA and FRB Regulation W on transactions by member banks with 
affiliates in the same manner and to the same extent as if they were 
member banks of the Federal Reserve System.
    (b) Exception. Any subsidiary relationship that predates March 17, 
2004, is exempt from the requirements and restrictions of this part 
that would otherwise apply if such relationship would not have been 
subject to section 23A and 23B of the FRA prior to December 12, 2002, 
because the subsidiary would not have at that time been considered to 
be an affiliate.


Sec.  324.3  Filings, submissions, requests and hearings.

    Filings, submissions, and requests made under section 324.5 and 
section 324.6 of this part are governed by 12 CFR 303.251. All other 
filings, submissions or requests under this part are governed by 
subpart A of 12 CFR 303. Procedures to which member banks are subject 
under FRB Regulation W for filings, submissions, requests and hearings 
do not apply in the case of a State nonmember bank.


Sec.  324.4  Definitions and usage of terms.

    For purposes of compliance with this part insured state nonmember 
banks should substitute ``insured State nonmember bank'' for ``member 
bank'' and ``FDIC'' for ``Board'' wherever those terms appear in 
Federal Reserve Board Regulation W. The phrase ``appropriate Federal 
banking agency'' as used in Federal Reserve Board Regulation W should 
in all instances be read to mean ``FDIC''. ``State nonmember bank'' has 
the same meaning as in 12 U.S.C. 1813(e)(2).


Sec.  324.5  Exemptions.

    An insured State nonmember bank may request that the FDIC exempt 
transactions or relationships from the requirements of section 23A of 
the FRA as implemented by this part. Exemption requests may be granted 
by the FDIC in its discretion if it finds such exemption to be in the 
public interest and to be consistent with the purposes of section 23A.


Sec.  324.6  Controlling influence determinations.

    Determinations by the FDIC that a shareholder or company directly 
or indirectly exercises a controlling influence over the management or 
policies of another company will only be made after notice and 
opportunity for hearing. Hearings will be conducted in accordance with 
12 CFR 303.251.
    3. The authority citation for part 303 continues to read as 
follows:

    Authority: 12 U.S.C. 378, 1813, 1815, 1817, 1818, 1819 (Seventh 
and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1, 1831w, 
1835a, 1843(l), 3104, 3105, 3108, 3207; 15 U.S.C. 1601-1607.

    4. Sections 303.251 and 303.252 of subpart M of part 303 are 
redesignated as Sec. Sec.  303.252 and 303.253.
    5. Section 303.251 is added to subpart M of part 303 to read as 
follows:

Subpart M--Other Filings

* * * * *


Sec.  303.251  Affiliate transactions.

    (a) Exemption requests. (1) Scope--This paragraph contains the 
procedures to be followed by an insured state nonmember bank that wants 
to obtain an order from the FDIC exempting affiliate transactions or 
relationships from the requirements of part 324 (12 CFR 324) and 
section 23A of the Federal Reserve Act (12 U.S.C. 371c) as made 
applicable to insured state nonmember banks by section 18(j)(1) of the 
FDI Act (12 U.S.C. 1828(j)(1)).
    (2) Where to File. Applicants shall submit a letter application to 
the appropriate FDIC office.
    (3) Content of Filing. The application shall contain the following:
    (i) A detailed description of the relationship or transaction for 
which the applicant is seeking an exemption,
    (ii) An identification of the requirements or restrictions from 
which the applicant is seeking relief, and
    (iii) A statement of why the requested relief is in the public 
interest and consistent with the purposes of section 18(j)(1) of the 
FDI Act.
    (4) Additional information. The FDIC may request additional 
information at any time during the processing of the filing.
    (5) Processing. The FDIC will provide the applicant with written 
notification of the final action when the decision is rendered.
    (b) Controlling influence determinations. (1) Scope--This paragraph 
contains the procedures the FDIC will follow when determining for the 
purposes of part 324 whether a company or shareholder controls another 
company as a result of directly or indirectly exercising a controlling 
influence over the management or policies of such company.
    (2) Opportunity for hearing. Prior to determining that a 
shareholder or a company has a controlling influence over the 
management or policies of another company, the shareholder or company 
will be provided written notice of an opportunity for hearing.
    (3) Hearing requests. Requests for a hearing must be received by 
the FDIC no later than 10 days after a written notice of opportunity 
for a hearing is received.
    (4) Where to File. Requests for a hearing must be submitted by 
letter to the appropriate FDIC office.
    (5) Timing of hearing. Upon receipt of a request for hearing, the 
FDIC will acknowledge the request in writing and set such date for the 
hearing as is determined by the FDIC to be reasonable.
    (6) Hearing Procedures. The presiding officer shall be the Director 
of the Division of Supervision and Consumer

[[Page 12580]]

Protection or the Director's designee. Hearings will be conducted in 
accordance with sections 303.10(f)-section 303.10(i), section 303.10(k) 
and section 303.10(m). The presiding officer is responsible for 
conducting the hearing, determining all procedural questions not 
governed by paragraph (b) of this section and making the final 
determination within 20 days of the date on which the hearing record is 
closed. Participants will be notified in writing of the final 
disposition and provided an explanation of the reasons for the final 
decision.
    (7) Review of final decision. Final decisions resulting in a 
determination that control exists may be appealed to the Board of 
Directors of the FDIC by filing a request for review with the Executive 
Secretary of the FDIC no later than 15 days after the date on which 
written notification of the final decision is received.

    Dated at Washington, DC, this 10th day of March, 2004.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 04-5928 Filed 3-16-04; 8:45 am]
BILLING CODE 6714-01-P