[Federal Register Volume 77, Number 69 (Tuesday, April 10, 2012)]
[Proposed Rules]
[Pages 21494-21505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8515]
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FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-1405]
RIN 7100-AD64
Definition of ``Predominantly Engaged in Financial Activities''
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Supplemental notice of proposed rulemaking and request for
comment.
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SUMMARY: On February 11, 2011, the Board published a notice of proposed
rulemaking (``February 2011 NPR'') that would amend Regulation Y to
establish the criteria for determining whether a company is
``predominantly engaged in financial activities'' and define the terms
``significant nonbank financial company'' and ``significant bank
holding company'' for purposes of Title I of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (the ``Dodd-Frank Act'' or
``Act''). Based on comments received, the Board believes that
clarification is needed regarding the scope of activities that would be
considered to be financial activities under that proposal. Accordingly,
this notice supplements the February 2011 NPR amending specific
portions of the regulation for clarity.
DATES: Comments should be received on or before May 25, 2012.
FOR FURTHER INFORMATION CONTACT: Laurie S. Schaffer, Associate General
Counsel, (202) 452-2272, Paige E. Pidano, Senior Attorney, (202) 452-
2803 or Christine E. Graham, Senior Attorney, (202) 452-3005, Legal
Division; Mark Van Der Weide, Senior Associate Director, (202) 452-
2263, Division of Banking Supervision and Regulation, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue NW, Washington, DC 20551. Users of Telecommunication Device for
Deaf (TDD) only, call (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
This Notice of Proposed Rulemaking (``NPR'') amends the February
2011 NPR and invites public comment on the definition of activities
that are financial solely for purposes of determining whether a company
qualifies as a nonbank financial company under Title I of the Dodd-
Frank Act.\1\
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\1\ The NPR refers to these activities as ``activities that are
financial in nature under Title I.''
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The Dodd-Frank Act established the Council, which, among other
authorities and duties, may require that a ``nonbank financial
company'' become subject to supervision by the Board and prudential
standards if the Council determines that the material financial
distress of the company, or the nature, scope, size, scale,
concentration, interconnectedness, or mix of the company's activities,
could pose a threat to the financial stability of the United States.\2\
Nonbank financial companies that are designated by the Council under
section 113 of the Dodd-Frank Act are referred to as ``nonbank
financial companies supervised by the Board.'' \3\
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\2\ See section 113 of the Dodd-Frank Act; 12 U.S.C. 5323.
\3\ See id.
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Title I of the Dodd-Frank Act defines a ``nonbank financial
company'' to include both a U.S. nonbank financial company and a
foreign nonbank financial company. The statute, in turn, defines a
``U.S. nonbank financial company'' as a company (other than a bank
holding company and certain other specified types of entities) that is
(i) incorporated or organized under the laws of the United States or
any State; and (ii) predominantly engaged in financial activities.\4\ A
``foreign nonbank
[[Page 21495]]
financial company'' is defined as a company (other than a bank holding
company or foreign bank or company that is, or is treated as, a bank
holding company) that is (i) incorporated or organized outside the
United States; and (ii) predominantly engaged in financial
activities.\5\
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\4\ See section 102(a)(4)(B) of the Dodd-Frank Act (emphasis
added); 12 U.S.C. 5311(a)(4)(B) (emphasis added). Besides bank
holding companies, the statute specifically provides that the term
``U.S. nonbank financial company'' does not include (i) a Farm
Credit System institution chartered and subject to the Farm Credit
Act of 1971 (12 U.S.C. 2001 et seq.), (ii) a national securities
exchange (or parent thereof), clearing agency (or parent thereof,
unless the parent is a bank holding company), security-based swap
execution facility, or security-based swap data repository that in
each case is registered with the SEC, or (iii) a board of trade
designated as a contract market (or parent thereof), or a
derivatives clearing organization (or parent thereof, unless the
parent is a bank holding company), swap execution facility or a swap
data repository that in each case is registered with the CFTC.
\5\ See section 102(a)(4)(A) of the Dodd-Frank Act (emphasis
added); 12 U.S.C. 5311(a)(4)(A) (emphasis added). A foreign bank, or
foreign company controlling a foreign bank, is treated as a bank
holding company for purposes of the BHC Act if the foreign bank has
a branch, agency, or commercial lending company subsidiary in the
United States and does not control a U.S. bank.
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For purposes of Title I of the Dodd-Frank Act, a company is
considered to be ``predominantly engaged'' in financial activities if
either
(i) The annual gross revenues derived by the company and all of
its subsidiaries from activities that are financial in nature (as
defined in section 4(k) of the Bank Holding Company Act), and, if
applicable, from the ownership or control of an insured depository
institution, represents 85 percent or more of the consolidated
annual gross revenues of the company; or
(ii) The consolidated assets of the company and all of its
subsidiaries related to activities that are financial in nature (as
defined in section 4(k) of the Bank Holding Company Act), and, if
applicable, related to the ownership or control of an insured
depository institution, represents 85 percent or more of the
consolidated assets of the company.\6\
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\6\ See section 102(a)(6) of the Dodd-Frank Act; 12 U.S.C.
5311(a)(6).
The Dodd-Frank Act requires the Board to establish the requirements
for determining whether a company is ``predominantly engaged in
financial activities.'' \7\ In accordance with this requirement, the
Board requested comment on the February 2011 NPR that, among other
things, set forth the requirements for determining if a company is
``predominantly engaged in financial activities'' under Title I of the
Act.\8\ The public comment period on the proposed rule closed on March
30, 2011.
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\7\ Section 102(b) of the Dodd-Frank Act 12 U.S.C. 5311(b).
\8\ 76 FR 7731 (February 11, 2011). The February 2011 NPR also
proposed definitions of the terms ``significant nonbank financial
company'' and ``significant bank holding company,'' as required by
the Dodd-Frank Act. See sections 102(a)(7) and (b) of the Dodd-Frank
Act; 12 U.S.C. 5311(a)(7) and (b).
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In light of comments received on the February 2011 NPR, the Board
is amending that NPR to clarify the activities that are financial for
purposes of Title I.
II. Overview of Comments
The Board received 23 comments on the February 2011 NPR. The
comments received by the Board relating to the definition of activities
that are financial for purposes of Title I raised questions as to
whether the conduct of certain financial activities--in particular,
investment activities--that did not comply with the conditions
applicable to bank holding companies engaging in such activities should
be considered to be financial activities for purposes of Title I. The
Board intends to provide a complete discussion of the comments
submitted in response to the February 2011 NPR after considering the
comments received on this second proposal.
The Board has considered the comments it received regarding the
definition of activities that are financial in nature for purposes of
Title I, as well as the language and legislative intent and history of
the Dodd-Frank Act and the Bank Holding Company Act (``BHC Act''), as
amended by the Gramm-Leach-Bliley Act (``GLB Act''). Based on these
considerations, the Board is proposing to amend the February 2011 NPR
to clarify that, consistent with the purpose of Title I any activity
referenced in section 4(k) will be considered to be a financial
activity without regard to conditions that were imposed on bank holding
companies that do not define the activity itself.\9\ To provide
clarity, the Board further is issuing as an appendix to the NPR a list
of the activities that would be considered to be financial activities
as of April 2, 2012, including conditions necessary to the definition
of the activity as a financial activity, for purposes of determining
whether a company is predominantly engaged in financial activities.
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\9\ As noted below, conditions that do not define the activity
itself include those conditions that were imposed to ensure that the
activity is conducted in a safe and sound manner, to prevent a
financial holding company from controlling a commercial firm, or to
comply with another provision of law.
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The Board is proposing this approach for several reasons. First,
section 4(k) of the BHC Act and Regulation Y, which is incorporated by
reference, contain broad lists of financial activities and impose
conditions on bank holding companies conducting those activities. Many
of these conditions were imposed so that a bank holding company, which,
by definition, controls a bank, could engage in the activities without
threatening the safety and soundness of its subsidiary depository
institution and are distinct from the definition of the activity
itself. Other conditions were required to comply with another provision
of law, such as the Glass-Steagall Act.
Defining financial activities for purposes of Title I to include
all of the conditions imposed on the conduct of the activities by bank
holding companies likely would enable some companies that are
predominantly engaged in financial activities to avoid consideration
for designation by the Council simply by choosing not to abide by
conditions that were imposed by the Board on bank holding companies to
ensure the safe and sound conduct of the activity or compliance with
other legal restrictions unrelated to whether the activity is a
financial activity. For example, some commenters suggested that a firm
that organizes, sponsors, and manages an open-end investment company
(including a mutual fund or money market mutual fund) should not be
considered to be engaged in a financial activity if the firm owns or
controls more than a given percentage of the fund because a financial
holding company may not own or control more than that amount of the
fund.
This proposal is consistent with the purpose and legislative
history of Title I, which demonstrate that Congress believed that the
statutory definition of a ``nonbank financial company'' would make
eligible for Council designation companies that were not bank holding
companies but that engaged in a broad range of financial
activities.\10\ A reading of Title I that limited the scope of
companies considered to be
[[Page 21496]]
``predominantly engaged in financial activities'' to only those
companies that conduct such activities in compliance with the
conditions applicable to bank holding companies would severely
undermine the purpose of Title I and the authority granted by Congress
to the Council to protect U.S. financial stability by taking certain
actions to ensure such stability, such as the authority to subject to
prudential standards financial firms that compete in financial markets
and could threaten financial stability.\11\
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\10\ See remarks by Senator Cardin at 156 Cong. Rec. S5873, July
15, 2010, in which he indicates that mutual funds and their advisers
would be eligible for designation by the Council (stating that 115
of the Dodd-Frank Act would ``ensure that mutual funds and their
advisers are not inadvertently subjected to unworkable standards in
the unlikely event the Financial Stability Oversight Council
designates [mutual funds] as systemically risky.''); See also
remarks by Senator Kerry at 156 Cong. Rec. S5902-5903, July 15,
2010, in which he indicates that although mutual funds and their
advisers would be eligible for designation by the Council,
regulation by the Board may not be appropriate for such companies
because they do not pose a risk to United States financial stability
(stating that ``there are large companies providing financial
services that are in fact traditionally low-risk businesses, such as
mutual funds and mutual fund advisers'' and that Congress did ``not
envision nonbank financial companies that pose little risk to the
stability of the financial system,'' such as ``mutual funds and
mutual fund advisers,'' to be supervised by the Federal Reserve.'').
\11\ Committee on Banking, Housing, and Urban Affairs Report, S.
Rep. No. 111-176, April 15 2010, page 3, citing Testimony of Timothy
Geithner, Secretary of the Treasury, to the Banking Committee, June
18, 2009.
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Second, section 167(a) of the Dodd-Frank Act supports the view that
Congress intended that companies could be eligible for designation by
the Council regardless of whether these companies complied with the
non-definitional conditions applied to bank holding companies in the
implementation of section 4(k).\12\ Section 167(a) provides that a
nonbank financial company supervised by the Board ``* * * shall not be
required to conform its activities to the requirements of section 4 of
the BHC Act.'' \13\
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\12\ See 12 U.S.C. 5367.
\13\ Id.
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This section demonstrates that Congress recognized that nonbank
financial companies do not conduct their activities in compliance with
the requirements applicable to bank holding companies. It would be
illogical to conclude that a company would be eligible for Council
designation only if it conducted its financial activities in
conformance with the requirements imposed on bank holding companies'
conduct of financial activities set forth in section 4(k), but would
not be required to conform its financial activities to the conditions
imposed on bank holding companies by section 4(k) after being
designated by the Council for Board supervision.
Third, the Council's anti-evasion authority appears to demonstrate
Congress's intent to broadly define ``nonbank financial companies'' to
capture firms predominantly engaged in the type of financial activities
authorized by section 4(k). A nonbank company could slightly alter the
manner in which it conducts a financial activity so that the activity
does not comply with one of the non-definitional conditions that
governs the conduct of the activity by a bank holding company to reduce
the company's financial revenues and assets for purposes of the asset
and revenue tests set forth in section 102(a)(6). The nonbank company
could thereby avoid qualifying as a nonbank financial company and thus
be ineligible for consideration by the Council for designation under
section 113. Section 113(c) of the Dodd-Frank Act gives the Council the
authority to subject the financial activities of any company to
supervision by the Board if the Council determines, either on its own
or pursuant to a recommendation by the Board, that: (i) The company is
organized and operates in such a manner to evade application of Title I
of the Dodd-Frank Act; and (ii) material financial distress related to,
or the nature, scope, size, scale, concentration, interconnectedness,
or mix of, the company's financial activities would pose a threat to
the financial stability of the United States.\14\ Companies that are
engaged in activities that are financial in nature, but that alter the
manner in which they conduct those activities for purposes of evading
designation by the Council under section 113 and supervision by the
Board may be subject to designation by the Council under the special
anti-evasion authority in section 113(c).
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\14\ 12 U.S.C. 5323(c).
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III. Overview of Proposed Rule
Activities as Defined in Section 4(k)
The proposal would revise section 225.301(d)(1) of the NPR to
provide that any activity described in section 4(k) of the BHC Act will
be considered financial in nature under Title I regardless of
conformance with the conditions applicable to bank holding companies
conducting such activity that do not define the financial activity
itself.
The proposed appendix would enumerate the activities that will be
considered financial in nature as of April 2, 2012. These activities
are identical to those in section 4(k) that are permissible for
financial holding companies as of such date, but do not include the
conditions imposed on the conduct of the activity by a bank holding
company that do not describe the financial activity. These financial
activities include those activities that were permitted by regulation
or order as ``closely related to banking'' under the BHC Act, permitted
as ``usual in connection with banking abroad,'' under the International
Banking Act, and those that were authorized for financial holding
companies by the GLB Act in 1999.
In order to distinguish between conditions that are definitional
from those that are imposed for other reasons, the Board considered its
prior authorizations of permissible financial activities for bank
holding companies. For instance, the Board reviewed its 1997 revisions
to section 225.28 of Regulation Y that describes activities that are
``closely related to banking,'' in which the Board removed several of
the conditions imposed on bank holding companies conducting these
activities. In this release, the Board distinguished between the
activities that were ``necessary to establish the definition of the
permitted activity'' and those that were imposed for other purposes,
such as ``to prevent circumvention of another statute, such as the
Glass-Steagall Act.'' \15\ The 1997 rulemaking is an example of the
Board's use of its longstanding authority to define the parameters of
permissible nonbanking activities for bank holding companies and impose
conditions on the conduct of such activities by bank holding companies,
and the Board's practice of distinguishing between the activities
themselves and the conditions imposed on the conduct of those
activities.
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\15\ See 62 FR 9290, 9305 (February 28, 1997). The Board stated
that the revisions made by the 1997 release were necessary to remove
conditions that ``[were] outmoded, [were] superseded by Board order,
or [did] not apply to insured depository institutions conducting
those same activities,'' and the conditions it retained in section
225.28 were ``necessary to establish the definition of the permitted
activity or to prevent circumvention of another statute, such as the
Glass-Steagall Act.'' The Board further noted that its ``removal of
[such] restrictions from the regulation does not affect the Board's
determination that'' these activities are ``so closely related to
banking as to be a proper incident thereto'' and thus permissible
for bank holding companies.
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The GLB Act authorized certain financial activities and repealed
many of the conditions imposed on bank holding companies under section
225.28 for bank holding companies that qualify as financial holding
companies. To the extent that an activity was originally authorized by
the GLB Act, the Board has reviewed the legislative history of that Act
to identify the conditions defining that activity. For instance, the
legislative history related to Congress's authorization of
``underwriting, merchant, and investment banking activities''
distinguishes between the activities themselves and certain conditions
imposed on the conduct of these activities by a financial holding
company that do not define the activities, such as the requirement that
a financial holding company have a securities or insurance
affiliate.\16\
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\16\ See Conf. Rep. 106-434, 154 (November 2, 1999). (``The
authorization of merchant banking activities as provided in new
section 4(k)(4)(H) of the BHCA is designed to recognize the
essential role that these activities play in modern finance and
permits an FHC that has a securities affiliate or an affiliate of an
insurance company engaged in underwriting life, accident and health,
or property and casualty insurance, or providing and issuing
annuities, to conduct such activities.'') (emphasis added).
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[[Page 21497]]
Because section 4(k) references financial activities that were
authorized by the Board under various authorities at different points
in time, certain of these financial activities overlap with, or are
wholly subsumed by, other financial activities permissible for
financial holding companies. For purposes of the proposal, the Board
has maintained the complete list of financial activities authorized
under section 4(k), including the overlapping and redundant activities.
Generally, the Board seeks comment on whether overlapping or redundant
financial activities should be combined or removed, as appropriate,
solely for purposes of determining whether a nonbank company is
predominantly engaged in financial activities, in order to simplify the
proposed appendix.
It is possible that the Board may modify, interpret, or authorize
activities under section 4(k) of the BHC Act in the future. Thus, the
proposed revision to section 225.301(d)(1) would clarify that neither
the rule nor the appendix would affect the authority of the Board under
any other provision of law or regulation to modify these activities or
to provide interpretations of section 4(k) in the future, which may
affect those activities that are financial in nature under Title I.
The following discussion describes the activities enumerated in the
proposed appendix and identifies the conditions imposed by section 4(k)
of the BHC Act and the Board's implementing regulations that are not
reflected in the proposed appendix because they do not define the
essential nature of the activity.
Lending, exchanging, transferring, investing for others, or
safeguarding money and securities
The activities of lending, exchanging, transferring, investing for
others, or safeguarding money and securities were authorized as
permissible for financial holding companies by the GLB Act.\17\
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\17\ 12 U.S.C. 1843(k)(4)(A).
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Insurance activities
A broad range of insurance activities, including insuring,
guaranteeing, or indemnifying against loss, harm, damage, illness,
disability, or death, or providing and issuing annuities, and acting as
principal, agent, or broker for purposes of the foregoing, in any
State, were authorized as permissible for financial holding companies
by the GLB Act.\18\
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\18\ 12 U.S.C. 1843(k)(4)(B).
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Financial, investment, and economic advisory services
The activities of providing investment, financial, or economic
advisory services were authorized as permissible for financial holding
companies by the GLB Act.\19\
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\19\ 12 U.S.C. 1843(k)(4)(C).
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Securitizing
The activity of issuing or selling instruments representing
interests in pools of assets was authorized as permissible for
financial holding companies by the GLB Act.\20\ The GLB Act also
imposed the condition that the assets being securitized must be
permissible for a bank to hold directly. This condition appears to
address both safety and soundness matters and restrictions imposed by
other provisions of law unrelated to the financial nature of the
activity, and is not reflected in the proposed appendix.
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\20\ 12 U.S.C. 1843(k)(4)(D).
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Underwriting, dealing, and market making
The activities of underwriting, dealing in, and making a market in
securities were authorized as permissible for financial holding
companies by the GLB Act.\21\
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\21\ 12 U.S.C. 1843(k)(4)(E).
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Extending credit and servicing loans
The activities of making, acquiring, brokering, or servicing loans
or other extensions of credit (including factoring, issuing letters of
credit and accepting drafts) for the company's account or for the
account of others were authorized by the Board as activities that are
closely related to banking and thus permissible for bank holding
companies.\22\ The Board requests comment on whether these lending
activities are included in the broad authorization of lending under
section 4(k)(4)(A) and need not be separately reflected in the
appendix.
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\22\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(1).
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Activities related to extending credit
Activities usual in connection with making, acquiring, brokering,
or servicing loans or other extensions of credit were determined to be
permissible by the Board for bank holding companies as activities that
are closely related to banking.\23\ These activities include performing
appraisals of real estate and personal property (including securities),
acting as an intermediary for commercial or industrial real estate
financing, providing check guarantee services, providing collection
agency services, providing credit bureau services, engaging in asset
management, servicing, and collection activities, acquiring debt in
default, and providing real estate settlement services.\24\ The
proposed appendix reflects these activities without the conditions
imposed on the conduct of these activities by a bank holding company
that do not describe the financial activities themselves.
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\23\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(2).
\24\ Id.
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For instance, under the Board's regulations, a bank holding company
may not have an interest in, participate in managing or developing, or
promote or sponsor the development of the property for which it is
arranging commercial real estate equity financing. The proposed
appendix does not reflect these conditions because they are not
essential to the activity of arranging commercial real estate equity
financing.\25\ Similarly, under the Board's regulations, bank holding
companies conducting asset management activities may engage in these
activities only if the company does not also engage in real property
management or real estate brokerage. The proposed appendix does not
reflect that condition because, for purposes of determining whether a
company is predominantly engaged in financial activities, the
restriction could be read to exclude any asset management activity from
being treated as financial if the company also engaged in any real
estate brokerage or property management activities. While neither real
estate brokerage nor real estate management is a permissible financial
activity for financial holding companies, nor are such activities
considered to be financial for purposes of Title I, a company may
engage in these activities and still be predominantly engaged in
financial activities so long as these activities comprise no more than
fifteen percent of the company's activities.
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\25\ Neither real estate brokerage nor real estate management is
an activity that is financial in nature. See 12 U.S.C. 1843 note;
Public Law 111-8, sec. 624 (Mar. 11, 2009).
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With respect to acquiring debt in default, under the Board's
regulations, a bank holding company acquiring debt in default must
divest impermissible assets securing debt in default within a certain
time period, stand only in the position of a creditor and not purchase
equity of obligors of debt in default, and not
[[Page 21498]]
acquire debt in default secured by shares of a bank or bank holding
company. The proposed appendix does not reflect these conditions
because they do not appear to be part of the essential nature of the
activity of acquiring debt in default. The conditions requiring the
bank holding company to divest impermissible assets and stand only in
the position of a creditor and not purchase equity of obligors are
intended to prevent the bank holding company from owning assets
prohibited by the BHC Act or other provisions of law and are not
related to the activity of acquiring debt in default. Similarly, the
condition requiring that the debt not be secured by shares of a bank or
bank holding company was imposed to prevent the bank holding company
from circumventing the BHC Act's requirement that a bank holding
company obtain approval from the Board before acquiring control of
another bank or bank holding company.
Leasing
Leasing personal or real property, and acting as an agent, broker,
or adviser for personal or real property was determined to be closely
related to banking by the Board.\26\
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\26\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(3).
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Operating nonbank depository institutions
The activities of owning, controlling, and operating nonbank
depository institutions, including industrial banks, Morris Plan banks,
industrial loan companies and thrifts, was determined to be closely
related to banking by the Board.\27\ While the Board's regulations
require that a target thrift be engaged only in deposit-taking
activities and activities permissible for bank holding companies, the
proposed appendix does not include these conditions because they are
not essential elements of the activity of owning a nonbank depository
institution.
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\27\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(4).
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Trust company functions
The activities performed by a trust company were determined to be
closely related to banking by the Board.\28\ The Board requests comment
on whether trust company functions are incorporated in the broad
authorization provided under section 4(k)(4)(A) to engage in lending,
exchanging, transferring, investing for others, and safeguarding
financial assets and need not be separately reflected in the appendix.
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\28\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(5).
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Financial and investment advisory activities
The activities of acting as an investment or financial advisor to
any person were determined to be closely related to banking by the
Board.\29\ These activities have been defined to include, without
limitation, serving as a registered investment adviser to a registered
investment company, including sponsoring, organizing, and managing a
closed-end investment company; furnishing general economic information
and advice, general economic statistical forecasting services, and
industry studies; providing advice in connection with mergers,
acquisitions, divestitures, investments, joint ventures, leveraged
buyouts, recapitalizations, capital structurings, financing
transactions and similar transactions; and conducting financial
feasibility studies; providing information, statistical forecasting,
and advice with respect to any transaction in foreign exchange, swaps,
and similar transactions, commodities, and any forward contract,
option, future, option on a future, and similar instruments; providing
educational courses and instructional materials to consumers on
individual financial management matters; and providing tax-planning and
tax-preparation services to any person.\30\ The Board requests comment
on whether these financial and investment advisory activities are
incorporated in the broad authorization provided by section 4(k)(4)(C)
of the BHC Act to provide financial, investment, and economic advisory
services and need not be separately reflected in the appendix.
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\29\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(6).
\30\ Id.
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Agency transactional services
Agency transactional services, including providing securities
brokerage services, acting as a riskless principal, providing private
placement services, and acting as a futures commission merchant, were
determined to be closely related to banking by the Board.\31\
Conditions that were imposed on bank holding companies conducting these
activities in order to prevent circumvention of the Glass-Steagall Act
or for safety and soundness reasons are not reflected in the proposed
appendix.
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\31\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(7).
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For instance, bank holding companies providing securities brokerage
services under this authority are limited to buying and selling
securities solely as agent for the account of customers and not
conducting securities underwriting or dealing activities, those
providing private placement services under this authority cannot
purchase or repurchase for their own account the securities being
placed or hold in inventory unsold portions of issues of those
securities, and those acting as riskless principal under this authority
are subject to conditions with respect to bank-ineligible securities.
These conditions were intended to prevent a bank holding company from
using securities brokerage or riskless principal authority to engage in
activities that were impermissible under the Glass-Steagall Act.\32\
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\32\ 62 FR 9290, 9308.
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In order to act as a futures commission merchant, a bank holding
company must conduct the activity through a separately incorporated
subsidiary, the contract must be traded on an exchange, and the parent
bank holding company cannot guarantee that subsidiary's liabilities.
The proposed appendix does not reflect these conditions, as they were
imposed for safety and soundness reasons to limit the bank holding
company's exposure to contingent obligations under the loss sharing
rules of exchange clearinghouses in order to preserve the holding
company's ability to serve as a source of strength to its insured
depository institutions.\33\
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\33\ Id. at 9309.
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In order to provide agent transactional services to customers on
certain commodity derivatives transactions, the derivative must relate
to a commodity that is traded on an exchange (regardless of whether the
contract being traded is traded on an exchange). The proposed appendix
does not reflect this limitation because it appears to have been
imposed for safety and soundness reasons and does not describe the
underlying activity of providing transactional services on commodity
derivatives transactions. The Board requests comment on whether the
agency transactional services discussed above are included in the broad
authorization provided under section 4(k)(5) to engage in arranging,
effecting, or facilitating financial transactions for the account of
third parties and need not be separately reflected in the appendix.
Investment transactions as principal
Engaging in investment transactions as principal, including
underwriting and dealing in government obligations and money market
instruments and investing and trading as principal in foreign exchange
and derivatives, and buying and selling bullion, are activities that
were determined to be closely
[[Page 21499]]
related to banking by the Board.\34\ Under the Board's regulations,
bank holding companies engaged in underwriting and dealing in
government obligations and money market instruments are subject to the
same conditions imposed on member banks engaged in these activities.
The proposed appendix does not reflect these conditions because they
were intended to prevent circumvention of the Glass-Steagall Act. In
addition, under the Board's regulations, bank holding companies engaged
in derivatives transactions are subject to certain conditions,
including that the derivative contract itself cannot be a bank-
ineligible security and either that the asset underlying the contract
be a bank permissible asset or that the contract contain protections
against physical settlement. The proposed appendix does not include
these conditions imposed on derivatives activities because these
conditions appear to have been imposed to prevent circumvention of the
Glass-Steagall Act's limitations on underwriting and dealing activities
and for safety and soundness reasons.
---------------------------------------------------------------------------
\34\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(8).
---------------------------------------------------------------------------
The Board requests comment on whether the activity of underwriting
and dealing in government obligations and money market instruments is
included in the broad authorization provided under section 4(k)(4)(E)
to engage in underwriting, dealing in, or making a market in securities
and need not be separately reflected in the appendix.
Management Consulting and Counseling Activities
Providing management consulting services on any matter to
unaffiliated depository institutions and on any financial, economic,
accounting, or audit matter to any other company was determined to be
closely related to banking by the Board.\35\ Under the Board's
regulations, bank holding companies engaged in management consulting
activities may not own more than 5 percent of the client institution or
have a management interlock. The proposed appendix does not reflect
this condition because it was intended to ensure that a bank holding
company does not exercise control over a client company through a
management consulting contract and to prevent conflicts of
interest.\36\ The Board requests comment on whether the activity of
management consulting is subsumed by the broader authority to engage in
management consulting services that was determined to be usual in
connection with banking abroad and need not be separately reflected in
the appendix.
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\35\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(9)(i).
\36\ 62 FR 9290, 9312.
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Providing employee benefits consulting services was determined to
be closely related to banking by the Board \37\ and is included in the
proposed appendix. Providing career counseling services also was
determined to be closely related to banking by the Board,\38\ subject
to the conditions that the services are provided to a financial
organization, to individuals who are seeking employment at a financial
institution, or to individuals currently employed in or who are seeking
positions in the finance, accounting, and audit departments of any
company. These conditions appear to be essential to this activity's
being considered financial and thus are included in the definition of
the financial activity in the proposed appendix.
---------------------------------------------------------------------------
\37\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(9)(ii).
\38\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(9)(iii).
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Courier Services and Printing and Selling MICR-Encoded Items
Providing courier services for certain instruments and audit and
accounting media was determined to be closely related to banking by the
Board.\39\ Printing and selling MICR-encoded items was determined to be
closely related to banking by the Board.\40\ These activities are
included in the proposed appendix.
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\39\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(10)(i).
\40\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(10)(ii).
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Insurance Agency and Underwriting
Activities related to the provision of credit insurance and
insurance in small towns were determined to be closely related to
banking by the Board.\41\ The Board requests comment on whether these
insurance activities are included in the broad authorization of
insurance activities provided under section 4(k)(4)(B) of the BHC Act
and thus need not be separately reflected in the appendix.
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\41\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(11).
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Community Development Activities
Making debt and equity investments in corporations or projects that
are designed primarily to promote community welfare, and providing
advisory and related services for such programs, was determined to be
closely related to banking by the Board.\42\ This activity is included
in the proposed appendix.
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\42\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(12).
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Money Orders, Savings Bonds, and Traveller's Checks
The issuance and sale of money orders and traveller's checks, and
the issuance of savings bonds, was determined to be closely related to
banking by the Board and is included in the proposed appendix.\43\
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\43\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(13).
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Data Processing
Providing data processing services and related activities with
respect to financial, banking, or economic data was determined to be
closely related to banking by the Board.\44\ Under the Board's
regulations, a bank holding company's data processing activities must
comply with the condition that the hardware provided in connection with
these services is offered only in conjunction with software related to
the processing, storage, and transmission of financial, banking, or
economic data, and where the general purpose hardware does not
constitute more than 30 percent of the cost of any packaged offering.
The proposed appendix does not include these conditions because they do
not define the activity of financial data processing.
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\44\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(14).
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Mutual Fund Advisory Services
Providing administrative and other services to mutual funds was
determined be closely related to banking by the Board \45\ and is
included in the proposed appendix.
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\45\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(i).
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Owning Shares of a Securities Exchange
Owning shares of a securities exchange was determined to be closely
related to banking by the Board \46\ and is included in the proposed
appendix.
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\46\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(ii).
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Certification Services
Acting as a certification authority for digital signatures and
authenticating the identity of persons conducting financial and
nonfinancial transactions was determined to be closely related to
banking by the Board \47\ and is included in the proposed appendix.
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\47\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(iii).
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Providing Employment Histories
Providing employment histories to third parties for use in making
credit decisions and to depository institutions and their affiliates
for use in the ordinary course of business was
[[Page 21500]]
determined to be closely related to banking by the Board \48\ and is
included in the proposed appendix.
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\48\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(iv).
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Check-Cashing and Wire-Transmission Services
Providing check-cashing and wire-transmission services was
determined to be closely related to banking by the Board \49\ and is
included in the proposed appendix.
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\49\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(v).
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Postage, Vehicle Registration, Public Transportation Services
Providing notary-public services, selling postage stamps and
postage-paid envelopes, providing vehicle registration services, and
selling public-transportation tickets and tokens in connection with
offering banking services was determined to be closely related to
banking by the Board \50\ and is included in the proposed appendix.
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\50\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(vi).
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Real Estate Title Abstracting
Engaging in real estate title abstracting was determined to be
closely related to banking by the Board \51\ and is included in the
proposed appendix.
---------------------------------------------------------------------------
\51\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(vii).
---------------------------------------------------------------------------
Management Consulting Services
Providing management consulting services was determined to be usual
in connection with the transaction of banking or other financial
operations abroad.\52\ Under the Board's regulations, bank holding
companies are prohibited from controlling the person to which the
services are provided. The proposed appendix does not reflect this
condition because it appears to have been intended to ensure that a
bank holding company does not exercise control over a client company
through a management consulting contract and to prevent conflicts of
interest.
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\52\ 12 U.S.C. 1843(k)(4)(G); 12 CFR 225.86(b)(1).
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Travel Agency
Operating a travel agency in connection with financial services was
determined to be usual in connection with the transaction of banking or
other financial operations abroad \53\ and is included in the proposed
appendix.
---------------------------------------------------------------------------
\53\ 12 U.S.C. 1843(k)(4)(G); 12 CFR 225.86(b)(2).
---------------------------------------------------------------------------
Mutual Fund Activities
Organizing, sponsoring, and managing a mutual fund was determined
to be usual in connection with the transaction of banking or other
financial operations abroad.\54\ Under the Board's regulations, bank
holding companies are prohibited from exerting managerial control over
the companies in which the fund invests and must reduce their ownership
to less than 25 percent of the equity of the fund within one year of
sponsoring the fund. The proposed appendix does not reflect these
conditions because they were imposed to prevent circumvention of the
investment restrictions in the BHC Act.
---------------------------------------------------------------------------
\54\ 12 U.S.C. 1843(k)(4)(G); 12 CFR 225.86(b)(3).
---------------------------------------------------------------------------
Merchant Banking
Section 4(k)(4)(H) of the BHC Act authorizes financial holding
companies to acquire ``shares, assets or ownership interests,''
including debt or equity securities, in a company engaged in any
activity not authorized under section 4 ``as part of a bona fide
underwriting or merchant or investment banking activity, including
investment activities engaged in for the purpose of appreciation and
ultimate resale or disposition of the investment,'' subject to the
following conditions: (i) The shares may not be acquired or held by a
depository institution; (ii) the shares must be acquired and held by a
securities affiliate or an affiliate thereof, or in the case of a
financial holding company that has an insurance company affiliate, the
shares must be acquired and held by an affiliate that provides
investment advice to an insurance company and is registered pursuant to
the Investment Advisers Act of 1940, or an affiliate thereof, as part
of a bona fide underwriting or merchant or investment banking activity,
including investment activities engaged in for the purpose of
appreciation and ultimate resale or disposition of the investment;
(iii) the shares must be held for a period of time to enable the sale
or disposition on a reasonable basis consistent with the financial
viability of the company's underwriting, merchant, or investment
banking activities; and (iv) during the period the shares are held, the
bank holding company may not routinely manage or operate the company
except as may be necessary to obtain a reasonable return on investment
upon resale or disposition.\55\
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\55\ 12 U.S.C. 1843(k)(4)(H).
---------------------------------------------------------------------------
The proposed appendix reflects those conditions that appear to
define the essential nature of the activities of underwriting,
merchant, or investment banking activities, and omits those that do
not.
First, the condition requiring that the shares be held for a period
of time to enable their sale or disposition on a reasonable basis
consistent with the financial viability of the company's underwriting,
merchant, or investment banking activities appears to be an essential
element of a bona fide underwriting, merchant, or investment banking
activity. Thus, this condition is reflected in the proposed appendix.
Companies engaging in bona fide underwriting, merchant, or investment
banking activities do not invest in investee companies for the purpose
of engaging in the activity in which the investee company is engaged,
but instead invest with the intent to sell such instruments at some
later point in time at which a profit is expected to be realized. The
length of time that the shares are held will vary by investment.\56\
---------------------------------------------------------------------------
\56\ The Board and the Secretary of the Treasury jointly
implemented regulations interpreting the holding period for merchant
banking investments by financial holding companies. This regulatory
interpretation is separate from the activity of merchant banking set
forth in section 4(k)(4)(H) of the BHC Act and would not apply for
determining whether an activity is a financial activity for purposes
of Title I. See 12 CFR 225.172 and 12 CFR 1500.3, respectively.
---------------------------------------------------------------------------
For example, certain companies, such as private equity firms, that
are engaged in bona fide underwriting, merchant, or investment banking
activities typically invest in firms that the private equity firm
believes will increase in value over time and can be resold at a
profit. The holding period for an investment will vary based on the
investee company, and in some cases the private equity firm may hold
the shares for several years. A firm such as a hedge fund or a mutual
fund invests in firms with the expectation to sell those instruments at
a future date in order to realize profits consistent with its
particular investment strategy. The holding period for an investment by
a hedge fund or a mutual fund will depend on the length of time
necessary to recognize gains consistent with the fund's investment
strategy.
The prohibition on routinely managing an investee company in which
it has purchased shares, other than for purposes of recognizing a
reasonable return, appears to be an essential element of bona fide
underwriting, merchant, or investment banking activities. Thus, this
prohibition is reflected in the proposed appendix. As previously
discussed, companies engaging in these activities purchase shares of
investee companies to recognize an ultimate profit, rather than to
engage in the underlying activity in which the investee company engages
as its primary business activity. Routinely managing the companies,
other than for the goal of recognizing a reasonable return, would be
inconsistent with the underlying nature of the activities. Therefore,
in order for an activity to qualify as a bona fide
[[Page 21501]]
underwriting, merchant, or investment banking activity, a nonbank
company must comply with this restriction.\57\
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\57\ The Board and the Secretary of the Treasury jointly
implemented regulations interpreting the limitation on routine
management and operation for merchant banking investments by
financial holding companies. This regulatory interpretation is
separate from the activity of merchant banking set forth in section
4(k)(4)(H) of the BHC Act and would not apply for determining
whether an activity is a financial activity for purposes of Title I.
See 12 CFR 225.171 and 12 CFR 1500.2 et seq., respectively.
---------------------------------------------------------------------------
By contrast, the condition requiring that shares acquired as part
of a bona fide underwriting or merchant or investment banking activity
not be acquired or held by a depository institution is not an essential
element of such activities, and thus is not reflected in the proposed
appendix. This restriction was imposed because banks are restricted
from investing in certain types of companies by statute and
regulation.\58\ Similarly, the condition in section 4(k) requiring a
financial holding company engaging in underwriting or merchant or
investment banking activities to either have (i) a securities
affiliate, or (ii) in the case of a financial holding company that has
an insurance company affiliate, an affiliate that provides investment
advice to an insurance company and is registered pursuant to the
Investment Advisers Act of 1940, does not appear to be an essential
element of these activities because the condition does not require that
the activity be conducted through the securities affiliate or
investment adviser affiliate of the financial holding company. The
condition was designed to ensure that only those financial holding
companies with experience engaging in underwriting, merchant, or
investment banking activities conducted such activities. The Board
proposes to define the activities of underwriting, merchant, and
investment banking to include only the conditions that appear to be
essential elements of the activities themselves, as discussed
above.\59\
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\58\ See, e.g., 12 U.S.C. 24, (Seventh); 12 U.S.C. 24,
(Eleventh); 12 CFR 1.
\59\ Similarly, the Council has indicated its belief that
nonbank companies such as hedge funds, private equity firms, and
mutual funds will be eligible for designation. The Council noted in
its second notice of proposed rulemaking that it will consider
whether to establish an additional set of metrics or thresholds
tailored to evaluate hedge funds and private equity firms and their
advisers for potential designation under section 113. See 76 FR
64264, 64269 (October 18, 2011).
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In addition, the proposed appendix does not reflect the provision
of section 4(k)(4)(H) that the investment be in company engaged in any
activity not authorized under section 4 of the BHC Act because this
provision does not affect the scope of activities that are financial
activities for purposes of Title I. An investment in a company solely
engaged in activities permissible under section 4 would otherwise be
treated as a financial activity.
Section 4(k)(4)(I) of the BHC Act similarly authorizes financial
holding companies to acquire ``shares, assets or ownership interests,''
including debt or equity securities, of a company or other entity
engaged in any activity not authorized by section 4(k) if (i) the
shares, assets, or ownership interests are not acquired or held by a
depository institution or a subsidiary of a depository institution;
(ii) such shares, assets, or ownership interests are acquired and held
by an insurance company that is predominantly engaged in underwriting
life, accident and health, or property and casualty insurance (other
than credit-related insurance) or providing and issuing annuities;
(iii) such shares, assets, or ownership interests represent an
investment made in the ordinary course of business of such insurance
company in accordance with relevant State law governing such
investments; and (iv) during the period such shares, assets, or
ownership interests are held, the bank holding company does not
routinely manage or operate such company except as may be necessary or
required to obtain a reasonable return on investment.
The condition requiring that shares, assets, or ownership interests
not be acquired or held by a depository institution does not appear to
be an essential element of the investment activities authorized by
section 4(k)(4)(I), and thus is not reflected in the proposed appendix.
This restriction was imposed because banks are restricted from
investing in certain types of companies by statute and regulation.\60\
Each of the other conditions imposed on the conduct of the activity by
a bank holding company appears to be an essential element of the
activity of investing in connection with engaging in insurance
activities. The Board proposes to define the investment activities
authorized by section 4(k)(4)(I) to include only the conditions that
appear to be essential elements of these activities, as discussed
above.
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\60\ See, e.g., 12 U.S.C. 24, (Seventh); 12 U.S.C. 24,
(Eleventh), 12 CFR 1.
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Lending, Safeguarding, Exchanging, and Investing for Others
With Respect to Financial Assets Other Than Money and Securities
The GLB Act authorizes the activities of lending, exchanging,
transferring, investing for others, or safeguarding financial assets
other than money or securities; providing any device or other
instrumentality for transferring money or other financial assets; and
arranging, effecting, or facilitating financial transactions for the
account of third parties for financial holding companies.\61\ The
statute requires the Board to define these activities as financial in
nature and the extent to which such activities are financial in nature
or incidental thereto. The Board and the Secretary of the Treasury
issued a joint interim rule authorizing such activities as permissible
for financial holding companies.\62\ These activities are included in
the proposed appendix.
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\61\ 12 U.S.C. 1843(k)(5).
\62\ See 66 FR 257 (January 3, 2001).
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Implications for Bank Holding Companies
The Board is proposing to define the activities listed in the
proposed appendix as financial solely for purposes of Title I of the
Dodd-Frank Act. The proposed appendix is not intended to amend section
4(k) of the BHC Act for purposes of defining those activities that are
permissible for financial holding companies or the manner in which bank
holding companies and financial holding companies are permitted to
conduct those activities. The Board notes that it does not have the
authority to unilaterally expand the list of permissible financial
activities under section 4(k) as it applies to financial holding
companies without first consulting with the Secretary of the
Treasury.\63\ In making its determination, the Board also must take
into account four factors: (1) The purposes of the GLB Act and BHC Act;
(2) the changes or reasonably expected changes in the marketplace in
which financial holding companies compete; (3) the changes or
reasonably expected changes in technology for delivering financial
services; and (4) whether the proposed activity is necessary or
appropriate to allow a financial holding company to compete effectively
with companies seeking to provide financial services in the United
States, efficiently deliver financial information and services through
technological means, and offer customers any available or emerging
technological means for using financial services or for the document
imaging of data.\64\ Additionally, Congress clearly did not intend to
expand the list of permissible financial activities for bank holding
companies in enacting the Dodd-Frank Act. In fact, Congress
[[Page 21502]]
demonstrated a clear intent to restrict the conduct of financial
activities by bank holding companies and other companies affiliated
with depository institutions, as evidenced by the new restrictions
imposed by section 619 of the Act (the ``Volcker Rule'') on certain
financial activities, such as securities underwriting and dealing,
conducted by bank holding companies and other depository institution
affiliates.\65\
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\63\ 12 U.S.C. 1843(k)(2).
\64\ 12 U.S.C. 1843(k)(3).
\65\ See 12 U.S.C. 1851.
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IV. Administrative Law Matters
A. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
chapter 3506; 5 CFR 1320 Appendix A.1), the Board reviewed this NPR
under the authority delegated to the Board by the Office of Management
and Budget (``OMB'').
As noted in the Supplementary Information, the Board published the
February 2011 NPR to amend the sections of Regulation Y that establish
the criteria for determining whether a company is ``predominantly
engaged in financial activities'' and define the terms ``significant
nonbank financial company'' and ``significant bank holding company''
for purposes of Title I of the Dodd-Frank Act. The comment period for
the February 2011 NPR closed on March 30, 2011; the Board received 23
comment letters. Based on comments received, the Board believes that
clarification is needed regarding the scope of activities that would be
considered to be financial activities under that proposal.
Although this NPR supplements the February 2011 NPR by amending
specific portions of the regulation for clarity, it does not affect the
collections of information that are proposed by the February 2011 NPR
that are found in 12 CFR 225.301(f). This NPR proposes no new
collections nor makes any revisions to the collections that were
proposed under the February 2011 NPR.
The Board may not conduct or sponsor, and an organization is not
required to respond to, this information collection unless it displays
a currently valid OMB control number. The OMB control number will be
assigned once the rulemaking has been finalized.
B. Regulatory Flexibility Act
In accordance with Section 3(a) of the Regulatory Flexibility Act,
5 U.S.C. 601 et seq. (``RFA''), the Board is publishing an initial
regulatory flexibility analysis with this rulemaking. The RFA requires
an agency either to provide an initial regulatory flexibility analysis
with a proposed rule for which a general notice of proposed rulemaking
is required or to certify that the proposed rule will not have a
significant economic impact on a substantial number of small entities.
As noted in the Supplementary Information, the Board published the
February 2011 NPR to amend the sections of Regulation Y that establish
the criteria for determining whether a company is ``predominantly
engaged in financial activities'' and define the terms ``significant
nonbank financial company'' and ``significant bank holding company''
for purposes of Title I of the Dodd-Frank Act. The comment period for
the February 2011 NPR closed on March 30, 2011; the Board received 23
comment letters. Based on comments received, the Board believes that
clarification is needed regarding the scope of activities that would be
considered to be financial activities under that proposal. Although
this NPR supplements the February 2011 NPR by amending specific
portions of that proposal for clarity, it does not affect the Board's
initial regulatory flexibility analysis with respect to the February
2011 NPR. A final regulatory flexibility analysis will be conducted
after consideration of comments received during the public comment
period.
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Banks, banking, Holding
companies, Reporting and recordkeeping requirements, Securities.
Authority and Issuance
For the reasons stated in the preamble, the Board proposes to
further amend Regulation Y, 12 CFR part 225, as proposed to be amended
at 76 FR 7731 (February 11, 2011), as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for part 225 is revised to read as
follows:
Authority: 12 U.S.C. 1844(b), 3106 and 3108, 1817(j)(13),
1818(b)), 1831i, 1972, Pub. L. 98-181, title IX, and 5311(a)(6) and
(b).
2. In Sec. 225.301 which was proposed to be added on February 11,
2011 at 76 FR 7731, is further amended by revising paragraph (d)(1) as
follows:
Sec. 225.301 Nonbank companies ``predominantly engaged'' in financial
activities.
* * * * *
(d) Activities that are financial in nature.
(1) In general. Any activity described in section 4(k) of the BHC
Act, regardless of conformance with the conditions applicable to
financial holding companies conducting such activity that do not define
the financial activity, shall be considered financial in nature for
purposes of this section. These activities as of April 2, 2012 are set
forth in the appendix. Nothing in this part limits the authority of the
Board under any other provision of law or regulation to modify the
activities it has determined to be financial in nature or to provide
interpretations of section 4(k) of the BHC Act.
* * * * *
3. Add Appendix A to Subpart N to read as follows:
Appendix A to Subpart N--Financial Activities for Purposes of Title I
(1) Lending, exchanging, transferring, investing for others, or
safeguarding money and securities.
(2) Insuring, guaranteeing, or indemnifying against loss, harm,
damage, illness, disability, or death, or providing and issuing
annuities, and acting as principal, agent, or broker for purposes of
the foregoing, in any state.
(3) Providing financial, investment, or economic advisory
services, including advising an investment company (as defined in
section 3 of the Investment Company Act of 1940).
(4) Issuing or selling instruments representing interests in
pools of assets.
(5) Underwriting, dealing in, or making a market in securities.
(6) Extending credit and servicing loans. Making, acquiring,
brokering, or servicing loans or other extensions of credit
(including factoring, issuing letters of credit and accepting
drafts) for the company's account or for the account of others.
(7) Activities related to extending credit. Any activity usual
in connection with making, acquiring, brokering or servicing loans
or other extensions of credit, including the following activities:
(i) Real estate and personal property appraising. Performing
appraisals of real estate and tangible and intangible personal
property, including securities.
(ii) Arranging commercial real estate equity financing. Acting
as intermediary for the financing of commercial or industrial
income-producing real estate by arranging for the transfer of the
title, control, and risk of such a real estate project to one or
more investors.
(iii) Check-guaranty services. Authorizing a subscribing
merchant to accept personal checks tendered by the merchant's
customers in payment for goods and services, and purchasing from the
merchant validly authorized checks that are subsequently dishonored.
(iv) Collection agency services. Collecting overdue accounts
receivable, either retail or commercial.
(v) Credit bureau services. Maintaining information related to
the credit history of consumers and providing the information to a
credit grantor who is considering a
[[Page 21503]]
borrower's application for credit or who has extended credit to the
borrower.
(vi) Asset management, servicing, and collection activities.
Engaging under contract with a third party in asset management,
servicing, and collection \1\ of assets of a type that an insured
depository institution may originate and own.
---------------------------------------------------------------------------
\1\ Asset management services include acting as agent in the
liquidation or sale of loans and collateral for loans, including
real estate and other assets acquired through foreclosure or in
satisfaction of debts previously contracted.
---------------------------------------------------------------------------
(vii) Acquiring debt in default. Acquiring debt that is in
default at the time of acquisition.
(viii) Real estate settlement servicing. Providing real estate
settlement services.\2\
---------------------------------------------------------------------------
\2\ For purposes of this section, real estate settlement
services do not include providing title insurance as principal,
agent, or broker.
---------------------------------------------------------------------------
(8) Leasing personal or real property. Leasing personal or real
property or acting as agent, broker, or adviser in leasing such
property if:
(i) The lease is on a nonoperating basis; \3\
---------------------------------------------------------------------------
\3\ The requirement that the lease be on a nonoperating basis
means that the company may not, directly or indirectly, engage in
operating, servicing, maintaining, or repairing leased property
during the lease term. For purposes of the leasing of automobiles,
the requirement that the lease be on a nonoperating basis means that
the company may not, directly or indirectly: (1) Provide servicing,
repair, or maintenance of the leased vehicle during the lease term;
(2) purchase parts and accessories in bulk or for an individual
vehicle after the lessee has taken delivery of the vehicle; (3)
provide the loan of an automobile during servicing of the leased
vehicle; (4) purchase insurance for the lessee; or (5) provide for
the renewal of the vehicle's license merely as a service to the
lessee where the lessee could renew the license without
authorization from the lessor. The company may arrange for a third
party to provide these services or products.
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(ii) The initial term of the lease is at least 90 days; and
(iii) In the case of leases involving real property:
(A) At the inception of the initial lease, the effect of the
transaction will yield a return that will compensate the lessor for
not less than the lessor's full investment in the property plus the
estimated total cost of financing the property over the term of the
lease from rental payments, estimated tax benefits, and the
estimated residual value of the property at the expiration of the
initial lease; and
(B) The estimated residual value of property for purposes of
paragraph (b)(3)(iii)(A) of this section shall not exceed 25 percent
of the acquisition cost of the property to the lessor.
(9) Operating nonbank depository institutions.
(i) Industrial banking. Owning, controlling, or operating an
industrial bank, Morris Plan bank, or industrial loan company that
is not a bank for purposes of the BHC Act.
(ii) Operating savings associations. Owning, controlling, or
operating a savings association.
(10) Trust company functions. Performing functions or activities
that may be performed by a trust company (including activities of a
fiduciary, agency, or custodial nature), in the manner authorized by
federal or state law that is not a bank for purposes of section 2(c)
of the Bank Holding Company Act.
(11) Financial and investment advisory activities. Acting as
investment or financial advisor to any person, including (without,
in any way, limiting the foregoing):
(i) Serving as investment adviser (as defined in section
2(a)(20) of the Investment Company Act of 1940, 15 U.S.C. 80a-
2(a)(20)), to an investment company registered under that act,
including sponsoring, organizing, and managing a closed-end
investment company;
(ii) Furnishing general economic information and advice, general
economic statistical forecasting services, and industry studies;
(iii) Providing advice in connection with mergers, acquisitions,
divestitures, investments, joint ventures, leveraged buyouts,
recapitalizations, capital structurings, financing transactions and
similar transactions, and conducting financial feasibility studies;
\4\
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\4\ Feasibility studies do not include assisting management with
the planning or marketing for a given project or providing general
operational or management advice.
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(iv) Providing information, statistical forecasting, and advice
with respect to any transaction in foreign exchange, swaps, and
similar transactions, commodities, and any forward contract, option,
future, option on a future, and similar instruments;
(v) Providing educational courses, and instructional materials
to consumers on individual financial management matters; and
(vi) Providing tax-planning and tax-preparation services to any
person.
(12) Agency transactional services for customer investments.
(i) Securities brokerage. Providing securities brokerage
services (including securities clearing and/or securities execution
services on an exchange), whether alone or in combination with
investment advisory services, and incidental activities (including
related securities credit activities and custodial services).
(ii) Riskless principal transactions. Buying and selling in the
secondary market all types of securities on the order of customers
as a ``riskless principal'' to the extent of engaging in a
transaction in which the company, after receiving an order to buy
(or sell) a security from a customer, purchases (or sells) the
security for its own account to offset a contemporaneous sale to (or
purchase from) the customer.
(iii) Private placement services. Acting as agent for the
private placement of securities in accordance with the requirements
of the Securities Act of 1933 (1933 Act) and the rules of the
Securities and Exchange Commission.
(iv) Futures commission merchant. Acting as a futures commission
merchant (FCM) for unaffiliated persons in the execution, clearance,
or execution and clearance of any futures contract and option on a
futures contract.
(v) Other transactional services. Providing to customers as
agent transactional services with respect to swaps and similar
transactions, any transaction described in paragraph (b)(8) of this
section, any transaction that is permissible for a state member
bank, and any other transaction involving a forward contract,
option, futures, option on a futures or similar contract (whether
traded on an exchange or not).
(13) Investment transactions as principal.
(i) Underwriting and dealing in government obligations and money
market instruments. Underwriting and dealing in obligations of the
United States, general obligations of states and their political
subdivisions, and other obligations that state member banks of the
Federal Reserve System may be authorized to underwrite and deal in
under 12 U.S.C. 24 and 335, including banker's acceptances and
certificates of deposit.
(ii) Investing and trading activities. Engaging as principal in:
(A) Foreign exchange;
(B) Forward contracts, options, futures, options on futures,
swaps, and similar contracts, whether traded on exchanges or not,
based on any rate, price, financial asset (including gold, silver,
platinum, palladium, copper, or any other metal), nonfinancial
asset, or group of assets.
(C) Forward contracts, options, futures, options on futures,
swaps, and similar contracts, whether traded on exchanges or not,
based on an index of a rate, a price, or the value of any financial
asset, nonfinancial asset, or group of assets.
(ii) Buying and selling bullion, and related activities. Buying,
selling and storing bars, rounds, bullion, and coins of gold,
silver, platinum, palladium, copper, and any other metal for the
company's own account and the account of others, and providing
incidental services such as arranging for storage, safe custody,
assaying, and shipment.
(14) Management consulting and counseling activities
(i) Management consulting. (A) Providing management consulting
advice: \5\
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\5\ In performing this activity, companies are not authorized to
perform tasks or operations or provide services to client
institutions either on a daily or continuing basis, except as
necessary to instruct the client institution on how to perform such
services for itself. See also the Board's interpretation of bank
management consulting advice (12 CFR 225.131).
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(1) On any matter to unaffiliated depository institutions,
including commercial banks, savings and loan associations, savings
banks, credit unions, industrial banks, Morris Plan banks,
cooperative banks, industrial loan companies, trust companies, and
branches or agencies of foreign banks;
(2) On any financial, economic, accounting, or audit matter to
any other company.
(ii) Employee benefits consulting services. Providing consulting
services to employee benefit, compensation and insurance plans,
including designing plans, assisting in the implementation of plans,
providing administrative services to plans, and developing employee
communication programs for plans.
(iii) Career counseling services. Providing career counseling
services to:
[[Page 21504]]
(A) A financial organization \6\ and individuals currently
employed by, or recently displaced from, a financial organization;
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\6\ Financial organization refers to insured depository
institution holding companies and their subsidiaries, other than
nonbanking affiliates of diversified savings and loan holding
companies that engage in activities not permissible under section
4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1842(c)(8)).
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(B) Individuals who are seeking employment at a financial
organization; and
(C) Individuals who are currently employed in or who seek
positions in the finance, accounting, and audit departments of any
company.
(15) Support services.
(i) Courier services. Providing courier services for:
(A) Checks, commercial papers, documents, and written
instruments (excluding currency or bearer-type negotiable
instruments) that are exchanged among banks and financial
institutions; and
(B) Audit and accounting media of a banking or financial nature
and other business records and documents used in processing such
media.\7\
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\7\ See also the Board's interpretation on courier activities
(12 CFR 225.129), which sets forth conditions for company entry into
the activity.
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(ii) Printing and selling MICR-encoded items. Printing and
selling checks and related documents, including corporate image
checks, cash tickets, voucher checks, deposit slips, savings
withdrawal packages, and other forms that require Magnetic Ink
Character Recognition (MICR) encoding.
(16) Insurance agency and underwriting.
(i) Credit insurance. Acting as principal, agent, or broker for
insurance (including home mortgage redemption insurance) that is:
(A) Directly related to an extension of credit by the company or
any of its subsidiaries; and
(B) Limited to ensuring the repayment of the outstanding balance
due on the extension of credit \8\ in the event of the death,
disability, or involuntary unemployment of the debtor.
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\8\ Extension of credit includes direct loans to borrowers,
loans purchased from other lenders, and leases of real or personal
property so long as the leases are nonoperating and full-payout
leases that meet the requirements of paragraph (b)(3) of this
section.
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(ii) Finance company subsidiary. Acting as agent or broker for
insurance directly related to an extension of credit by a finance
company \9\ that is a subsidiary of a company, if:
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\9\ Finance company includes all non-deposit-taking financial
institutions that engage in a significant degree of consumer lending
(excluding lending secured by first mortgages) and all financial
institutions specifically defined by individual states as finance
companies and that engage in a significant degree of consumer
lending.
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(A) The insurance is limited to ensuring repayment of the
outstanding balance on such extension of credit in the event of loss
or damage to any property used as collateral for the extension of
credit; and
(B) The extension of credit is not more than $10,000, or $25,000
if it is to finance the purchase of a residential manufactured home
\10\ and the credit is secured by the home; and
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\10\ These limitations increase at the end of each calendar
year, beginning with 1982, by the percentage increase in the
Consumer Price Index for Urban Wage Earners and Clerical Workers
published by the Bureau of Labor Statistics.
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(C) The applicant commits to notify borrowers in writing that:
(1) They are not required to purchase such insurance from the
applicant;
(2) Such insurance does not insure any interest of the borrower
in the collateral; and
(3) The applicant will accept more comprehensive property
insurance in place of such single-interest insurance.
(iii) Insurance in small towns. Engaging in any insurance agency
activity in a place where the company or a subsidiary has a lending
office and that:
(A) Has a population not exceeding 5,000 (as shown in the
preceding decennial census); or
(B) Has inadequate insurance agency facilities, as determined by
the Board, after notice and opportunity for hearing.
(iv) Insurance-agency activities conducted on May 1, 1982.
Engaging in any specific insurance-agency activity \11\ if the
company, or subsidiary conducting the specific activity, conducted
such activity on May 1, 1982, or received Board approval to conduct
such activity on or before May 1, 1982.\12\ A company or subsidiary
engaging in a specific insurance agency activity under this clause
may:
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\11\ Nothing contained in this provision shall preclude a
company subsidiary that is authorized to engage in a specific
insurance-agency activity under this clause from continuing to
engage in the particular activity after merger with an affiliate, if
the merger is for legitimate business purposes and prior notice has
been provided to the Board.
\12\ For the purposes of this paragraph, activities engaged in
on May 1, 1982, include activities carried on subsequently as the
result of an application to engage in such activities pending before
the Board on May 1, 1982, and approved subsequently by the Board or
as the result of the acquisition by such company pursuant to a
binding written contract entered into on or before May 1, 1982, of
another company engaged in such activities at the time of the
acquisition.
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(A) Engage in such specific insurance agency activity only at
locations:
(1) In the state in which the company has its principal place of
business (as defined in 12 U.S.C. 1842(d));
(2) In any state or states immediately adjacent to such state;
and
(3) In any state in which the specific insurance-agency activity
was conducted (or was approved to be conducted) by such company or
subsidiary thereof or by any other subsidiary of such company on May
1, 1982; and
(B) Provide other insurance coverages that may become available
after May 1, 1982, so long as those coverages insure against the
types of risks as (or are otherwise functionally equivalent to)
coverages sold or approved to be sold on May 1, 1982, by the company
or subsidiary.
(v) Supervision of retail insurance agents. Supervising on
behalf of insurance underwriters the activities of retail insurance
agents who sell:
(A) Fidelity insurance and property and casualty insurance on
the real and personal property used in the operations of the company
or its subsidiaries; and
(B) Group insurance that protects the employees of the company
or its subsidiaries.
(vi) Small companies. Engaging in any insurance-agency activity
if the company has total consolidated assets of $50 million or less.
A company performing insurance-agency activities under this
paragraph may not engage in the sale of life insurance or annuities
except as provided in paragraphs (b)(11)(i) and (iii) of this
appendix, and it may not continue to engage in insurance-agency
activities pursuant to this provision more than 90 days after the
end of the quarterly reporting period in which total assets of the
holding company and its subsidiaries exceed $50 million.
(vii) Insurance-agency activities conducted before 1971.
Engaging in any insurance-agency activity performed at any location
in the United States directly or indirectly by a company that was
engaged in insurance-agency activities prior to January 1, 1971, as
a consequence of approval by the Board prior to January 1, 1971.
(17) Community development activities.
(i) Financing and investment activities. Making equity and debt
investments in corporations or projects designed primarily to
promote community welfare, such as the economic rehabilitation and
development of low-income areas by providing housing, services, or
jobs for residents.
(ii) Advisory activities. Providing advisory and related
services for programs designed primarily to promote community
welfare.
(18) Money orders, savings bonds, and traveler's checks. The
issuance and sale at retail of money orders and similar consumer-
type payment instruments; the sale of U.S. savings bonds; and the
issuance and sale of traveler's checks.
(19) Data processing. Providing data processing, data storage
and data transmission services, facilities (including data
processing, data storage and data transmission hardware, software,
documentation, or operating personnel), databases, advice, and
access to such services, facilities, or databases by any
technological means, if the data to be processed, stored or
furnished are financial, banking or economic.
(20) Providing administrative and other services to mutual
funds.
(21) Owning shares of a securities exchange.
(22) Acting as a certification authority for digital signatures
and authenticating the identity of persons conducting financial and
nonfinancial transactions.
(23) Providing employment histories to third parties for use in
making credit decisions and to depository institutions and their
affiliates for use in the ordinary course of business.
(24) Check cashing and wire transmission services.
(25) In connection with offering banking services, providing
notary public services, selling postage stamps and postage-paid
envelopes, providing vehicle registration services, and selling
public transportation tickets and tokens.
[[Page 21505]]
(26) Real estate title abstracting.
(27) Providing management consulting services, including to any
person with respect to nonfinancial matters, so long as the
management consulting services are advisory.
(28) Operating a travel agency in connection with financial
services.
(29) Organizing, sponsoring, and managing a mutual fund.
(30) Directly, or indirectly acquiring or controlling, whether
as principal, on behalf of 1 or more entities, or otherwise, shares,
assets, or ownership interests (including debt or equity securities,
partnership interests, trust certificates, or other instruments
representing ownership) of a company or other entity, whether or not
constituting control of such company or entity, if:
(i) Such shares, assets, or ownership interests are acquired and
held as part of a bona fide underwriting or merchant or investment
banking activity, including investment activities engaged in for the
purpose of appreciation and ultimate resale or disposition of the
investment;
(ii) Such shares, assets, or ownership interests are held for a
period of time to enable the sale or disposition thereof on a
reasonable basis consistent with the financial viability of the
activities described in paragraph (30)(i) of this appendix; and
(iii) During the period such shares, assets, or ownership
interests are held, the company does not routinely manage or operate
such company or entity except as may be necessary or required to
obtain a reasonable return on investment upon resale or disposition.
(31) Directly or indirectly acquiring or controlling, whether as
principal, on behalf of 1 or more entities, or otherwise, shares,
assets, or ownership interests (including debt or equity securities,
partnership interests, trust certificates or other instruments
representing ownership) of a company or other entity, whether or not
constituting control of such company or entity if--
(i) Such shares, assets, or ownership interests are acquired and
held by an insurance company that is predominantly engaged in
underwriting life, accident and health, or property and casualty
insurance (other than credit-related insurance) or providing and
issuing annuities;
(ii) Such shares, assets, or ownership interests represent an
investment made in the ordinary course of business of such insurance
company in accordance with relevant State law governing such
investments; and
(iii) During the period such shares, assets, or ownership
interests are held, the company does not routinely manage or operate
such company except as may be necessary or required to obtain a
reasonable return on investment.
(32) Lending, exchanging, transferring, investing for others, or
safeguarding financial assets other than money or securities.
(33) Providing any device or other instrumentality for
transferring money or other financial assets.
(34) Arranging, effecting, or facilitating financial
transactions for the account of third parties.
By order of the Board of Governors of the Federal Reserve
System, April 2, 2012.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 2012-8515 Filed 4-9-12; 8:45 am]
BILLING CODE 6210-01-P