[Federal Register Volume 78, Number 66 (Friday, April 5, 2013)]
[Rules and Regulations]
[Pages 20756-20781]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-07688]
[[Page 20755]]
Vol. 78
Friday,
No. 66
April 5, 2013
Part III
Federal Reserve System
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12 CFR Part 242
Definitions of ``Predominantly Engaged In Financial Activities'' and
``Significant'' Nonbank Financial Company and Bank Holding Company;
Final Rule
Federal Register / Vol. 78 , No. 66 / Friday, April 5, 2013 / Rules
and Regulations
[[Page 20756]]
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FEDERAL RESERVE SYSTEM
12 CFR Part 242
[Regulation PP; Docket No. R-1405]
RIN 7100-AD64
Definitions of ``Predominantly Engaged In Financial Activities''
and ``Significant'' Nonbank Financial Company and Bank Holding Company
AGENCY: Board of Governors of the Federal Reserve System (``Board'').
ACTION: Final rule.
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SUMMARY: The Board is adopting this final rule to establish, for
purposes of Title I of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'' or ``Act''), the requirements
for determining if a company is ``predominantly engaged in financial
activities''; and definitions of the terms ``significant nonbank
financial company'' and ``significant bank holding company.'' These
terms are relevant to various provisions of Title I of the Dodd-Frank
Act, including section 113, which authorizes the Financial Stability
Oversight Council (``Council'') to designate a nonbank financial
company for supervision by the Board if the Council determines that the
nonbank financial company could pose a threat to the financial
stability of the United States.
DATES: The final rule will become effective on May 6, 2013.
FOR FURTHER INFORMATION CONTACT: Laurie Schaffer, Associate General
Counsel (202) 452-2272, Paige E. Pidano, Counsel, (202) 452-2803, or
Christine E. Graham, Senior Attorney, (202) 452-3005, Legal Division;
or Felton C. Booker, Senior Supervisory Financial Analyst, (202) 912-
4651, 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
The Dodd-Frank Act established the Council, which, among other
authorities and duties, may subject a ``nonbank financial company'' to
supervision by the Board and consolidated prudential standards if the
Council determines that material financial distress at the nonbank
financial 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.\1\ 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.'' \2\
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\1\ See section 113 of the Dodd-Frank Act; 12 U.S.C. 5323.
\2\ See section 102(a)(4)(D) of the Dodd-Frank Act; 12 U.S.C.
5311(a)(4)(D).
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The authority of the Council to subject a nonbank financial company
to consolidated prudential supervision by the Board is an important
component of recent legislative and regulatory changes designed to
address gaps and weaknesses in the financial regulatory system that
became evident during the financial crisis. These gaps often allowed
financial firms whose failure could pose substantial risks to the
financial stability of the United States to avoid prudential,
consolidated supervision.
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.\3\ A
``foreign nonbank financial company'' is defined as a company (other
than a 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.\4\
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\3\ 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.
\4\ 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 financial activities, as well as from the
ownership or control of an insured depository institution, represent 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 financial activities, as well as related to the
ownership or control of an insured depository institution, represent 85
percent or more of the consolidated assets of the company.\5\ The Dodd-
Frank Act requires the Board to establish the requirements for
determining if a company is ``predominantly engaged in financial
activities.'' \6\
Section 165(d)(2) of the Dodd-Frank Act also requires nonbank
financial companies supervised by the Board and bank holding companies
with total consolidated assets of $50 billion or more to disclose the
nature and extent of (i) the company's credit exposure to other
significant nonbank financial companies and significant bank holding
companies; and (ii) the credit exposure of such significant entities to
the company.\7\ The terms ``significant nonbank financial company'' and
``significant bank holding company'' are used in section 113 of the
Dodd-Frank Act as well, which specifies that the Council must consider
the extent and nature of a nonbank company's transactions and
relationships with other ``significant nonbank financial companies''
and ``significant bank holding companies,'' among other factors, in
determining whether to designate a nonbank financial company for
supervision by the Board.\8\ The Act does not define the terms
``significant nonbank financial company'' or ``significant bank holding
company,'' but instead directs the Board to define those terms by
rule.\9\
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\5\ See section 102(a)(6) of the Dodd-Frank Act (emphasis
added); 12 U.S.C. 5311(a)(6).
\6\ See section 102(b) of the Dodd-Frank Act; 12 U.S.C. 5311(b).
\7\ See section 165(d)(2) of the Dodd-Frank Act; 12 U.S.C.
5365(d)(2).
\8\ See sections 113(a)(2)(C) and (b)(2)(C) of the Dodd-Frank
Act; 12 U.S.C. 5323(a)(2)(C) and (b)(2)(C).
\9\ 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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On February 11, 2011, the Board invited comment on a proposed rule
that would have (i) established the requirements for determining if a
company is ``predominantly engaged in financial activities'' for
purposes of Title I of the Act and (ii) defined the terms ``significant
nonbank financial company'' and ``significant bank
[[Page 20757]]
holding company'' (``First NPR'').\10\ In response to the First NPR,
the Board received 23 comments, including comments related to the
definition of activities that are financial for purposes of Title I.
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\10\ 76 FR 7731 (February 11, 2011).
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Among other things, these comments indicated that some commenters
believed that a firm engaged in financial activities could avoid
designation simply by choosing not to comply with the conditions
imposed on the manner in which those activities must be conducted by
bank holding companies. After considering those comments, 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''), on April 2, 2012, the Board
invited comment on an amendment to the First NPR to clarify that,
consistent with the purpose of Title I, any activity referenced in
section 4(k) of the BHC Act will be considered to be a financial
activity without regard to conditions that do not define whether an
activity is itself financial but were imposed on bank holding companies
to ensure that the activity is conducted by bank holding companies in a
safe and sound manner or to comply with another provision of law
(``Second NPR'').\11\ In the Second NPR, the Board proposed an appendix
of the list of the activities that would be considered to be financial
activities as of April 2, 2012, together with conditions the Board
believed necessary to define the activity as a financial activity and
excluding conditions that the Board believed were related to the safe
and sound conduct of the activity, compliance with other law, or other
factors not related to whether the activity was financial, for purposes
of determining whether a company is predominantly engaged in financial
activities. In response to the Second NPR, the Board received 12
comments.
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\11\ 77 FR 21494 (April 10, 2012).
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II. Explanation of Final Rule
The final rule provides clarity for purposes of determining whether
particular companies qualify as nonbank financial companies under Title
I of the Dodd-Frank Act. This is important both in the context of
Council designation as well as for large bank holding companies and
nonbank financial companies that are required to report their credit
exposures to other significant nonbank financial companies pursuant to
section 165(d). In developing this final rule, the Board has considered
the comments received on both the First and Second NPRs and the
language and purposes of the relevant statutory provisions. In
addition, the Board consulted with the other Council members and member
agencies.
After this review, the Board has determined to adopt the attached
final rule, which includes several modifications of the earlier
proposals to address matters raised by commenters.
A. Predominantly Engaged in Financial Activities
1. Two-Year Test Based on Consolidated Financial Statements
The First NPR provided that a company would be considered to be
predominantly engaged in financial activities if:
The consolidated annual gross financial revenues of the
company in either of its two most recently completed fiscal years
represent 85 percent or more of the company's consolidated annual
gross revenues (as determined in accordance with applicable
accounting standards) in that fiscal year; or
The consolidated total financial assets of the company
as of the end of either of its two most recently completed fiscal
years represent 85 percent or more of the company's consolidated
total assets (as determined in accordance with applicable accounting
standards) as of the end of that fiscal year.\12\
\12\ See Sec. 225.301(a)(1) and (2) of the First NPR and Sec.
242.3(a)(1) and (2) of the Final Rule.
Several commenters asserted that the 85 percent threshold in the
revenue and asset tests was too high and that a company should be
considered to be ``predominantly engaged in financial activities'' if a
lower percentage of the company's revenues are derived from, or a lower
percentage of its assets are related to, activities that are financial
in nature. The statutory language of the Act establishes that a company
will be considered to be predominantly engaged in financial activities
if either 85 percent of its revenues are derived from, or 85 percent of
its assets are related to, financial activities. The Board does not
have the discretion to lower the 85 percent threshold established by
Congress. Therefore, the final rule retains the revenue and asset tests
described above as proposed in the First NPR.
The final rule also retains the proposed definition of
``consolidated annual gross financial revenues'' of a company. A
company's consolidated annual gross financial revenues would be
determined in accordance with applicable accounting standards, and are
that portion of the consolidated annual gross revenues derived directly
by the company, or indirectly by any of its consolidated subsidiaries,
from: (i) Activities that are financial in nature; or (ii) the
ownership, control, or activities of an insured depository institution
or any subsidiary of an insured depository institution.\13\ Similarly,
the final rule retains the proposed definition of ``consolidated total
financial assets'' of a company, which is that portion of the company's
consolidated total assets, as determined in accordance with applicable
accounting standards, that are related to (i) activities that are
financial in nature, or (ii) the ownership, control, or activities of
an insured depository institution or any subsidiary of an insured
depository institution.\14\
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\13\ See Sec. 242.3(b) of the Final Rule.
\14\ See Sec. 242.3(c) of the Final Rule.
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As in the First NPR, the final rule provides that computation of
assets and revenues for purposes of determining if a company meets the
statutory threshold would be based on the relevant company's annual
financial revenues in, or financial assets at the end of, either of its
two most recent fiscal years. This methodology is designed to account
for transitory fluctuations in assets and revenues that may not be
indicative of any substantive change in the financial nature of the
company or its predominant activities and to allow the Council to
effectively fulfill its important responsibilities of designating (and
reviewing existing designations of) those nonbank financial companies
whose material financial distress could pose a threat to the financial
stability of the United States.
2. Activities that are Financial in Nature
The Dodd-Frank Act provides that financial activities are those
activities that have been defined as financial in nature in section
4(k) of the BHC Act.\15\ In response to issues raised by comments
received on the First NPR, the Board invited comment in the Second NPR
on a proposal that any activity described in section 4(k) of the BHC
Act would be considered financial in nature under Title I regardless of
whether the activity is conducted in conformance with conditions
imposed on bank holding companies conducting the activity that do not
define the financial activity itself, such as conditions related to
safety and soundness or related to compliance with another provision of
law, such as the Glass-Steagall Act. The Second NPR included an
appendix that enumerated the activities and related conditions the
Board proposed to retain as part of the
[[Page 20758]]
definitions of financial activities under section 4(k) of the BHC Act.
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\15\ See section 102(a)(6) of the Dodd-Frank Act; 12 U.S.C.
5311(a)(6).
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The Board received several comments on the approach taken in the
Second NPR. One commenter expressed support for the approach proposed
in the Second NPR, while others raised questions regarding the
approach. The final rule generally maintains the approach set forth in
the Second NPR, with certain modifications that address matters raised
by commenters, including the restoration of several conditions the
Board proposed to remove in the Second NPR.
The Board also received several comments on the First NPR
requesting clarity regarding the relationship between certain types of
assets and revenues and financial activities. These comments and the
Board's responses are described in greater detail below.
a. Scope of Financial Activities
Some commenters asserted that the Board does not have the authority
to issue regulations regarding the scope of activities that are
financial in nature for purposes of Title I. One commenter asserted
that, while the Dodd-Frank Act expressly provides the Board with
rulemaking authority regarding the requirements for determining whether
a company is predominantly engaged in financial activities, the Board's
rulemaking authority is limited to establishing technical guidelines
for calculating a company's financial revenues or assets in assessing
whether a particular company and its activities fall within the defined
terms of ``predominantly engaged'' and ``financial activities,'' such
as identifying the accounting methods that may be used in these
calculations.\16\
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\16\ See letter dated May 25, 2012, to Jennifer J. Johnson,
Secretary, Board of Governors of the Federal Reserve System, from
David T. Hirschmann, President and Chief Executive Officer, Center
for Capital Markets Competitiveness, U.S. Chamber of Commerce, p. 3.
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The Board believes that the approach taken in the Second NPR is
authorized under the Dodd-Frank Act's grant of authority to the Board
in section 102(b) to establish, by regulation, the requirements for
determining if a company is predominantly engaged in financial
activities, as defined in section 102(a)(6) of the Dodd-Frank Act.\17\
Section 102(a)(6) provides that a company is ``predominantly engaged in
financial activities'' if more than 85 percent of the company's and its
subsidiaries' annual gross revenues are derived from, or more than 85
percent of the company's and its subsidiaries' consolidated assets are
related to, ``activities that are financial in nature'' as defined in
section 4(k) of the BHC Act. The identification of the scope of
activities that are ``financial in nature'' as defined in section 4(k)
of the BHC Act is a necessary requirement for determining whether a
company is predominantly engaged in financial activities and, thus, is
within the Board's rulemaking authority under section 102(b).
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\17\ See section 102(b) of the Dodd-Frank Act, 12 U.S.C.
5311(b).
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As noted, section 102(a)(6) refers to ``activities that are
financial in nature (as defined in section 4(k) of the Bank Holding
Company Act of 1956)).'' Section 4(k) of the BHC Act, added by the GLB
Act, authorizes bank holding companies that qualify as ``financial
holding companies'' to engage in a wide range of financial
activities.\18\ Section 4(k) defines as ``financial'' a list of
Congressionally-authorized activities added by the GLB Act and
activities previously approved by the Board for bank holding companies
pursuant to sections 4(c)(8) and (13) of the BHC Act, which are
incorporated by reference. Section 4(k) and the Board's rules
implementing sections 4(c)(8) and (13) also impose conditions on the
conduct of some of those activities for safety and soundness reasons or
to comply with other provisions of law. Some of the Congressionally-
authorized activities for financial holding companies, such as lending,
overlap completely with activities that had been authorized by the
Board for bank holding companies. Others expanded the authorization of
activities previously approved by the Board for bank holding companies,
such as certain insurance activities, by removing the conditions that
apply to bank holding companies engaging in the activity. Bank holding
companies that are not financial holding companies may only engage in
activities previously approved by the Board under sections 4(c)(8) and
4(c)(13) of the BHC Act and are subject to the related conditions.
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\18\ 12 U.S.C. 1843(l)(1). To engage in the broad range of
activities authorized by section 4(k), a bank holding company must
be well-capitalized and well managed, and its subsidiary insured
depository institutions must also be well-capitalized and well-
managed and have `satisfactory' ratings under the Community
Reinvestment Act.
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While the BHC Act is clear as to the type and scope of activities
that are permissible for each category of bank holding company, section
102(b) of the Dodd-Frank Act is silent as to how the overlapping
definitions of financial activities and related conditions incorporated
in section 4(k) should be applied in determining whether companies that
are not bank holding companies are predominantly engaged in financial
activities for purposes of Title I. Because section 102 does not
address how to apply these overlapping and sometimes inconsistent
definitions of financial activities or how to apply the related
conditions incorporated in section 4(k) in assessing the financial
activities of nonbank firms, the reference in section 102 of the Dodd-
Frank Act to financial activities ``as defined in section 4(k)'' is
ambiguous. As the agency with sole authority to ``establish, by
regulation, the requirements for determining if a company is
predominantly engaged in financial activities, as defined in section
102(a)(6),'' it is appropriate for the Board to resolve this
ambiguity.\19\
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\19\ See section 102(b) of the Dodd-Frank Act, 12 U.S.C.
5311(b).
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Under Supreme Court precedent, a statutory term defined by cross-
reference to another statute is not alone evidence of clear
Congressional intent that the implementing agency construe the term
identically. In Environmental Defense v. Duke Energy Corp.
(``Duke''),\20\ the Court held that the general presumption of
statutory construction ``that the same term has the same meaning when
it occurs here and there in a single statute,'' may be overcome where
context indicates that the term was intended to be construed
differently.\21\
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\20\ 549 U.S. 561 (2007).
\21\ See id. at 574, 576, citing Atlantic Cleaners & Dyers, Inc.
v. United States, 286 U.S. 427, 433. The Court considered whether
the Environmental Protection Agency (``EPA'') was required to
interpret the term ``modification'' identically where one section of
the Clean Air Act (``CAA'') defined ``modification'' ``as defined
in'' a different section of the CAA. The Court held that when
considering whether a term that is used in different statutes must
be interpreted identically, ``context counts.'' See id. at 575-76,
citing United States v. Cleveland Indians Baseball Co., 532 U.S.
200, 213 (2001). The Court considered the context in which the term
``modification'' was used and the legislative history of the
relevant statutory provisions and found no evidence of Congressional
intent that ``modification'' be construed identically by the EPA
despite the cross-reference to the term in the statute because the
contexts in which the term was used and the purposes of each use
were different.
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Consistent with the Court's analysis in Duke, the Board believes
that neither the text, the context in which the text appears, nor the
legislative purpose or history of the Dodd-Frank Act suggests that
Congress intended that a nonbank company must engage in financial
activities in compliance with all the conditions and requirements
imposed under section 4(k) and the Board's implementing regulations in
order for the company to be considered to be engaged in the relevant
financial activity. A reading of Title I that limited the scope of
companies considered to be ``predominantly engaged in financial
[[Page 20759]]
activities'' to only those companies that conduct activities in
compliance with the conditions applicable to bank holding companies
would undermine the purpose of Title I and the authority granted by
Congress to the Council to protect U.S. financial stability.\22\
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 would lead to the absurd result that some companies that are
predominantly engaged in financial activities could avoid consideration
for designation by the Council simply by choosing not to abide by one
or more conditions that were imposed 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.
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\22\ 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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The Board's proposed approach to addressing the scope of activities
is consistent with Congressional intent as reflected in Title I as well
as the legislative history of the Dodd-Frank Act. Other sections of
Title I support 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). For instance,
section 167(a) provides that a nonbank financial company supervised by
the Board is not required ``to conform its activities to the
requirements of section 4 of the BHC Act.'' \23\ 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.
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\23\ See 12 U.S.C. 5367.
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In addition, the Council's anti-evasion authority demonstrates
Congress's intent to give the Council the authority to consider a broad
range of nonbank financial companies for designation.\24\ 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.\25\ Companies that are
engaged in activities that are financial in nature, but that alter the
manner in which they conduct those activities such that they evade
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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\24\ See 12 U.S.C. 5323(c).
\25\ See id.
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The legislative history of the Dodd-Frank Act demonstrates 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. For instance, several members of
Congress indicated that, while in their view designation may not be
appropriate for mutual funds, the activities conducted by mutual funds,
which typically do not conform to the prudential conditions imposed on
the investment advisory or management activities of bank holding
companies, were financial activities for purposes of Title I.\26\ In
addition, section 165 of the Dodd-Frank Act, which sets forth the
enhanced prudential standards applicable to nonbank financial companies
designated by the Council, further illustrates that Congress believed
that the activities of investment companies were financial activities.
Section 165(b)(1)(A)(i) requires the Board to impose risk-based capital
requirements and leverage limits on nonbank financial companies
designated by the Board and certain bank holding companies, ``unless
the Board of Governors, in consultation with the Council, determines
that such requirements are not appropriate for a company subject to
more stringent prudential standards because of the activities of such
company (such as investment company activities or assets under
management) or structure, in which case, the Board of Governors shall
apply other standards that result in similarly stringent risk
controls.'' \27\ This statutory requirement indicates that Congress
believed that investment company activities were financial.
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\26\ See, for example, 156 Cong. Rec. S5873 (daily ed. July 15,
2010) (statement of Sen. Cardin) (indicating that mutual funds and
their advisers would be eligible for designation by the Council by
stating that section 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 156 Cong. Rec. S5902-5903 (daily ed. July 15,
2010) (statement of Sen. Kerry) (indicating 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, by 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'').
\27\ See section 165(b)(1)(A)(i) of the Dodd-Frank Act; 12
U.S.C. 5365(b)(1)(A)(i).
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Moreover, references in section 4(k) itself distinguish between
financial activities and the conditions imposed on those activities.
Among the activities that section 4(k) defines as being ``financial in
nature'' are all of the activities that the Board had determined, by
regulation or order, prior to November 12, 1999, to be ``so closely
related to banking or managing or controlling banks as to be a proper
incident thereto (subject to the same terms and conditions contained in
such order or regulation, unless modified by the Board)'' under section
4(c)(8) of the BHC Act.\28\ By recognizing that the Board could modify
the terms and conditions in the orders and rules authorizing these
activities, section 4(k) itself recognizes that these terms and
conditions do not necessarily determine whether the activity is a
financial activity. Pursuant to section 4(k), an activity authorized
under section 4(c)(8) is a financial activity regardless of the
conditions imposed by rule or order--all of which may be modified or
removed.'' \29\
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\28\ See 12 U.S.C. 1843(k)(4)(F).
\29\ Distinguishing between the definition of an activity and
conditions imposed for reasons related to other policy and statutory
factors is consistent with the Board's long-standing interpretations
of the BHC Act, which is the Act to which section 102 of the Dodd-
Frank Act refers. For example, in the Board's 1997 revisions to
Regulation Y (``1997 rulemaking''), the Board removed several of the
conditions imposed on bank holding companies conducting activities
that are ``closely related to banking'' by distinguishing between
the conditions 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. See 62 FR 9290, 9305 (February 28,
1997). The Board stated that the revisions made by the 1997
rulemaking 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 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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[[Page 20760]]
One commenter expressed support for the Board's proposal to
consider financial activities without regard to the conditions imposed
on the conduct of the activities by bank holding companies when
considering whether a company is predominantly engaged in financial
activities for purposes of Title I.\30\ The commenter argued that
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 would enable some companies that are predominantly engaged in
financial activities to avoid consideration for designation by the
Council simply by choosing not to comply with conditions imposed for
prudential or other reasons on the manner in which the activities must
be conducted by bank holding companies. Some commenters questioned the
approach taken in the Second NPR to the extent that it appeared that
the approach might cover activities routinely conducted by non-
financial firms such as manufacturers or retailers. In these
commenters' view, an overly broad interpretation of the definition of
financial activities subverts the ``85-percent'' test imposed by
statute. In the final rule, the Board has addressed commenters'
concerns that activities routinely conducted by non-financial companies
could be considered financial through restoration of some of the
conditions.
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\30\ See letter dated May 24, 2012, to Jennifer J. Johnson,
Secretary, Board of Governors of the Federal Reserve System, from
Christopher Cole, Senior Vice President and Senior Regulatory
Counsel, Independent Community Bankers of America.
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b. Description of ``Financial Activities''
In determining whether or not to include a condition imposed on the
scope of an activity or the manner in which an activity may be
conducted, the Board considered many factors, including the information
and views presented by commenters. The Board also reviewed the
statutory language of section 4(k) of the BHC Act and the Board's
releases related to the activities that are financial in nature under
section 4(k). In addition, the Board reviewed the legislative history
of the GLB Act, which itself removed or modified many of the conditions
applicable to the conduct of financial activities by bank holding
companies and financial holding companies.\31\
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\31\ In amending Regulation Y consistent with the GLB Act, the
Board noted that the GLB Act eliminated many of the ``detailed
restrictions on relationships and transactions between depository
institutions and securities affiliates'' that had been required
prior to the passage of the GLB Act. See 65 FR 14440, 14441 (March
17, 2000). The Board also noted that in light of the GLB Act
``securities underwriting, dealing, and market making * * * is
authorized for financial holding companies in a broader form'' than
had previously been permitted. See id. at 14433, 14435 (March 17,
2000).
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As an initial matter, the Board notes that the only role of this
rulemaking is to define activities that are financial. This rulemaking
does not designate any specific entity for enhanced supervision under
Title I of the Dodd-Frank Act. Authority to designate an entity for
enhanced supervision rests exclusively with the Council. Thus, clarity
regarding whether any specific entity will be designated under Title I
must come from other agencies.\32\
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\32\ As noted previously, Title I of the Dodd-Frank Act
authorizes the Council to take certain actions with respect to
nonbank financial companies, including designating a nonbank
financial company for Board supervision pursuant to section 113 and
issuing recommendations under section 120 to a primary financial
regulatory agency to apply new or heightened standards to a
financial activity conducted by nonbank financial companies under
the jurisdiction of that regulatory agency. A nonbank financial
company is a company that is predominantly engaged in financial
activities. Therefore, the application of the definitions of
financial activities and the determination that a company is
predominantly engaged in financial activities will be subject to
review by the Council with respect to an action taken by the Council
involving nonbank financial companies under Title I of the Dodd-
Frank Act. 12 U.S.C. 5323(a) and (b). The Dodd-Frank Act provides a
specific procedure in the designations process under which a company
may challenge the Council's proposed determination that the nonbank
financial company could pose a threat to U.S. financial stability
and shall be subject to Board supervision. 12 U.S.C. 5323(e) and
(h).
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In the Second NPR, the Board noted that the list of financial
activities authorized under section 4(k) included overlapping and
redundant activities, and invited 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
reduce the ambiguity created by these overlapping and sometimes
inconsistent activities and to simplify the proposed appendix. The
Board did not receive comment on this request, and, consistent with the
Second NPR, the Board has maintained the complete list of financial
activities authorized under section 4(k), including the overlapping and
redundant activities, in order to ensure completeness and to avoid
confusion based on the specific statutory authority relied on in
defining an activity. To reduce the ambiguity created by the
overlapping and redundant descriptions of financial activities included
in the appendix, a company that engages in a particular activity in a
manner that does not comply with the narrower definition of the
particular activity will be considered to be engaged in a financial
activity if its activities are captured by the broader description of
the activity.
The following discussion describes the activities enumerated in the
appendix to the final rule that are financial in nature as defined in
section 4(k) of the BHC Act for purposes of determining whether a
company is predominantly engaged in financial activities. The
discussion also identifies the conditions imposed in section 4(k) or by
the Board's implementing regulations pursuant to sections 4(c)(8) and
(13) that are not reflected in the appendix because they were imposed
for safety and soundness considerations or to comply with other
provisions of law and, thus, are not relevant for determining whether
these activities are considered financial for purposes of determining
whether a firm is predominantly engaged in financial activities. As
noted previously, the final rule reinstates several conditions that the
Board proposed to remove from the definitions of financial activities
in the Second NPR. The final rule retains all of the conditions set
forth in the description of financial activities specifically
enumerated under section 4(k), other than two conditions with respect
to the activity of investing as part of a bona fide underwriting or
merchant or investment banking activity, and one condition with respect
to insurance company portfolio investments, which do not define the
activity itself and were imposed for safety and soundness reasons and
to ensure compliance with other provisions of law.
i. Financial activities added to the BHC Act by the GLB Act
The following financial activities were authorized for financial
holding companies and added to section 4(k) of the BHC Act by the GLB
Act. These activities are financial activities for purposes of
determining whether a firm is predominantly engaged in financial
activities under Title I.
[[Page 20761]]
Lending, Exchanging, Transferring, Investing for Others, and
Safeguarding Money or Securities
The activities of lending, exchanging, transferring, investing for
others, or safeguarding money or securities are specifically
enumerated, without conditions, in section 4(k) of the BHC Act.\33\ The
activity of ``investing for others'' includes buying, selling, or
otherwise acquiring and disposing of money or securities in order to
benefit from changes in the value of those assets and distribute
profits to investors. These activities are often conducted by
investment advisors, wealth managers, limited purpose trust companies,
mutual funds, hedge funds, private equity funds, real estate investment
trusts, and similar vehicles.
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\33\ 12 U.S.C. 1843(k)(4)(A).
---------------------------------------------------------------------------
One commenter asserted that the Board had not authorized bank
holding companies to control or be an open-end investment company and
that, as a result, open-end investment companies cannot be found to be
engaged in financial activities as defined in section 4(k) of the BHC
Act. The commenter argued that open-end investment companies (e.g.,
mutual funds) are not engaged in a financial activity as defined in
section 4(k) of the BHC Act, and that the Board should ``reduce
uncertainty created by the ambiguity in Title I * * * to make clear to
investors and the public that [money market mutual funds] will not be
designated * * * under Title I'' of the Dodd-Frank Act.\34\ The crux of
this commenter's argument is the assertion that the Board has not
issued any order approving an application or request by a bank holding
company to be or to control a mutual fund \35\ and therefore such
activities cannot be considered to be financial.
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\34\ See letter dated March 30, 2011, to Jennifer J. Johnson,
Secretary, Board of Governors of the Federal Reserve System, from
John D. Hawke, Jr., Arnold & Porter LLP, p. 7 (emphasis in
original).
\35\ See id. at p. 8.
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The Board believes that it is clear that open-end investment
companies, such as mutual funds including money market funds, as well
as closed-end investment companies, engage in financial activities as
defined in section 4(k) of the BHC Act. The Board's regulations have
long authorized bank holding companies to engage in organizing,
sponsoring, and managing mutual funds and closed-end investment
companies and serving as an investment adviser to mutual funds and
closed-end investment companies and others using authority described in
section 4(k) of the BHC Act.\36\ As the commenter recognized, prior to
enactment of the GLB Act in 1999, the Board permitted bank holding
companies to own more than 5 percent (and up to 25 percent) of the
shares of an open-end investment company--a determination that
represents a finding that open-end investment companies engage in a
financial activity.\37\ The investment limitation reflects a decision
by the Board that the public benefits of allowing a bank holding
company to own more than 25 percent of the shares of a mutual fund did
not outweigh the potential costs consequent with treating the mutual
fund as a subsidiary of the bank holding company. Under the BHC Act,
the decision to allow a bank holding company to own more than 5 percent
of the shares of a mutual fund is sufficient to indicate that the
mutual fund itself, which is a company, is engaged in a financial
activity.\38\ The activity of organizing, sponsoring, and managing a
mutual fund was also determined to be usual in connection with the
transaction of banking or other financial operations abroad prior to
November 11, 1999, and, thus, is incorporated as a financial activity
in section 4(k) by the GLB Act.\39\ The Board's regulations prohibit
bank holding companies from exerting managerial control over the
companies in which the mutual fund invests and require bank holding
companies to reduce their ownership to less than 25 percent of the
equity of the mutual fund within one year of sponsoring the fund.\40\
These limitations were imposed to prevent circumvention of the
investment restrictions in the BHC Act.
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\36\ See, e.g., 12 CFR 211.10(a)(11); 225.28(b)(6)(i);
225.86(b)(3); and 225.125. See also, e.g., Mellon Bank Corporation,
79 Federal Reserve Bulletin 626 (1993), and Bayerische Vereinsbank
AG, 73 Federal Reserve Bulletin 155 (1987).
\37\ See letter dated June 24, 1999, to H. Rodgin Cohen, Esq.,
Sullivan & Cromwell (First Union Corporation), from Jennifer J.
Johnson, Secretary of the Board of Governors of the Federal Reserve
System. See also 12 CFR 225.86(b)(3).
\38\ Bank holding companies are generally prohibited from owning
more than 5 percent of the voting shares of a company unless that
company is engaged only in a financial activity. See 12 U.S.C.
1843(a).
\39\ 12 U.S.C. 1843(k)(4)(G); 12 CFR 225.86(b)(3).
\40\ 12 CFR 225.86(b)(3).
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Moreover, section 4(k) itself authorizes all of the component
activities in which a mutual fund engages--investing for others,\41\
merchant banking,\42\ investment advice,\43\ and underwriting \44\--as
financial. These activities are defined as financial under section 4(k)
separately from, and in addition to, those activities previously
approved by the Board as being so closely related to banking as to be a
proper incident thereto, or usual in connection with the transaction of
banking or other financial operations abroad, which are incorporated
into the definition of financial activities in section 4(k).\45\
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\41\ 12 U.S.C. 1843(k)(4)(A).
\42\ 12 U.S.C. 1843(k)(4)(H).
\43\ 12 U.S.C. 1843(k)(4)(C).
\44\ 12 U.S.C. 1843(k)(4)(E).
\45\ In amending Regulation Y consistent with the GLB Act, the
Board added the financial activities added to section 4(k) by the
GLB Act and noted that in light of the passage of the GLB Act
``securities underwriting, dealing, and market making * * * is
authorized for financial holding companies in a broader form'' than
had previously been permitted. See 65 FR 14440, 14443, 14435 (March
17, 2000).
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Section 4(k) specifically defines the activities of underwriting,
dealing in, or making a market in securities as a financial activity,
which includes key components of sponsoring and distributing mutual
funds and investment companies. Section 4(k) also specifically
enumerates as financial activities providing financial, investment, and
economic advisory services and investing for others, which includes
buying, selling, or otherwise acquiring and disposing of money or
securities in order to benefit from changes in the value of those
assets and distribute profits to investors. Similarly, section 4(k)
authorizes merchant banking activities--which represent investments
made for the purpose of profiting from price appreciation--as
financial.
The fact that the Board has imposed prudential conditions on bank
holding companies engaged in the activity of organizing, sponsoring, or
managing a mutual fund does not negate the fact that the activity is
financial for purposes of section 4(k).\46\ Moreover, while open-end
investment companies (and other investment vehicles) have not applied
to become bank holding companies, the Board does not believe that this
in any way reflects a judgment that the companies are not engaged in
financial activities. It is more likely a reflection that open-end
investment companies (and similar investment vehicles) have chosen not
to control banks in order to avoid the capital, risk management, and
other supervisory requirements attendant to becoming a bank holding
company.
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\46\ As noted previously, bank holding companies are generally
prohibited from owning more than 5 percent of the voting shares of a
company unless that company is engaged only in a financial activity.
See 12 U.S.C. 1843(a).
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Insurance Activities
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,
[[Page 20762]]
are financial activities specifically enumerated in section 4(k) of the
BHC Act.\47\
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\47\ 12 U.S.C. 1843(k)(4)(B). In amending Regulation Y
consistent with the GLB Act, the Board noted that section 4(k)(4)
authorized financial activities, including ``activities that
previously have not been permissible for bank holding companies,
such as acting as principal, agent, or broker for purposes of
insuring, guaranteeing, or indemnifying against loss, harm, damage,
illness, disability, or death, and issuing annuity products.
Permissible insurance activities as principal include reinsuring
insurance products. A financial holding company acting under that
section may conduct insurance activities without regard to the
restrictions on the insurance activities imposed on bank holding
companies under section 4(c)(8).'' See 65 FR 14433, 14435 (March 17,
2000).
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Financial, Investment, and Economic Advisory Services
Financial, investment, and economic advisory services are financial
activities specifically enumerated in section 4(k) of the BHC Act.\48\
These activities may be provided individually or in combination and
include discretionary and non-discretionary investment advisory
activities. This broad authorization to provide financial, investment,
or economic advisory services also includes activities that the Board
previously determined were closely related to banking. For example, the
Board determined that acting as an investment or financial advisor to
any person was closely related to banking, including, without
limitation, the activities of sponsoring, organizing, and managing a
closed-end investment company, such as a hedge fund, and furnishing
general economic information and advice.\49\ The Board also previously
determined that providing administrative and other services to mutual
funds could be provided in connection with acting as an investment or
financial advisor as activities that were closely related to banking,
as described further below.
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\48\ 12 U.S.C. 1843(k)(4)(C).
\49\ See 12 CFR 225.28(b)(6) and 225.125.
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Issuing or Selling Instruments Representing Interests in Pools
of Bank-Permissible Assets
Issuing or selling instruments representing interests in pools of
assets permissible for a bank to hold directly is a financial activity
specifically enumerated in section 4(k) of the BHC Act.\50\
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\50\ 12 U.S.C. 1843(k)(4)(D).
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Underwriting, Dealing, and Market Making
Underwriting, dealing in, or making a market in securities is a
financial activity specifically enumerated in section 4(k) of the BHC
Act,\51\ which includes sponsoring and distributing all types of mutual
funds and investment companies.\52\
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\51\ 12 U.S.C. 1843(k)(4)(E).
\52\ See H.R. Rep. No. 106-434 at 153 (1999) (Conf. Rep.)
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Merchant Banking
Section 4(k)(4)(H) of the BHC Act describes the financial activity
of acquiring or controlling shares, assets or ownership interests,
including debt or equity securities, in a company engaged in any
activity not authorized under section 4 of the BHC Act ``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''
\53\ (``merchant banking''). Section 4(k)(4)(H) imposes several
requirements on financial holding companies seeking to engage in
merchant banking activities. In particular, (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, 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; (iii) the shares must be
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; (iv) the shares are 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 (v) during the period the shares are held, the
bank holding company does not routinely manage or operate the company
except as may be necessary to obtain a reasonable return on investment
upon resale or disposition.\54\
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\53\ 12 U.S.C. 1843(k)(4)(H).
\54\ See id.
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The condition in section 4(k)(4)(H) requiring that the shares only
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 merchant banking activities is an essential element of a bona
fide merchant banking activity. Thus, this condition is reflected in
the appendix. Bona fide merchant banking activities involve investing
with the intent to sell the investment at some later point in time at
which a profit is expected to be realized. For example, companies such
as hedge funds, mutual funds, and private equity firms \55\ that are
engaged in bona fide merchant banking activities typically make
investments in companies that they believe will increase in value over
time and that can be resold at a profit. Hedge funds, mutual funds, and
private equity funds invest with the expectation of selling those
instruments at a future date in order to realize profits consistent
with a particular investment strategy rather than for the purpose of
owning and operating the business.
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\55\ See H.R. Rep. No. 106-434 at 154 (1999) (Conf. Rep.)
(describing the merchant banking authority under section 4(k)(4)(H)
as authorizing a financial holding company (``FHC'') to acquire an
ownership interest ``in an entity engaged in any kind of trade or
business whatsoever * * * whether acting as principal, on behalf of
one or more entities (e.g., as adviser to a fund, regardless of
whether the FHC is also an investor in the fund), including entities
that the FHC controls (other than a depository institution or a
subsidiary of a depository institution), or otherwise.'').
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The Board and the Secretary of the Treasury jointly issued
regulations adopting holding periods for merchant banking investments
by financial holding companies pursuant to section 4(k)(4)(H).\56\
Specific time periods are not set forth in section 4(k) of the BHC Act.
As such, they are not included in the definition of merchant banking
for purposes of Title I. Nevertheless, the time periods adopted by the
Board and the Secretary of the Treasury are instructive in determining
whether a nonbank company is engaged in bona fide merchant banking
activities. Thus, for purposes of determining whether a nonbank company
is predominantly engaged in financial activities under Title I, nonbank
companies that acquire and hold shares for the period permitted for
financial holding companies under the Board's regulations will be
presumed to be holding the shares for the purpose of appreciation and
ultimate resale or disposition in accordance with the condition in
section 4(k)(4)(H). This presumption will help companies determine
whether they are predominantly engaged in financial activities. In
addition, this presumption will reduce burden on companies that are
required to report their credit exposure to significant bank holding
companies and significant nonbank financial companies under section
165(d) of the Dodd-Frank Act.\57\
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\56\ See 12 CFR 225.172 and 12 CFR 1500.3, respectively.
\57\ As previously discussed, section 165(d)(2) requires nonbank
financial companies supervised by the Board and bank holding
companies with total consolidated assets of $50 billion or more to
submit reports to the Board, the Council, and the FDIC on the nature
and extent of (i) the company's credit exposure to other significant
nonbank financial companies and significant bank holding companies;
and (ii) the credit exposure of such significant entities to the
company. In order to comply with this reporting obligation,
companies required to report their credit exposure to significant
nonbank financial companies must be able to identify those companies
that are predominantly engaged in financial activities, and thus,
considered to be nonbank financial companies.
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[[Page 20763]]
The Board recognizes that some investment vehicles may hold shares
for longer periods as part of a bona fide merchant banking activity
consistent with the vehicle's investment strategy. For this reason, the
Council, with respect to the definition of a nonbank financial company
for purposes of Title I, or the Board, with respect to the definition
of a significant nonbank financial company, also may determine, on a
case-by-case basis, that a company that acquires and holds shares for a
period of time greater than the period permissible for a financial
holding company is engaged in bona fide merchant banking activities for
purposes of determining whether the company is predominantly engaged in
financial activities.
The prohibition in section 4(k)(4)(H) on routinely managing a
portfolio company, other than for purposes of recognizing a reasonable
return on resale or disposition, is an essential element of bona fide
merchant banking activities. Thus, this prohibition is reflected in the
appendix. As previously discussed, companies engaging in these
activities purchase shares of portfolio companies to recognize an
ultimate profit, rather than to engage in the underlying activity in
which the portfolio company engages as its primary business activity.
Routinely managing the companies, other than for the goal of
recognizing a reasonable return, may indicate a strategic investment in
the operations of another firm.
Section 4(k) does not define the statutory prohibition of routinely
managing a portfolio company. The regulations issued by the Board and
the Secretary of the Treasury governing the merchant banking activities
of financial holding companies provide guidance on the statutory
prohibition of routinely managing a portfolio company in connection
with a bona fide merchant banking activity. These regulations are
instructive in determining whether a nonbank company is engaged in bona
fide merchant banking activities. Therefore, for purposes of
determining whether a nonbank company is predominantly engaged in
financial activities under Title I, nonbank companies that comply with
this guidance regarding the limitations on managing or operating a
portfolio company will be presumed to be engaged in a bona fide
merchant banking activity. This presumption will reduce burden on
companies attempting to determine whether they, or certain of their
counterparties,\58\ are predominantly engaged in financial activities.
The Council or the Board, as appropriate, also may determine, on a
case-by-case basis, that an entity that does not comply with the
Board's guidance regarding this limitation may still be engaged in a
bona fide merchant banking activity for purposes of determining whether
the company is predominantly engaged in financial activities.
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\58\ See id.
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By contrast, the condition in section 4(k)(4)(H) requiring a
financial holding company engaging in merchant banking activities to
have a securities affiliate is not an essential element of bona fide
merchant banking activities for determining whether these activities
are financial activities.\59\ This is evidenced by the fact that
section 4(k) does not require that the securities affiliate participate
in or play a role with respect to these activities. This condition was
designed to ensure that only those financial holding companies with
experience engaging in investment, securities, or advisory activities
conducted merchant banking activities. Accordingly, this condition is
not reflected in the appendix.
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\59\ 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
affiliate. 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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Similarly, the condition in section 4(k)(4)(H) requiring that
shares acquired as part of a bona fide merchant 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 appendix.
This restriction was imposed because banks are restricted from
investing in certain types of companies by statute and regulation, and
in particular, national banks were prohibited by the GLB Act from
engaging in merchant banking activities through a financial subsidiary
unless certain findings were made by the Secretary of the Treasury and
the Board.\60\ The restriction on acquiring or holding investments
through a depository institution does not define the activity of
merchant banking but rather imposes conditions on holding the
investment through one type of corporate affiliate. The condition does
not define the activity itself, as financial holding companies, which
have bank affiliates, engage in these activities on a regular basis.
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\60\ See, e.g., 12 U.S.C. 24, (Seventh); 12 U.S.C. 24,
(Eleventh); 12 CFR 1.
---------------------------------------------------------------------------
Finally, section 4(k)(4)(H) provides that shares acquired in
connection with a bona fide merchant banking activity must be those of
a company engaged in an activity not authorized under section 4 of the
BHC Act. This provision provided new authority for bank holding
companies that qualify as financial holding companies to engage in
merchant banking activities with regard to nonbanking firms; bank
holding companies were already authorized under other provisions of
section 4 of the BHC Act to invest in firms engaged in financial
activities.\61\ For this reason, the Board has retained this reference
to an ``activity not authorized under section 4 of the BHC Act'' in the
description of bona fide merchant banking activities. An investment in
a company engaged in activities otherwise permissible under section 4
would otherwise be treated as a financial activity under section
4(k)(1) or other provisions of section 4(k). Thus, shares acquired in
all types of firms in connection with a bona fide merchant banking
activity are effectively included by section 4(k) within the list of
permissible financial activities.
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\61\ See 65 FR 16460, 16463-16464 (March 28, 2000), in which the
Board noted that the provision in section 4(k)(4)(H) that authorizes
a financial holding company to invest in any company engaged in any
activity not authorized pursuant to section 4 of the BHC Act
``appears to have been included in recognition of the fact that
other provisions of the BHC Act permit a financial holding company
to make investments in companies that conduct financial activities
without resorting to merchant banking authority.''
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Insurance Company Portfolio Investments
Section 4(k)(4)(I) of the BHC Act authorizes companies engaged in
certain types of insurance activities to make portfolio investments. In
particular, financial holding companies are authorized to acquire
assets or ownership interests, including debt or equity securities, of
a company or other entity engaged in any activity not
[[Page 20764]]
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.\62\
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\62\ 12 U.S.C. 1843(k)(4)(I).
---------------------------------------------------------------------------
The conditions in section 4(k)(4)(I) requiring that the shares (i)
be acquired and held by an insurance company engaged in particular
activities, (ii) in the ordinary course of business of the acquiring
insurance company in accordance with relevant state law governing such
investments, are essential elements of this activity, which was
authorized by Congress specifically to permit ``an insurance company
that is affiliated with a depository institution to continue to
directly or indirectly acquire or control any kind of ownership
interest in any company,'' in recognition of the fact ``that as part of
the ordinary course of business, insurance companies frequently invest
funds received from policyholders by acquiring most or all the shares
of stock of a company that may not be engaged in a financial
activity.'' \63\ Thus, these conditions are reflected in the appendix.
In contrast to merchant banking activities described in section
4(k)(4)(H), which requires a financial holding company engaging in such
activities to have a securities affiliate, but does not require that
the securities affiliate play a role in the activities, section
4(k)(4)(I) requires that the investment activities authorized
thereunder be conducted by or through an insurance company.
---------------------------------------------------------------------------
\63\ See H.R. Rep. No. 106-434 at 154 (1999) (Conf. Rep.)
(further describing section 4(k)(4)(I) as recognizing that ``these
investments are made in the ordinary course of business pursuant to
state insurance laws governing investments by insurance companies,
and are subject to ongoing review and approval by the applicable
state regulator'').
---------------------------------------------------------------------------
The prohibition in section 4(k)(4)(I) on routinely managing a
portfolio company, other than for purposes of recognizing a reasonable
return on the investment, is an essential element of the investment
activities conducted by insurance companies. Thus, this prohibition is
reflected in the appendix. As noted previously, insurance companies
typically invest policyholder funds in other companies in the ordinary
course of business pursuant to state insurance laws. Routinely managing
the companies, other than for the purpose of recognizing a return on
investment, may indicate a strategic investment in the operations of
the other company.\64\
---------------------------------------------------------------------------
\64\ See id. at 155 (noting that ``to the extent an FHC
participates in the management or operation of a portfolio company,
such participation would ordinarily be for the purpose of
safeguarding the investment of the insurance company in accordance
with applicable state insurance law. This is irrespective of any
overlap between board members and officers of the FHC and the
portfolio company'').
---------------------------------------------------------------------------
Section 4(k)(4)(I) requires that shares acquired pursuant to an
insurance company's investment activities not be acquired or held by a
depository institution. This condition is not an essential element of
this activity, and, thus, is not reflected in the appendix. The
restriction on acquiring or holding investments through a depository
institution does not define the investment activity described in
section 4(k)(4)(I), but rather imposes conditions on holding the
investment through one type of corporate affiliate. As discussed
previously, section 4(k)(4)(I) requires that the investment activities
authorized thereunder be conducted by or through an insurance company.
In addition, as noted previously, banks are restricted from investing
in certain types of companies by statute and regulation.\65\ The
condition does not define the activity itself, as insurance companies
affiliated with depository institutions engage in these activities on a
regular basis.\66\
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\65\ See, e.g., 12 U.S.C. 24, (Seventh); 12 U.S.C. 24,
(Eleventh); 12 CFR part 1.
\66\ As discussed above, section 4(k)(4)(I) was intended to
permit ``an insurance company that is affiliated with a depository
institution to continue to directly or indirectly acquire or control
any kind of ownership interest in any company if certain
requirements are met.'' See H.R. Rep. No. 106-434 at 154 (1999)
(Conf. Rep.).
---------------------------------------------------------------------------
Finally, as in section 4(k)(4)(H), section 4(k)(4)(I) provides that
shares acquired by an insurance company in connection with its
investment activities must be those of a company engaged in an activity
not authorized under section 4 of the BHC Act. For the same reasons
described above, the Board has retained this reference to an ``activity
not authorized under section 4 of the BHC Act'' in the description of
the investment activities of insurance companies pursuant to section
4(k)(4)(I). An investment in a company engaged in activities otherwise
permissible under section 4 would otherwise be treated as a financial
activity under section 4(k)(1) or other provisions of section 4(k).
Thus, investments by insurance companies in all types of firms are
effectively included by section 4(k) within the list of permissible
financial activities.
Lending, Exchanging, Transferring, Investing for Others,
Safeguarding Financial Assets Other Than Money or Securities, and Other
Activities
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
are financial activities specifically enumerated in section 4(k)(5) of
the BHC Act.\67\
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\67\ 12 U.S.C. 1843(k)(5). The BHC Act requires the Board to
define the extent to which these 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. See 66 FR 257 (January
3, 2001).
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ii. Financial Activities That Are Closely Related to Banking
Section 4(k) provides that ``any activity that the Board has
determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto'' is a financial
activity.\68\ These activities are also financial for purposes of
determining whether a firm is predominantly engaged in financial
activities under Title I. These activities include the following:
---------------------------------------------------------------------------
\68\ 12 U.S.C. 1843(k)(4)(F).
---------------------------------------------------------------------------
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 were authorized by the Board as activities that are closely
related to banking.\69\
---------------------------------------------------------------------------
\69\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(1). See 62 FR
9290, 9305 (February 28, 1997), in which the Board noted that
``[l]ending activities are already broadly defined and contain no
restrictions.''
---------------------------------------------------------------------------
Activities Related to Extending Credit
Activities usual in connection with making, acquiring, brokering,
or servicing loans or other extensions of credit were authorized by the
Board as
[[Page 20765]]
activities that are closely related to banking.\70\ 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, collection
agency, and credit bureau services, engaging in asset management,
servicing, and collection activities, acquiring debt in default, and
providing real estate settlement services.\71\
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\70\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(2).
\71\ Id.
---------------------------------------------------------------------------
The Board's regulations impose certain conditions on the conduct of
these activities that are not relevant for determining whether these
activities are considered financial for purposes of determining whether
a firm is predominantly engaged in financial activities. For instance,
under the Board's regulations, a bank holding company that is arranging
financing for commercial or industrial income-producing real estate may
not have an interest in, participate in managing or developing, or
promote or sponsor the development of a property for which it is
arranging financing, or engage in property management or real estate
brokerage.\72\ These conditions were imposed to clarify that real
property management and real estate brokerage activities--which were
not at the time found to be financial activities--are not indirectly
authorized as permissible for bank holding companies through the
activity of real estate financing.\73\ As such, the appendix reflects
the activity of arranging commercial real estate financing without
reference to the independent activities of owning, managing,
developing, or promoting or sponsoring development of real estate.\74\
While neither real estate brokerage nor real estate management are
financial activities under section 4(k), a company may engage in these
activities and still be predominantly engaged in the financial activity
of arranging commercial real estate financing. Under the final rule,
only assets and revenues associated with this latter activity are
considered financial for purposes of determining whether a firm is
predominantly engaged in financial activities.
---------------------------------------------------------------------------
\72\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(2)(ii).
\73\ The Board first approved the application of a bank holding
company to engage in real estate equity financing in 1982. In
approving this activity, the Board noted that it had imposed
conditions, including that the bank holding company not have an
interest in, participate in managing or developing, or promote or
sponsor the development of a property for which it is arranging
financing, ``to confine the activity * * * to equity financing and
to prevent [the bank holding company] from engaging in real estate
development * * * '' See BankAmerica Corporation, 68 Federal Reserve
Bulletin 647 (1982). The activity of arranging commercial real
estate equity financing was added to Regulation Y in 1984 and
incorporated the limitations that the Board had placed on the
activity in the 1982 order. See 70 Federal Reserve Bulletin 121, 137
(1984).
\74\ 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).
---------------------------------------------------------------------------
Acquiring debt in default also is a financial activity for purposes
of determining whether a firm is predominantly engaged in financial
activities under Title I as it is an activity that is usual in
connection with making, acquiring, brokering, or servicing loans or
other extensions of credit.\75\ Under the Board's regulations, a bank
holding company that acquires debt in default must divest assets
securing the debt that are impermissible for bank holding companies to
hold within a certain time period, stand only in the position of a
creditor, not purchase equity of obligors of debt in default, and not
acquire debt in default secured by shares of a bank or bank holding
company. These conditions are intended to prevent bank holding
companies from circumventing the BHC Act and other provisions of law.
For instance, the condition requiring a bank holding company to divest
impermissible assets within a certain timeframe was intended to
distinguish between a bank holding company's acquisition of debt in
default and its retention of impermissible collateral securing the
debt.\76\ The conditions requiring the bank holding company to stand
only in the position of a creditor and not purchase equity of obligors
of debt in default are intended to prevent a bank holding company from
acquiring assets in connection with a debt previously contracted the
ownership of which is prohibited by the BHC Act or other provisions of
law. These conditions are not related to defining the financial nature
of the activity of acquiring debt in default.\77\ 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.\78\ For these reasons, these conditions are
not relevant for determining whether the assets and revenues associated
with these activities are considered financial for purposes of
determining whether a firm is predominantly engaged in financial
activities. The appendix provides that the activity of acquiring debt
that is in default at the time of acquisition is a financial activity
for purposes of determining whether a company is predominantly engaged
in financial activities under Title I without reference to these
conditions.
---------------------------------------------------------------------------
\75\ 12 CFR 225.28(b)(2)(vii).
\76\ See 62 FR 9290, 9305 (February 28, 1997).
\77\ Id.
\78\ Id.
---------------------------------------------------------------------------
Leasing
Leasing personal or real property, and acting as an agent, broker,
or adviser for leasing personal or real property were determined to be
closely related to banking by the Board.\79\ Under the Board's
regulations, permissible leasing must involve a lease that is on a
nonoperating basis with an initial term of at least 90 days. In
addition, leasing involving real property must have the effect of
yielding a return that will compensate the lessor for not less than the
lessor's full investment plus the estimated cost of financing the
property over the term of the lease, and the property must have an
estimated residual value that is no more than 25 percent of the
acquisition cost of the property. The conditions serve to distinguish
between the financial activity of leasing and the nonfinancial
activities of real or personal property rental and real estate
management.\80\ As such, the appendix reflects these conditions in
defining the activities of leasing and acting as an agent, broker, or
adviser for personal or real property.
---------------------------------------------------------------------------
\79\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(3).
\80\ See 62 FR 9290, 9306 (February 28, 1997) (``These
requirements were developed in the course of litigation regarding
the leasing activities of national banks, and were relied on by the
courts in distinguishing bank leasing activities from general
property rental and real estate development businesses. The
requirement that a lease be nonoperating is also a statutory
requirement limiting the high residual value leasing activities of
national banks.'')
---------------------------------------------------------------------------
Operating Nonbank Depository Institutions
The activity of owning, controlling, and operating depository
institutions, including industrial banks, Morris Plan banks, industrial
loan companies and savings associations that do not qualify as
``banks'' for purposes of the BHC Act was determined to be closely
related to banking by the Board.\81\ While the Board's regulations
require that a thrift owned, controlled, or operated by a bank holding
company be engaged only in deposit-taking activities and activities
permissible for bank holding companies, the appendix does not include
these conditions because they are inconsistent with section 102 of the
[[Page 20766]]
Dodd-Frank Act, which provides that all revenues from or assets related
to the ownership of an insured depository institution shall be
considered to be financial.
---------------------------------------------------------------------------
\81\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(4).
---------------------------------------------------------------------------
Trust Company Functions
The activities performed by a trust company (including activities
of a fiduciary, agency, or custodial nature) that is not a bank for
purposes of section 2(c) of the BHC Act were determined to be closely
related to banking by the Board.\82\
---------------------------------------------------------------------------
\82\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(5).
---------------------------------------------------------------------------
Financial and Investment Advisory Activities
Acting as an investment or financial advisor to any person was
determined to be closely related to banking by the Board.\83\ The
activity includes, 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.\84\
---------------------------------------------------------------------------
\83\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(6).
\84\ Id.
---------------------------------------------------------------------------
Agency Transactional Services for Customer Investments
Providing 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.\85\
---------------------------------------------------------------------------
\85\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(7).
---------------------------------------------------------------------------
Regulation Y imposes conditions on the manner in which bank holding
companies may conduct securities brokerage services, act as riskless
principal, provide private placement services, and act as a futures
commission merchant. 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 may not conduct securities underwriting or dealing
activities. Bank holding companies providing private placement services
under this authority may not purchase or repurchase for their own
account the securities being placed or hold in inventory unsold
portions of issues of those securities. Bank holding companies acting
as riskless principal under this authority are subject to conditions
with respect to bank-ineligible securities.
Each of these conditions was intended to prevent a bank holding
company from engaging in securities underwriting or dealing activities
in connection with the activities of securities brokerage, private
placement, or riskless principal, which were impermissible for bank
holding companies under the Glass-Steagall Act at the time the
activities were authorized.\86\ The fact that a firm may retain some
portion of shares in connection with, for example, private placement
activities, does not affect or negate the financial nature of private
placement activities. Moreover, as described elsewhere, securities
underwriting and dealing activities were subsequently determined by
statute to be financial activities. Thus, the appendix provides that
the following activities are financial without the non-definitional
conditions:
---------------------------------------------------------------------------
\86\ See 62 FR 9290, 9307-9308 (February 28, 1997).
---------------------------------------------------------------------------
[cir] 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).
[cir] Buying and selling in the secondary market all types of
securities on the order of customers as a ``riskless principal'' in a
transaction in which the company purchases (or sells) the security for
its own account to offset a contemporaneous sale to (or purchase from)
the customer.
[cir] 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.
Under the Board's regulations, a bank holding company acting as a
futures commission merchant must conduct the activity through a
separately incorporated subsidiary, the contract must be traded on an
exchange, and the parent bank holding company may not guarantee that
subsidiary's liabilities. The appendix does not reflect these
conditions, as they were imposed for the prudential purpose of limiting
the transmission of risk from these activities to an insured depository
affiliate or the parent bank holding company.\87\
---------------------------------------------------------------------------
\87\ Id. at 9309. (``The Board has determined that a * * *
restriction that prohibits the parent bank holding company from
guaranteeing or otherwise becoming liable for non-proprietary trades
conducted by or through its FCM subsidiary * * * effectively
addresses the Board's concern about a parent bank holding company's
exposure to an exchange's or clearinghouse's loss sharing rules * *
* [by protecting] the parent bank holding company from potential
exposure from customer trades and open-ended contingent liability
under loss sharing rules * * *'').
---------------------------------------------------------------------------
The Board's regulations also contain a broad provision authorizing
a bank holding company to provide ``transactional services for
customers involving any derivative or foreign exchange transaction that
a bank holding company is permitted to conduct for its own account.''
\88\ Specifically, the Board's Regulation Y describes the activity as
``[p]roviding 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) relating to a commodity that is
traded on an exchange.'' \89\ In the Second NPR, the Board proposed
removing the requirement that agent transactional services on certain
commodity derivatives transactions be provided only with respect to a
commodity that is traded on an exchange (regardless of whether the
contract being traded is traded on an exchange) because the limitation
was imposed for safety and soundness reasons. In light of comments
received, the Board has determined that
[[Page 20767]]
this condition, while serving a prudential role, also is part of the
definition of the authorized activity because it prevents a bank
holding company from engaging in the forward sale of commercial
products. Because the condition distinguishes the financial activity of
engaging in derivatives contracts from the commercial sale of assets,
the final appendix includes this condition.
---------------------------------------------------------------------------
\88\ Id. at 9310.
\89\ 12 CFR 225.28(b)(7)(v). The 1997 rulemaking describes this
financial activity as permitting a bank holding company to ``* * *
act as a broker with respect to forward contracts based on a
financial or nonfinancial commodity that also serves as the basis
for an exchange-traded futures contract. This permits a bank holding
company to act as agent in a forward contract that involves the same
commodities and assessment of risk that underlay the permissible FCM
activities of bank holding companies without extending this
authority to forward contracts for the delayed sale of commercial
products (such as automobiles, consumer products, etc.) or real
estate.'' See 62 FR 9290, 9311 (February 28, 1997).
---------------------------------------------------------------------------
Investment Transactions as Principal
Engaging in investment transactions as principal, including
underwriting and dealing in government obligations and money market
instruments, investing and trading as principal in foreign exchange and
derivatives, and buying and selling bullion were determined to be
closely related to banking by the Board.\90\ 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 limitations as would be applicable if the activity were
performed by member banks.\91\ The appendix does not reflect this
limitation because it was intended to prevent circumvention of the
Glass-Steagall Act. This condition does not define the activity of
engaging in investment transactions as principal and is therefore not
relevant for determining whether the activity of underwriting and
dealing in government obligations and money market instruments is
financial for purposes of determining whether a firm is predominantly
engaged in financial activities.\92\
---------------------------------------------------------------------------
\90\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(8).
\91\ 12 CFR 225.28(b)(8)(i).
\92\ 62 FR 9290, 9311 (February 28, 1997).
---------------------------------------------------------------------------
Under the Board's regulations, engaging in derivatives transactions
is a financial activity provided that the derivative contract is not a
bank-ineligible security, and either the asset underlying the contract
is a bank permissible asset or the contract contains conditions
designed to limit the potential that physical settlement would
occur.\93\
---------------------------------------------------------------------------
\93\ 12 CFR 225.28(b)(8)(ii)(B).
---------------------------------------------------------------------------
In the Second NPR, the Board proposed to remove these conditions in
defining derivatives activities that are financial activities.
Commenters expressed the view that the conditions requiring cash-
settlement were necessary to distinguish between commercial activities
involving physically settled derivatives contracts and the types of
financial derivative activities conducted by financial companies.
The Board has considered these comments, as well as the Board's
other precedents, in evaluating whether the conditions relating to
cash-settlement and assignment or offset are an essential part of the
definition of the financial activity of engaging in derivatives
activities. These conditions were imposed by the Board originally to
reduce the potential that bank holding companies would become involved
in and bear the risks of physical possession, transport, storage, and
delivery of commodities and to ensure that the commodity derivatives
business of a bank holding company is largely limited to acting as a
financial intermediary in the facilitation of transactions for
customers who use or produce commodities or are otherwise exposed to
commodity price risk as part of their regular business.\94\ In certain
instances, the Board has determined that engaging in physically-
settling commodities, physical commodity trading, energy tolling, and
energy management services, are activities that are complementary to
the financial activity of engaging as principal in commodity
derivatives transactions.\95\ Under section 4(k) of the BHC Act,
complementary activities are those that, although not necessarily
financial in nature, are so meaningfully connected to financial
activities that they complement those financial activities.
---------------------------------------------------------------------------
\94\ See 68 FR 39807, 39808 (July 3, 2003).
\95\ See Board letters regarding Bank of America Corporation
(April 24, 2007), Credit Suisse Group (March 27, 2007), Fortis S.A./
N.V. (September 29, 2006), and Wachovia Corporation (April 13,
2006); and Board orders regarding Royal Bank of Scotland Group plc,
94 Federal Reserve Bulletin C60 (2008), Societe Generale, 92 Federal
Reserve Bulletin C113 (2006), Deutsche Bank AG, 91 Federal Reserve
Bulletin C54 (2005), JPMorgan Chase & Co., 91 Federal Reserve
Bulletin C57 (2005); Barclays Bank PLC, 90 Federal Reserve Bulletin
511 (2004), UBS AG, 90 Federal Reserve Bulletin 215 (2004), and
Citigroup Inc., 89 Federal Reserve Bulletin 508 (2003).
---------------------------------------------------------------------------
Based on this review, the Board has determined that these
conditions, while serving an important prudential role, are also part
of the definition of the authorized activity because they distinguish
these derivatives activities from similar derivatives activities that
are not conducted as a financial intermediary. Thus, the appendix
includes, as a financial activity for purposes of Title I, engaging as
principal in 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, other than a bank-ineligible security \96\ if: (i) A state
member bank is authorized to invest in the asset underlying the
contract; \97\ (ii) the contract requires cash settlement; (iii) the
contract allows for assignment, termination, or offset prior to
delivery or expiration, and the company makes every reasonable effort
to avoid taking or making delivery of the asset underlying the
contract, or receives and instantaneously transfers title to the
underlying asset, by operation of contract and without taking or making
physical delivery of the asset; or (iv) the contract does not allow for
assignment, termination, or offset prior to delivery or expiration and
is based on an asset for which futures contracts or options on futures
contracts have been approved for trading on a U.S. contract market by
the Commodity Futures Trading Commission, and the company makes every
reasonable effort to avoid taking or making delivery of the asset
underlying the contract, or receives and instantaneously transfers
title to the underlying asset, by operation of contract and without
taking or making physical delivery of the asset.
---------------------------------------------------------------------------
\96\ The Board's Regulation Y provides that a bank-ineligible
security is any security that a state member bank is not permitted
to underwrite or deal in under 12 U.S.C. 24 and 335.
\97\ State member banks may own, for example, investment grade
corporate debt securities, U.S. government and municipal securities,
foreign exchange, and certain precious metals. See 68 FR 39807,
39808, note 2 (July 3, 2003).
---------------------------------------------------------------------------
Similarly, engaging as principal in 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, is a financial activity only if the contract requires cash
settlement.
Investing and trading in foreign exchange is a financial activity
under the Board's regulations.
The Board also received a comment in response to the Second NPR
requesting that the Board clarify that derivatives transactions would
not be considered ``financial'' with respect to a commercial
manufacturer, producer, shipper, energy, or commodity firm when they
are incidental or ancillary to a party's activities as such. Under the
Dodd-Frank Act, whether an activity is ``financial'' is determined by
the nature of the activity, rather than by what type of firm conducts
the activity. Thus, the Board did not amend the appendix to the final
rule in this manner.
[[Page 20768]]
Management Consulting and Counseling Activities
The Board has authorized management consulting as a permissible
activity under several different authorities, each of which are
encompassed within the cross-references contained in section 4(k) of
the BHC Act. Providing management consulting advice on any matter to
unaffiliated depository institutions and on any financial, economic,
accounting, or audit matter to any other company (``financial
management consulting services'') was determined to be closely related
to banking by the Board.\98\ Under the Board's regulations, bank
holding companies that engage in financial management consulting
services also are permitted to provide management consulting services
generally to any company other than an unaffiliated depository
institution, on any non-financial matter (``non-financial management
consulting services''), provided at least 70 percent of the bank
holding company's total annual revenue derived from all management
consulting services is derived from financial management consulting
services. The revenue limitation on providing non-financial management
consulting services was designed to limit the involvement of bank
holding companies in the provision of management consulting services on
non-financial matters to nondepository institutions. The limitations on
the authority of bank holding companies to provide non-financial
management consulting services does not change the nature of the
permissible financial management consulting services done within those
limits.
---------------------------------------------------------------------------
\98\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(9)(i). The
Board's regulations provide that in conducting management consulting
advice, bank holding 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. This
restriction was designed to limit a bank holding company's
activities to providing advice rather than other services that may
involve impermissible activities for bank holding companies. For
purposes of Title I, assets and revenues derived from providing
management consulting services to a depository institution and any
consulting on financial, economic, accounting, or audit matters to
any company, will be considered financial regardless of other
services the firm might provide. See 12 CFR 225.28(b)(9)(i), note
11.
---------------------------------------------------------------------------
For purposes of applying the asset and revenue tests under Title I,
assets and revenues derived from or associated with any management
consulting services to a depository institution and any consulting on
financial, economic, accounting, or audit matters to any company, will
be considered financial. In addition, because a bank holding company
may derive up to 30 percent of its total annual revenue from non-
financial management consulting services and still be considered to be
engaged in financial management consulting activities under the Board's
regulations, for purposes of the applying the asset and revenue tests
under Title I, up to 30 percent of a nonbank company's assets or
revenues related to non-financial management consulting services will
be included in the company's financial assets or revenues.
The Board's regulations also prohibit a bank holding company
providing financial management consulting services from owning or
controlling more than 5 percent of the voting securities of a client
institution or from having a management interlock.\99\ These conditions
were intended to ensure that a bank holding company does not
effectively exercise control over a client company with which it has a
management consulting contract, thereby circumventing the prohibitions
and notice requirements applicable to bank holding companies seeking to
acquire a controlling interest in a company engaged in nonbanking
activities, and to prevent conflicts of interest.\100\ However, the
Board believes that these conditions also serve a definitional role to
distinguish management consulting from the actual conduct of the
commercial activity in which a client firm is engaged.
---------------------------------------------------------------------------
\99\ See id. See also 62 FR 9290, 9304, 9312 (February 28,
1997).
\100\ See 62 FR 9290, 9304, 9312 (February 28, 1997).
---------------------------------------------------------------------------
The authorization for these activities overlaps with, and is
largely subsumed under, the broader authority to engage in management
consulting services that was determined to be usual in connection with
banking abroad, described below. Therefore, a company that engages in
management consulting activities in a manner that does not comply with
the conditions described above will be considered to be engaged in a
financial activity if its management consulting activities are captured
by the broader authority.
Providing employee benefits 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 was determined to be closely related to banking by the
Board.\101\ Providing career counseling services also was determined to
be closely related to banking by the Board,\102\ subject to the
condition that the services must be provided to a financial
organization and individuals currently employed by, or recently
displaced from, a financial organization; to individuals who are
seeking employment at a financial organization; or to individuals
currently employed in or who are seeking positions in the finance,
accounting, and audit departments of any company. These conditions are
essential to this activity's being considered financial, and thus, this
activity is included in the appendix with these conditions.
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\101\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(9)(ii).
\102\ 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
The activity of providing courier services for: (i) Checks,
commercial papers, documents, and written instruments (excluding
currency or bearer-type negotiable instruments) that are exchanged
among banks and financial institutions, and (ii) audit and accounting
media of a banking or financial nature and other business records and
documents used in processing such media was determined to be closely
related to banking by the Board.\103\
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\103\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(10)(i).
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The activity of 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 encoding also was determined to be
closely related to banking by the Board.\104\
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\104\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(10)(ii).
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Insurance Agency and Underwriting
Certain insurance activities, including activities related to the
provision of credit insurance and insurance in small towns, were
determined to be closely related to banking by the Board.\105\ Under
the Board's regulations, bank holding companies may engage in these
activities, subject to various conditions and limitations, which are
reflected in the appendix. However, the authorization for these
activities overlaps with, and is largely subsumed under, the general
authority to engage in insurance underwriting and insurance agency
activities discussed above. Therefore, a company that engages in
insurance activities in a manner that does not comply with the
conditions described above will be considered to be
[[Page 20769]]
engaged in a financial activity if its insurance activities are
captured by the general authority.
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\105\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(11).
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Community Development Activities
The activities of 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.\106\
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\106\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(12).
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Money Orders, Savings Bonds, and Traveler's Checks
Issuing and selling money orders and similar consumer-type payment
instruments, selling U.S. savings bonds, and issuing traveler's checks
were determined to be closely related to banking by the Board.\107\
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\107\ 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.\108\ Under the Board's
regulations, a bank holding company's data processing activities must
comply with the conditions that the hardware provided in connection
with these services be offered only in conjunction with software
related to the processing, storage, and transmission of financial,
banking, or economic data, and all general purpose hardware provided
with financial software not constitute more than 30 percent of the cost
of any packaged offering.
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\108\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.28(b)(14).
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The restrictions on providing hardware as part of providing
financial data processing services were designed to limit the
involvement of bank holding companies in the sale of data processing
hardware, in particular, the sale of general purpose hardware. The
limitations on the authority of bank holding companies to provide
hardware as part of financial data processing do not change the nature
of the permissible financial data processing done within those limits.
For purposes of applying the asset and revenue tests under Title I,
only that portion of a firm's data processing that involves providing
financial data processing along with related hardware up to the limits
imposed on bank holding companies would be considered financial
activities. The provision of hardware or nonfinancial data processing
beyond those limits would not disqualify the financial data processing
revenues or assets, but also would not be considered financial
activities.
Mutual Fund Administrative Services
Providing administrative and other services to mutual funds was
determined be closely related to banking by the Board.\109\
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\109\ 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.\110\
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\110\ 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.\111\
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\111\ 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 determined to be closely
related to banking by the Board.\112\
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\112\ 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.\113\
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\113\ 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
The activities of providing notary-public services, selling postage
stamps and postage-paid envelopes, providing vehicle registration
services, and selling public-transportation tickets and tokens, when
offered in connection with banking services, were determined to be
closely related to banking by the Board.\114\
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\114\ 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.\115\
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\115\ 12 U.S.C. 1843(k)(4)(F); 12 CFR 225.86(a)(2)(vii).
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iii. Financial Activities That are Usual in Connection With Banking or
Other Financial Operations Abroad
Section 4(k) defines as a financial activity ``engaging, in the
United States, in any activity that: (i) A bank holding company may
engage in outside of the United States; and (ii) the Board has
determined pursuant to section 4(c)(13) of the BHC Act to be usual in
connection with the transaction of banking or other financial
operations abroad.'' \116\ These activities are described below.
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\116\ 12 U.S.C. 1843(k)(4)(G).
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Management Consulting Services
As noted previously, the Board has authorized management consulting
as a permissible activity under several different authorities contained
in the cross-references in section 4(k) of the BHC Act. In addition to
finding that management consulting services are closely related to
banking for purposes of section 4(c)(8) of the BHC Act, described
above, the Board also determined that providing management consulting
services is usual in connection with the transaction of banking or
other financial operations abroad under section 4(c)(13) of the BHC
Act.\117\ Under the Board's regulations, a bank holding company may
provide management consulting services, ``including to any person with
respect to nonfinancial matters, so long as the management consulting
services are advisory and do not allow the financial holding company to
control the person to which the services are provided.'' \118\
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\117\ 12 U.S.C. 1843(k)(4)(G); 12 CFR 225.86(b)(1).
\118\ 12 CFR 225.86(b)(1).
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In the second NPR, the Board proposed to define this financial
activity without regard to the condition that the bank holding company
not control a client firm because this condition was imposed to prevent
bank holding companies from circumventing the prohibitions and approval
requirements in the BHC Act and to prevent conflicts of interest, as
described previously. However, the Board believes that this condition
also serves a definitional role to distinguish management consulting
from the actual conduct of the activities in which a client firm is
engaged, which may be commercial in nature. Therefore, the Board has
restored this condition to the definition of management consulting
activities that will be considered financial for purposes of Title I.
Travel Agency
Operating a travel agency in connection with providing financial
[[Page 20770]]
services was determined to be usual in connection with the transaction
of banking or other financial operations abroad.\119\ This activity
could be conducted in connection with any of the financial activities
listed in this appendix, such as, for example, engaging in credit card
activities.\120\
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\119\ 12 U.S.C. 1843(k)(4)(G); 12 CFR 225.86(b)(2).
\120\ See 48 FR 56932, 56933 (December 27, 1983).
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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.\121\ This activity is in addition to, and
in some ways includes, the financial activity of providing
administrative services to mutual funds discussed above. Under the
Board's regulations, bank holding companies are prohibited from
exerting managerial control over the companies in which the mutual fund
invests and must reduce their ownership to less than 25 percent of the
equity of the mutual fund within one year of sponsoring the fund. These
conditions do not define the essential nature of organizing,
sponsoring, or managing a mutual fund. Rather, they were imposed to
prevent circumvention of the investment restrictions in the BHC
Act.\122\ Therefore, they are not reflected in the appendix.
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\121\ 12 U.S.C. 1843(k)(4)(G); 12 CFR 225.86(b)(3).
\122\ Furthermore, the Board's regulations governing a financial
holding company's merchant banking activities authorizes the
financial holding company to own all of the voting shares of a fund,
but no more than 25 percent of the equity of the fund, which
demonstrates that section 4(k) authorizes financial holding
companies to control funds. The limitation on a financial holding
company's equity interest in a fund was a prudential limitation
imposed to limit the potential losses to which the financial holding
company may be exposed.
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Commercial Banking Activities
Engaging in commercial banking and other banking activities was
determined to be usual in connection with the transaction of banking or
other financial operations abroad.\123\ Commercial banking activities
include the ownership of a bank, as well as engaging in activities and
making investments permissible for a bank.\124\ The purchase of
liquidity instruments, such as U.S. government securities, is an
activity that is permissible for a bank. Some commenters had suggested
that assets such as liquidity instruments not be included in a
company's financial revenues or assets for purposes of determining
whether the company is predominantly engaged in financial activities.
However, investing in bank permissible investments is intrinsic to
commercial banking. Therefore, a nonbank company's purchase of
liquidity instruments would be included in the company's financial
revenues and assets.
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\123\ 12 CFR 211.10(a)(1).
\124\ The Board's regulations implementing section 4(k) of the
BHC Act do not include this activity because the regulations were
intended to identify the activities that may be conducted using the
post-transaction notice procedures. In the preamble to the final
rule implementing section 4(k), the Board expressed the view that
``the GLB Act did not authorize a financial holding company to
conduct commercial and other banking activities in the United States
by using the post-transaction notice procedure.'' 66 FR 400, 405
(January 3, 2001). The fact that post-transaction notice procedures
are not available for commercial or other banking activities does
not impact the conclusion that engaging in commercial and other
banking activities is a financial activity for purposes of
determining whether a firm is predominantly engaged in financial
activities under Title I.
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c. Implications for Bank Holding Companies
As noted in the Second NPR, the activities listed in the appendix
would be defined as financial solely for purposes of Title I of the
Dodd-Frank Act. The 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.
d. Other Activities
As described above, section 4(k) of the BHC Act authorizes the
Board, in consultation with the Secretary of the Treasury, to determine
in the future that additional activities are ``financial in nature.''
\125\ One commenter contended that the universe of financial activities
that should be included when calculating either the revenue or asset
test should be frozen as of the date on which the Dodd-Frank Act was
passed and should not include additional activities that the Board, in
consultation with the Secretary of the Treasury, determines in the
future to be ``financial in nature.''
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\125\ See 12 U.S.C. 1843(k)(1)-(k)(3).
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The Board has considered this comment and believes that the
language of section 102 of the Dodd-Frank Act is best read as providing
that any activities that are considered to be ``financial in nature''
at the time a company is considered under the asset or revenue test to
determine whether such company is predominantly engaged in financial
activities, should be included in such calculation.
Section 102 specifically provides that an activity that is
``financial in nature'' as defined in section 4(k) of the BHC Act,
shall be considered to be a financial activity for purposes of
determining whether a company is predominantly engaged in financial
activities. The definition of financial activities under section 4(k)
is not static, and, under the terms of section 4(k), may be expanded.
In light of the evolving nature of financial markets and companies, the
inclusion of all activities that are considered to be financial at the
time the determination is made ensures that the definition of
``financial activities'' for purposes of the designation process
accurately reflects that evolution. This interpretation also is
consistent with the statutory process that requires the Council to
revisit designation decisions at least annually. This provision of the
statute contemplates that a company's status as a ``nonbank financial
company'' would not remain static, but would be reevaluated at
different times in the future. This requirement to revisit designation
decisions indicates that Congress foresaw that the mix of financial and
nonfinancial activities conducted by companies could change over time.
A company's mix of financial and nonfinancial activities could change
in the future for various reasons, including a determination by the
Board and the Secretary of the Treasury, that additional activities
should be considered to be financial in nature under section 4(k).
In addition, the Board believes that this interpretation is
consistent with the Council's duties under section 112 of the Dodd-
Frank Act, which include monitoring the financial services marketplace
to identify potential threats to the financial stability of the United
States and providing a forum for discussion and analysis of emerging
market developments and financial regulatory issues. The Council's
duties and authorities contemplate that the Council will stay abreast
of the evolving nature of financial activities, markets, and companies.
The inclusion of all activities that are considered to be financial at
the time the determination is made helps ensure that the Council
fulfills its statutory duties, authorities, and purposes, including its
authority to consider any company that is predominantly engaged in
financial activities that could pose a threat to U.S. financial
stability for designation. The Board, as appropriate, will, on a case-
by-case basis, provide assistance to companies in determining whether a
particular activity is financial in nature for purposes of Title
I.\126\
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\126\ The First NPR proposed a formal procedure under which a
company could request that the Board determine whether a particular
activity is financial in nature for purposes of Title I, which was
substantially similar to the procedure outlined in Sec. 225.88 of
the Board's Regulation Y under which a financial holding company or
other interested entity may request a determination from the Board
that an activity is financial in nature or incidental to a financial
activity. The final rule contemplates that the Board and Council, as
appropriate, will help companies determine whether the company is
predominantly engaged in financial activities. As part of this
process, the Board expects to provide assistance to companies
attempting to determine whether a particular activity is financial,
as appropriate, consistent with the Board's interpretive authority
under the BHC Act and its authority under section 102(a)(6) of the
Dodd-Frank Act. Therefore, the Board has determined that it is
unnecessary to include in the final rule a formal procedure under
which a company may request that the Board determine whether a
particular activity is financial in nature.
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[[Page 20771]]
3. Equity Investments in Unconsolidated Entities
The First NPR included two rules of construction governing the
application of the two-year test to revenues and assets attributable to
a company's minority equity investments in unconsolidated entities.
Under the first proposed rule of construction, the Board proposed to
attribute to a company all revenues derived from, and assets related
to, the company's equity investment in any unconsolidated company that
itself is predominantly engaged in financial activities.\127\ This rule
of construction would have required companies to determine whether 85
percent or more of an investee company's revenues or assets were
attributable to financial activities for purposes of determining
whether to treat revenues and assets related to unconsolidated minority
investments as financial. Under the second rule of construction, the
Board proposed to permit (but not require) a company to treat as
nonfinancial the revenues and assets attributable to a limited amount
of de minimis equity investments in unconsolidated companies without
having to separately determine whether the investee company is itself
predominantly engaged in financial activities.\128\
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\127\ See Sec. 225.301(e)(1) of the First NPR.
\128\ See Sec. 225.301(e)(2) of the First NPR.
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First Rule of Construction: Unconsolidated Investments
Several commenters asserted that a company's minority equity
investments in an unconsolidated company should not be included in a
company's financial revenues or assets when determining whether such
company is predominantly engaged in financial activities unless the
investment was made in connection with a merchant banking investment as
defined in section 4(k) of the BHC Act or was made in a subsidiary of
the company. Some commenters expressed the view that requiring a
company to determine whether unconsolidated investee companies are
themselves predominantly engaged in financial activities would be
unduly burdensome.
In light of the comments, the Board has eliminated the requirement
that a company determine whether an unconsolidated company in which it
has made an investment is predominantly engaged in financial
activities. Rather, the Board has amended the final rule to provide
that an investment in an unconsolidated company will be presumed to be
made in the course of conducting a financial activity set forth in
section 4(k). In the Board's experience, this presumption is
appropriate because most companies that derive a significant portion of
revenue from, or have significant assets related to, investments in
unconsolidated companies (such as hedge funds, private equity funds, or
mutual funds) generally hold those investments for purposes of resale
in connection with a bona fide merchant or investment banking activity
as set forth in section 4(k)(4)(H), make those investments in
connection with the activity of investing for others as defined in
section 4(k)(4)(A), or invest in companies engaged in financial
activities as provided for in section 4(k)(1). This presumption will
reduce burden on companies by allowing them to determine whether they
are predominantly engaged in financial activities without having to
determine whether an unconsolidated company in which it has invested is
itself predominantly engaged in financial activities.\129\ In addition,
this presumption will reduce burden on companies that are required to
report their credit exposure to significant bank holding companies and
significant nonbank financial companies under section 165(d) of the
Dodd-Frank Act, which requires companies subject to this reporting
obligation to identify companies that are predominantly engaged in
financial activities, and thus, nonbank financial companies.
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\129\ Unless this presumption is rebutted, a nonbank company's
investment income, including the company's proportionate share of
earnings associated with an investment accounted for under the
equity method, and dividend income from investments in
unconsolidated companies will be included in the company's financial
revenues for purposes of the revenue test.
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However, the Board recognizes that the presumption will not be
appropriate in all instances, such as when a company holds an
investment in a supplier in order to manage its supply chain more
efficiently, to otherwise integrate various aspects of the company's
business, or as a joint venture to engage in a business related to the
company's primary business, among other possibilities. Accordingly, a
company may rebut the presumption that an investment in a particular
unconsolidated company is related to a financial activity by providing
evidence to the Council, with respect to the definition of a nonbank
financial company for purposes of Title I (other than with respect to
the definition of a significant nonbank financial company), or the
Board, with respect to the definition of a significant nonbank
financial company, that the investment is not a merchant banking
investment, an investment for others, an investment in a company
engaged in activities that are financial in nature, or is not otherwise
related to a financial activity. The Council or the Board, as
appropriate, will consider this evidence on a case-by-case basis to
determine whether the revenues derived from, or the assets related to,
a company's investment in an unconsolidated company should be
considered to be financial revenues or assets of the company.
The Board also has amended the first rule of construction to
clarify that it would apply to a nonbank company's investment in an
unconsolidated company, regardless of whether this investment would
constitute a ``minority'' investment under applicable accounting
standards. This amendment is intended to address circumstances in which
an investor holds more than a majority of an investee company's voting
shares but has granted substantive participating rights or similar
rights to minority shareholders and, therefore, does not have a
controlling financial interest under applicable accounting standards.
Second Rule of Construction: De Minimis Investments
As noted above, the first NPR contained a second rule of
construction that would permit (but not require) a company to treat as
nonfinancial the revenues and assets attributable to investments in
unconsolidated companies representing less than five percent of any
class of outstanding voting shares, and less than 25 percent of the
total equity, of the unconsolidated company without having to
separately determine whether those companies are themselves
predominantly engaged in financial activities.\130\ This rule of
construction was subject to several conditions designed to limit the
[[Page 20772]]
potential for these de minimis investments to substantially alter the
financial character of the activities of a company.\131\
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\130\ See Sec. 225.301(e)(2) of the First NPR.
\131\ Specifically, this rule of construction provided that a
company may treat revenues derived from, or assets related to, an
equity investment by the company in an investee company as revenues
or assets not derived from, or related to, activities that are
financial in nature (regardless of the type of activities conducted
by the other company), if (i) the company owns less than five
percent of any class of outstanding voting shares, and less than 25
percent of the total equity, of the investee company; (ii) the
financial statements of the investee company are not consolidated
with those of the company under applicable accounting standards;
(iii) the company's investment in the investee company is not held
in connection with the conduct of any financial activity (such as,
for example, investment advisory activities or merchant banking
investment activities) by the company or any of its subsidiaries;
(iv) the investee company is not a bank, bank holding company,
broker-dealer, insurance company, or other regulated financial
institution; and (v) the aggregate amount of revenues or assets
treated as nonfinancial under the rule of construction in any year
does not exceed five percent of the company's annual gross financial
revenues or consolidated total financial assets of the company.
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In light of the rebuttable presumption discussed above, which
provides that the Board will presume that a company's investments in
unconsolidated companies are financial as either a merchant banking
investment under section 4(k)(4)(H), an investment made for others
under section 4(k)(4)(A), or an investment in a company engaged in
activities that are financial in nature under section 4(k)(1), and the
company's ability to rebut the presumption in consultation with the
Board, the second rule of construction is no longer necessary. The
Council or the Board as appropriate, will, on a case-by-case basis,
consider whether a particular investment is related to an activity that
is financial in nature as defined in section 4(k), including
investments representing less than five percent of any class of the
unconsolidated investee company's outstanding voting shares, and less
than 25 percent of the unconsolidated investee company's total equity.
4. Characterization of Internal Financial Activities and Certain Assets
Several commenters requested that the Board clarify whether
revenues derived from, or assets related to, internal financial
activities should be included as financial revenues or assets when
determining whether a company is predominantly engaged in financial
activities.
As the Board explained in the First NPR, the definition of
financial activities includes all activities that have been, or may be,
determined to be ``financial in nature'' under section 4(k) regardless
of where the activity is conducted by a company or whether the company
is conducting the activity on an internal or inter-affiliate basis or
with a third-party. This view is consistent with the language of the
Dodd-Frank Act. Section 102(a)(6) does not distinguish between
financial activities conducted internally or those conducted with third
parties. This is in sharp contrast to the specific terms of sections
113(c) and 167(b) of the Dodd-Frank Act, which provide that the Board
may require a nonbank financial company to conduct its financial
activities in an intermediate holding company ``other than'' internal
financial activities, including internal treasury, investment, and
employee benefit functions.\132\ The absence of such an exclusion in
section 102(a)(6) indicates that Congress intended that internal
financial activities be included for purposes of determining whether a
company is predominantly engaged in financial activities as defined in
section 102(a)(6).
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\132\ 12 U.S.C. 5323(c) and 5367(b). See also section 626 of the
Dodd-Frank Act; 12 U.S.C. 1467b.
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In addition, some commenters requested that the Board clarify that
particular assets, such as cash, goodwill and other intangibles, and
accounts receivable that relate to the company's financing a non-
financial activity or product, are not included in a company's assets
related to financial activities for purposes of determining whether the
company is predominantly engaged in financial activities.
The Dodd-Frank Act compares assets related to financial activities
to a firm's total assets. Cash on hand is not easily mapped to or
necessarily used to fund a particular financial activity. Moreover,
while a firm may be able to trace the generation of cash to a
particular activity internally, the Dodd-Frank Act also contemplates
that third parties be able to determine whether a firm is predominantly
engaged in financial activities.\133\ Third parties are not privy to
the type of internal documentation that would allow them to assess
whether cash is related to a particular financial activity.
Consequently, the final rule excludes cash from a company's
consolidated total assets and consolidated total financial assets for
purposes of determining whether a company is predominantly engaged in
financial activities under the asset test. However, inflows of cash
generally may be attributed to particular activities for purposes of
the revenue test in the Dodd-Frank Act using the company's cash flow
statement. Thus, all revenues, including cash, that are derived from
financial activities must be included in the revenue test.
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\133\ As previously discussed, section 165(d)(2) of the Dodd-
Frank Act requires nonbank financial companies supervised by the
Board and bank holding companies and foreign banks treated as bank
holding companies with $50 billion or more in assets to report their
credit exposure to significant nonbank financial companies and bank
holding companies, which requires companies subject to this
reporting obligation be identify those companies that are
predominantly engaged in financial activities, and thus, nonbank
financial companies.
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Holdings of cash equivalents represent investments and are,
therefore, related to the financial activity of making bank-permissible
investments. Therefore, cash equivalents are assets related to a
financial activity for purposes of the asset test.
Intangible assets generally may be attributed to a particular
activity. Accordingly, the final rule treats each intangible asset in
the same manner as the transaction or asset that gives rise to the
intangible asset. An intangible asset is a financial asset of the
company for purposes of the asset test only to the extent that it is
related to the conduct of a financial activity. For example, mortgage
servicing rights generate an intangible asset derived from an activity
determined to be financial under section 4(k) of the BHC Act. On the
other hand, goodwill, which is generally recognized as an intangible
asset, is generated when a company makes an acquisition at a premium
over the fair value of the asset acquired. The final rule allows
exclusion of goodwill from the company's consolidated total assets and
consolidated total financial assets for purposes of determining whether
a company is predominantly engaged in financial activities under the
asset test.
Accounts receivable may, in some cases, be related to the financial
activity of extending credit, such as when the firm charges the
customer interest over a term in exchange for the credit after a
product or service is delivered. In other cases, a company's accounts
receivable may simply reflect an agreement to accept payment from
customers on a specified date for the company's goods and services. In
those instances, the company may simply have provided its customers an
accommodation to provide payment by a certain date with no credit terms
such as interest. Because accounts receivable may in some cases reflect
a company's extensions of credit, the Board has determined that it is
most appropriate to treat accounts receivable as related to a financial
activity unless a company rebuts this presumption by providing evidence
to the Council, with respect to the definition of a nonbank financial
company for purposes of Title I (other
[[Page 20773]]
than with respect to the definition of a significant nonbank financial
company), or the Board, with respect to the definition of a significant
nonbank financial company, that the receivable is not related to
extending credit. As is the case with respect to the other presumptions
adopted by the Board in this rulemaking, this presumption will help
companies determine whether they are predominantly engaged in financial
activities and will reduce burden on companies that are required to
report their credit exposure to significant nonbank financial companies
under section 165(d) of the Dodd-Frank. A company may rebut this
presumption by providing evidence to the Council or the Board that the
receivable is not related to extending credit, and the evidence will be
considered on a case-by-case basis to determine whether the receivable
should be considered to be related to a financial activity.
As noted previously, the Board recognizes that determining whether
and the extent to which particular revenues or assets are related to
financial activities may be a complex endeavor, and the Council and the
Board, as appropriate, will assist companies on a case-by-case basis
that require assistance in determining whether the company is
predominantly engaged in financial activities.
5. Appropriate Accounting Standards
Under the two-year test set forth in the First NPR, the amount of a
company's financial revenues and financial assets would be calculated
as a percentage of the company's consolidated annual gross revenues and
consolidated total assets, respectively, as determined under and in
accordance with (1) U.S. generally accepted accounting principles
(GAAP), if the company uses GAAP in the ordinary course of its business
in preparing its consolidated financial statements, (2) International
Financial Reporting Standards (IFRS), if the company uses IFRS in the
ordinary course of its business in preparing its consolidated financial
statements, or (3) such other accounting standards that the Board
determines are appropriate.\134\ The final rule retains this provision,
but provides that the Council, with respect to the definition of a
nonbank financial company for purposes of Title I of the Dodd-Frank Act
(other than with respect to the definition of a significant nonbank
financial company), or the Board, with respect to the definition of a
significant nonbank financial company, may determine that an accounting
standard other than GAAP or IFRS is appropriate on a case-by-case
basis.\135\ In determining whether an accounting standard other than
GAAP or IFRS is appropriate, the Board expects that the Council and the
Board would consider various factors, including whether the accounting
standard is used by the company in the ordinary course of its business
in preparing its consolidated financial statements. Reliance on an
accounting standard that the company uses in the ordinary course
reduces the potential for companies to arbitrage the 85 percent
financial test by changing the accounting standards used for these
purposes.
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\134\ For example, one commenter requested that the Board
clarify that statutory accounting principles (SAP) would qualify as
an appropriate accounting standard for calculating a firm's
financial revenues and financial assets. The commenter indicated
that some insurance companies, for example, prepare their financial
statements in accordance with SAP and are not required by insurance
law or regulation to prepare financial statements in accordance with
GAAP. A company could request that the Council or the Board, as
appropriate, permit the company to use an alternative accounting
standard, such as SAP. A company seeking to use an alternative
accounting standard for purposes of determining whether it is
predominantly engaged in financial activities should provide
information to the Council or the Board that describes why the
proposed alternative accounting standard likely would ensure a
presentation of the company's consolidated revenues and assets in a
manner that reliably allows a determination of whether the firm
meets or does not meet the statutory test for a nonbank financial
company.
\135\ See Sec. 242.2(a)(3) of the Final Rule.
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As the Board explained in the First NPR, the rule allows companies
to use their consolidated, year-end financial statements (prepared in
accordance with the accounting standards discussed above) as the basis
for determining their annual gross revenues and consolidated assets for
purposes of the two-year test. This methodology is likely to provide a
transparent, accurate, and comparable basis for determining such
amounts across companies and, thus, should facilitate the ability of a
company, the Council, and the Board to determine whether a company is a
nonbank financial company for purposes of Title I of the Dodd-Frank
Act. Moreover, allowing companies to use the year-end consolidated
financial statements that they already prepare for financial reporting
or other purposes should help reduce potential burden.
6. Timing of Determination
The final rule provides the Council and the Board with the
flexibility, in appropriate circumstances, to consider whether a
company meets the statute's 85 percent financial revenue or asset test
based on the full range of information that may be available concerning
the company's activities and assets (including information obtained
from other Federal or state financial supervisors or agencies) at any
time rather than only as reflected in the company's year-end
consolidated financial statements.\136\
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\136\ See Sec. 242.3(a)(3) of the Final Rule.
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For example, the Board notes that the mix of a company's revenues
or assets, as well as the risks the company could pose to the U.S.
financial system, may change significantly and quickly as a result of
various types of transactions or actions, such as a merger,
consolidation, acquisition, establishment of a new business line, or
the initiation of a new activity. Moreover, these transactions and
actions may occur at any time during a company's fiscal year and,
accordingly, the effects of the transactions or actions may not be
reflected in the year-end consolidated financial statements of the
company for several months.
Section 242.3(a)(3) of the final rule would allow the Council, with
respect to the definition of a nonbank financial company for purposes
of Title I (other than with respect to the definition of a significant
nonbank financial company), or the Board, with respect to the
definition of a significant nonbank financial company, to promptly
consider the effect of changes in the nature or mix of a company's
activities as a result of such a transaction or action. The Board
expects that the Council and the Board would conduct such a case-by-
case review of whether a company is predominantly financial only when
justified by the circumstances. In addition, this authority would
enable the Council and the Board, in appropriate circumstances, to
determine whether a company that does not prepare consolidated
financial statements is predominantly engaged in financial activities
through consultation with the company.
B. Significant Nonbank Financial Company and Significant Bank Holding
Company
As discussed above, the Dodd-Frank Act requires the Board to define
the terms ``significant nonbank financial company'' and ``significant
bank holding company'' by rule.\137\
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\137\ See sections 102(a)(7) of the Dodd-Frank Act; 12 U.S.C.
5311(a)(7). These terms are used in two places in the Dodd-Frank
Act. First, under section 113, the Council must consider the
relationships of a nonbank financial company with significant
nonbank financial companies and significant bank holding companies
in determining whether the nonbank financial company should be
subjected to supervision by the Federal Reserve (12 U.S.C.
5323(a)(2), (b)(2)). Second, under section 165(d)(2), nonbank
financial companies and bank holding companies with $50 billion or
more of total consolidated assets must file credit reports that
include their exposures to significant nonbank financial companies
and significant bank holding companies (12 U.S.C. 5365(d)(2)).
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[[Page 20774]]
The First NPR defined a ``significant nonbank financial company''
to mean (i) any nonbank financial company supervised by the Board; and
(ii) any other nonbank financial company that had $50 billion or more
in total consolidated assets as of the end of its most recently
completed fiscal year. The final rule retains this definition. The
final rule defines a ``significant bank holding company,'' as ``any
bank holding company or company that is, or is treated in the United
States as, a bank holding company, that had $50 billion or more in
total consolidated assets as of the end of the most recently completed
calendar year'' as reported by the bank holding company or company that
is, or is treated in the United States as, a bank holding company on
the appropriate Federal Reserve form.
Several commenters provided suggestions regarding the $50 billion
asset threshold established in the proposed definitions of
``significant nonbank financial company'' and ``significant bank
holding company.'' One commenter requested that the Board adjust the
threshold for inflation, and another commenter suggested that the Board
define ``significant nonbank financial company'' to include only those
firms that the Council has designated for Board supervision under
section 113 and eliminate that portion of the definition based on the
$50 billion asset threshold.
The Board designed the threshold to provide a transparent standard
that other companies and the Council may use in meeting their
respective statutory obligations to consider the relationships of
companies with ``significant'' nonbank financial companies and bank
holding companies. The requirement that firms calculate their exposure
to significant nonbank financial companies and bank holding companies
based on widely-used and transparent standards likely will reduce the
burden imposed on the Council and those firms that are required to
calculate their exposure to significant entities.
In establishing this threshold, the Board considered its
supervisory experience with bank holding companies. The Board also
considered the fact that Congress established $50 billion in total
consolidated assets as the threshold (without an inflation adjustment)
at which bank holding companies should be subject to enhanced
prudential supervision without any special determination by the Council
that the bank holding company's failure would pose a threat to
financial stability. The Board also notes that a company that meets the
definition of either a ``significant'' nonbank financial company or
bank holding company would not be subject to any additional supervision
or regulation by virtue of that definition.
For these reasons, the Board has concluded that there is a
sufficient basis for adopting the $50 billion threshold for purposes of
defining ``significant'' nonbank financial companies and bank holding
companies. The Board has determined not to include an inflation
adjustment provision in the final rule. An inflation adjustment would
add complexity and burden to the definition without any significant
benefit in more accurately defining the relevant terms. However, the
Board may consider amending the $50 billion threshold in the future if
the Board determines that such reconsideration is appropriate.
Several commenters suggested that the Board exclude certain assets
from the calculation of a nonbank financial company's ``total
consolidated assets,'' despite the consolidation of such assets on the
company's balance sheet under GAAP or other appropriate accounting
standards. For instance, several commenters requested that the Board
exclude managed assets and investment fund assets when calculating the
total assets of the asset manager or fund adviser in situations in
which applicable accounting standards provide for the consolidation of
such assets on the balance sheets of the asset manager and the fund
adviser, respectively. The commenters contended that exclusion of such
assets was appropriate, because such assets are not the at-risk assets
of the manager or adviser.
Another commenter requested that the calculation of the $50 billion
threshold with respect to asset managers and fund advisers exclude
capitalized goodwill and other intangibles that are not financial
assets that are impacted by temporary market movements, and for which
the clients have no direct or indirect ownership interest. Commenters
also suggested that separate investment funds managed by the same
investment adviser not be consolidated when measuring total
consolidated assets of the adviser. With respect to the definition of a
``significant bank holding company,'' one commenter suggested that the
$50 billion asset calculation should include only the U.S.-based assets
of the bank holding company or foreign bank treated as a bank holding
company, rather than the company's worldwide consolidated assets.
The Board has considered these comments and has retained the
requirements in the final rule that the calculation of ``total
consolidated assets'' of a nonbank financial company include a
company's worldwide consolidated assets as determined in accordance
with GAAP, IFRS, or other appropriate accounting standards. The Board
believes that the determination of total consolidated assets based on
applicable accounting principles provides a reliable, uniform (across a
given accounting framework), and simple approach that is most readily
applied by the Council, the Board, and affected companies with the
least burden. Any other approach would require the Council, the Board,
and affected companies to obtain information from the ``significant''
firms and make adjustments to the reported assets of the firm, which
would be burdensome and potentially unreliable.
The Board also has retained the proposed definition of a
``significant bank holding company'' as any bank holding company or
foreign bank or company that is treated as a bank holding company that
had $50 billion or more in total consolidated assets as of the end of
the most recently completed calendar year (as reported by the bank
holding company or foreign bank on the appropriate Federal Reserve
form), based on the bank holding company's consolidated worldwide
assets. Using worldwide consolidated assets measures the significance
of a bank holding company and, as above, imposes the least burden on
the Council, the Board, and the relevant entities.
Several commenters requested that the Board highlight the
distinction between ``significant'' nonbank financial companies and
nonbank financial companies that are designated by the Council for
supervision by the Board under section 113 of the Dodd-Frank Act.
Qualifying as a significant nonbank financial company is not tantamount
to a determination by the Council to subject a nonbank financial
company to heightened prudential supervision by the Board under section
113 of the Dodd-Frank Act. A company that is considered to be a
significant bank holding company or a significant nonbank financial
company does not become subject to any additional supervision or
regulation by virtue of that definition.
One commenter expressed concern that the proposed rule neither
established a procedure under which a company could determine whether
it were a ``significant'' nonbank financial
[[Page 20775]]
company, nor imposed a requirement that a company calculate or publish
its classification as significant. Like the proposed rule, the final
rule does not impose a requirement that a company determine whether it
meets the definition of either a ``significant'' nonbank financial
company or bank holding company, because a company is not required to
report its status as ``significant'' to the Board. Rather, the
determination regarding a company's status as ``significant'' as
provided in the final rule is intended to be self-executing and based
on readily available financial statements.
One commenter suggested that the Board consider defining
``significant'' companies differently for purposes of sections 113 and
165(d)(2) of the Act. As the Board discussed in the proposed rule,
while the Board alone is responsible for defining ``significant''
nonbank financial companies and bank holding companies for purposes of
section 113, the Board and the FDIC are jointly responsible for
developing rules to implement the credit exposure reporting
requirements under section 165(d)(2), under which nonbank financial
companies supervised by the Board and bank holding companies and
foreign banks treated as bank holding companies with $50 billion or
more in assets must report their credit exposure to ``significant''
nonbank financial companies and bank holding companies. The Board and
the FDIC sought comment on a joint proposed rule on April 12, 2011, to
implement the provisions of section 165(d), including the credit
exposure reporting requirements.\138\ The joint proposed rule adopted
the same definitions of the terms ``significant'' nonbank financial
company and bank holding company as proposed by the Board in the First
NPR, and as adopted in this final rulemaking.
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\138\ See 76 FR 22648 (2011). The Board and FDIC issued a final
rule implementing several of the provisions of section 165(d) on
November 1, 2011. The agencies did not finalize the credit exposure
reporting requirement at that time. See 76 FR 67323, 67327 (November
1, 2011).
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Several commenters requested that the final rule address
circumstances under which a determination that a company is a
significant nonbank financial company or bank holding company would be
treated by the Board as confidential under the Freedom of Information
Act. Other commenters requested that the Board refrain from publishing
a list of significant nonbank financial companies and bank holding
companies.
Because neither the statute nor the final rule requires a
significant nonbank financial company or bank holding company to report
its status as ``significant'' to the Board, the statute and the final
rule also do not require the Board to make a determination regarding
whether a nonbank financial company or bank holding company is
``significant.'' Moreover, because the Dodd-Frank Act imposes
requirements on certain firms that deal with ``significant'' nonbank
financial companies and bank holding companies, and not on the nonbank
financial companies or bank holding companies themselves, it is
important that firms that must identify significant companies can do so
without impediments on the availability of information.
III. Administrative Law Matters
A. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
Ch. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed this final
rule under the authority delegated to the Board by the Office of
Management and Budget (``OMB''). The final rule contains no collections
of information under the PRA. See 44 U.S.C. 3502(3). Accordingly, there
is no paperwork burden associated with the final rule.\139\ One
commenter asserted that the Board's analysis of the proposed rule under
the Paperwork Reduction Act was insufficient because the proposal did
not contain any notice or request for comment regarding any collection
of information to determine whether a company would be considered to be
a ``significant nonbank financial company.'' However, neither the
statute nor the final rule requires: (i) A ``significant'' nonbank
financial company or bank holding company to report its status as
``significant'' to the Board, or (ii) the Board to make such a
determination regarding a nonbank financial company or bank holding
company. For these reasons, the Board does not anticipate conducting or
sponsoring the collection of any information related to the Board's
establishment of the definitions of ``significant'' nonbank financial
company'' and ``significant'' bank holding company in this final rule.
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\139\ As described previously, the First NPR proposed a formal
procedure under which a company could request in writing a
determination from the Board as to whether a particular activity is
financial in nature. However, the Board believes that it is
unnecessary to include in the final rule a formal procedure under
which a company may request in writing that the Board determine
whether a particular activity is financial in nature. The
elimination of this formal procedure from the final rule has
eliminated all potential paperwork burden associated with this final
rule.
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B. Regulatory Flexibility Act
In accordance with Section 4(a) of the Regulatory Flexibility Act,
5 U.S.C. 601 et seq. (``RFA''), the Board must publish a final
regulatory flexibility analysis with this rulemaking. The RFA requires
an agency either to provide a final regulatory flexibility analysis
with a final rule for which a general notice of proposed rulemaking is
required or to certify that the final rule will not have a significant
economic impact on a substantial number of small entities. Based on its
analysis and for the reasons stated below, the Board believes that the
final rule will not have a significant economic impact on a substantial
number of small entities. Nevertheless, the Board is publishing a final
regulatory flexibility analysis.
In accordance with sections 102(b) and 102(a)(7) of the Dodd-Frank
Act, the Board is adopting Regulation PP (12 CFR 242 et seq.) to
establish the criteria for determining if a company is ``predominantly
engaged in financial activities'' and to define the terms ``significant
nonbank financial company'' and ``significant bank holding company.''
\140\ The reasons and justifications for the rule are described in the
SUPPLEMENTARY INFORMATION. As discussed in the SUPPLEMENTARY
INFORMATION, the criteria and definitions that are established by the
rule are relevant to the authority of the Council to require that a
nonbank financial company become subject to consolidated prudential
supervision by the Board, because material financial distress at 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.
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\140\ 12 U.S.C. 5311(a)(7) and (b).
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Although asset size may not be the determinative factor of whether
a company may pose systemic risks, it is an important
consideration.\141\ Under regulations issued by the Small Business
Administration (``SBA''), firms within the ``Finance and Insurance''
sector are considered ``small'' if they have asset sizes that vary from
$7 million or less in assets to $175 million or less in assets.\142\
The Board believes that the Finance and Insurance sector constitutes a
reasonable universe of firms for these purposes because such firms
generally engage in activities that are financial in nature. A
financial firm that is at or below these size thresholds is not likely
to be designated by the Council under section 113 of the Dodd-
[[Page 20776]]
Frank Act because material financial distress at such a firm, or the
nature, scope, size, scale, concentration, interconnectedness, or mix
of its activities, is not likely to pose a threat to the financial
stability of the United States.\143\
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\141\ See 77 FR 21637 (April 11, 2012).
\142\ 13 CFR 121.201.
\143\ The terms ``significant nonbank financial company'' and
``significant bank holding company'' also are used in the credit
exposure reporting provisions of section 165(d) of the Dodd-Frank
Act, which apply to bank holding companies and foreign banks that
are treated as a bank holding company that have $50 billion or more
in assets (as well as nonbank financial companies supervised by the
Board). Bank holding companies and foreign banks subject to these
credit exposure reporting requirements substantially exceed the $175
million asset threshold at which a banking entity is considered
``small'' under regulations issued by the SBA.
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In addition, as described in the Supplementary Information, the
Board also has taken several steps to reduce the potential burden of
the rule on all companies that may be affected by the rule. These steps
include allowing companies to use their consolidated, year-end
financial statements prepared in accordance with GAAP or IFRS as the
basis for determining whether they are predominantly engaged in
financial activities, and establishing a rule of construction governing
the application of the two-year test to revenues and assets
attributable to a company's unconsolidated investments. In addition,
the presumptions adopted by the Board in connection with determining
whether a company is predominantly engaged in financial activities will
reduce burden on companies attempting to determine whether they are
predominantly engaged in financial activities and on companies that are
required to report their credit exposure to significant bank holding
companies and significant nonbank financial companies under section
165(d) of the Dodd-Frank Act.
One commenter expressed the view that although it is unlikely that
companies with less than $175 million in assets would be designated by
the Council, in the event that a money market mutual fund were
designated, small businesses, municipal entities, and small non-profit
organizations that invest in the fund would face higher costs.
Furthermore, the commenter argued that a money market mutual fund that
was designated would likely be less active in the short term debt
markets, which would lead to less liquid and more expensive markets for
small municipal and governmental entities that issue commercial paper.
For these reasons, the commenter asserted that the RFA requires the
Board to perform a cost-benefit analysis of its proposed rules because
the RFA applies even in those instances in which a regulation does not
directly apply to an entity, but directly affects it.\144\
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\144\ The commenter cited to Aeronautical Repair Station Ass'n,
Inc. v. FAA, 494 F.3d 161, 177 (D.C. Cir. 2007). In that case, the
FAA regulation at issue required employees who performed certain
functions ``directly or by contract (including by subcontract at any
tier)'' to be subject to drug and alcohol testing. The commenter
stated that the ``court rejected arguments that an RFA analysis was
unnecessary because contractors of air carriers were not `directly
regulated' and were not the `targets' of the regulation. The
commenter asserted that the court held that contractors were
`subject to the proposed regulation' for purposes of the RFA even
though the regulation was `immediately addressed' to the air
carriers, because the regulations applied to employees of the
contractors, just as it applied to employees of the air carriers.
The contractors were `directly affected and therefore regulated'
within the meaning of the RFA.''
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The question of whether the RFA requires consideration of the
indirect application of a rule has been considered by the courts, which
have held that the RFA only requires an analysis of how a rule affects
small entities that would be directly subject to its requirements.\145\
As described above, the final rule establishes the criteria for
determining if a company is ``predominantly engaged in financial
activities'' and defines the terms ``significant nonbank financial
company'' and ``significant bank holding company,'' which are relevant
to the authority of the Council to designate a nonbank financial
company for consolidated prudential supervision by the Board, because
the nonbank financial company could pose a threat to the financial
stability of the United States. The final rule does not impose
requirements directly on any entity.\146\ Moreover, as the Board noted
in the First NPR, it is extremely unlikely that a company with less
than $175 million in assets would be designated. As such, the Board
believes that the final rule will not have a significant economic
impact on a substantial number of small entities.
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\145\ See Mid-Tex Elec. Coop v. FERC, 773 F.2d 327 (D.C. Cir.
1985) and American Trucking Ass'ns v. EPA, 175 F.3d 1027, 1044 (D.C.
Cir 1999), aff'd in part and rev'd in part on other grounds, Whitman
v. American Trucking Ass'ns, 531 I/S/ 457 (2001). In Mid-Tex, the
court rejected the argument that ``the RFA is intended to apply to
all rules that affect small entities, whether the small entities are
directly regulated or not,'' and held that the RFA requires agencies
to consider the ``economic impact'' of a regulation on ``a
substantial number of small entities that are subject to the
requirements'' of the regulation. See 773 F.2d at 342 (emphasis
added). The court further stated that ``Congress did not intend to
require that every agency consider every indirect effect that any
regulation might have on small businesses in any stratum of the
national economy.'' See id. at 343. The court in Aeronautical Repair
Station, the case cited by the commenter, distinguished Mid-Tex and
its progeny from the facts in that case, in which the regulations at
issue ``expressly require[d] that the employees of contractors and
subcontractors be tested'' for drug and alcohol use. See 494 F.3d at
177. For this reason, the court in Aeronautical Repair Station found
that the rule at issue ``impose[d] responsibilities directly on the
contractors and subcontractors and they [we]re therefore parties
affected by and regulated by it.'' See id. (emphasis added).
\146\ 12 U.S.C. 5311(a)(7) and (b).
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The same commenter also asserted that the Board is required to
perform a cost benefit analysis under Executive Order 13579. The
Executive Order cited by the commenter does not mandate that
independent agencies such as the Board perform a cost benefit analysis
of their regulations. However, the Board takes seriously the importance
of evaluating the burdens imposed by its rulemaking efforts. For
example, the Board seeks to adopt final rules that faithfully reflect
the statutory provisions and Congressional intent while minimizing
regulatory burden. In addition, the Board provides an analysis of the
costs to small entities of its rules consistent with the RFA and
computes the anticipated cost of paperwork for affected entities
consistent with the Paperwork Reduction Act in its rulemaking. As
described above, the Board conducted a final regulatory flexibility
analysis and an analysis under the PRA in connection with this
rulemaking.
List of Subjects in 12 CFR Part 242
Administrative practice and procedure, Holding companies, Nonbank
financial companies.
Authority and Issuance
For the reasons stated in the preamble, the Board adds new Part 242
to Chapter II of Title 12 as follows:
PART 242--DEFINITIONS RELATING TO TITLE I OF THE DODD-FRANK ACT
(REGULATION PP)
Sec.
242.1 Authority and purpose.
242.2 Definitions.
242.3 Nonbank companies ``predominantly engaged'' in financial
activities.
242.4 Significant nonbank financial companies and significant bank
holding companies.
Appendix A to Part 242--Financial Activities for Purposes of Title I
of the Dodd-Frank Act
Authority: 12 U.S.C. 5311.
Sec. 242.1 Authority and purpose.
(a) Authority. This part is issued by the Board pursuant to
sections 102(a)(7) and (b) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) (12 U.S.C. 5311(a)(7) and
(b)).
(b) Purpose. (1) This part establishes the criteria for determining
if a company
[[Page 20777]]
is ``predominantly engaged in financial activities'' as required under
section 102(b) of the Dodd-Frank Act (12 U.S.C. 5311(b)) for purposes
of Title I of the Dodd-Frank Act.
(2) This part defines the terms ``significant nonbank financial
company'' and ``significant bank holding company'' as provided in
section 102(a)(6) of the Dodd-Frank Act for purposes of--
(i) Section 113 of the Dodd-Frank Act (12 U.S.C. 5323) relating to
the designation of nonbank financial companies by the Financial
Stability Oversight Council (Council) for supervision by the Board; and
(ii) Section 165(d)(2) of the Dodd-Frank Act (12 U.S.C. 5365(d)(2))
relating to the credit exposure reports required to be filed by--
(A) A nonbank financial company supervised by the Board; and
(B) A bank holding company or foreign bank subject to the Bank
Holding Company Act (BHC Act) (12 U.S.C. 1841 et seq.) that has $50
billion or more in total consolidated assets.
Sec. 242.2 Definitions.
For purposes of this part, the following definitions shall apply:
Applicable accounting standards.--The term ``applicable accounting
standards'' with respect to a company means:
(1) U.S. generally accepted accounting principles (GAAP), if the
company uses GAAP in the ordinary course of its business in preparing
its consolidated financial statements;
(2) International Financial Reporting Standards (IFRS), if the
company uses IFRS in the ordinary course of its business in preparing
its consolidated financial statements, or
(3) Such other accounting standards that the Council, with respect
to the definition of a nonbank financial company for purposes of Title
I of the Dodd-Frank Act (other than with respect to the definition of a
significant nonbank financial company), or the Board, with respect to
the definition of a significant nonbank financial company, determines
are appropriate on a case-by-case basis.
Foreign nonbank financial company.--The term ``foreign nonbank
financial company'' means a company (other than a company that is, or
is treated in the United States, as a bank holding company) that is--
(1) Incorporated or organized in a country other than the United
States; and
(2) Predominantly engaged in (including through a branch in the
United States) financial activities as defined in Sec. 242.3 of this
part.
Nonbank financial company.--The term ``nonbank financial company''
means a U.S. nonbank financial company and a foreign nonbank financial
company.
Nonbank financial company supervised by the Board.--The term
``nonbank financial company supervised by the Board'' means a nonbank
financial company or other company that the Council has determined
under section 113 of the Dodd-Frank Act (12 U.S.C. 5323) should be
supervised by the Board and for which such determination is still in
effect.
State.--The term ``State'' includes any State, commonwealth,
territory, or possession of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the
Northern Mariana Islands, American Samoa, Guam, and the United States
Virgin Islands.
U.S. nonbank financial company.--The term ``U.S. nonbank financial
company'' means a company that--
(1) Is incorporated or organized under the laws of the United
States or any State;
(2) Is predominantly engaged in financial activities as defined in
Sec. 242.3 of this part; and
(3) Is not--
(i) A bank holding company;
(ii) A Farm Credit System institution chartered and subject to the
provisions of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);
(iii) 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
Securities and Exchange Commission as such; or
(iv) A board of trade designated as a contract market (or parent
thereof), a derivatives clearing organization (or parent thereof,
unless the parent is a bank holding company), a swap execution
facility, or a swap data repository that, in each case, is registered
with the Commodity Futures Trading Commission as such.
Sec. 242.3 Nonbank companies ``predominantly engaged'' in financial
activities.
(a) In general. A company is ``predominantly engaged in financial
activities'' for purposes of this section if--
(1) The consolidated annual gross financial revenues of the company
in either of its two most recently completed fiscal years represent 85
percent or more of the company's consolidated annual gross revenues (as
determined in accordance with applicable accounting standards) in that
fiscal year;
(2) The consolidated total financial assets of the company as of
the end of either of its two most recently completed fiscal years
represent 85 percent or more of the company's consolidated total assets
(as determined in accordance with applicable accounting standards) as
of the end of that fiscal year; or
(3) The Council, with respect to the definition of a nonbank
financial company for purposes of Title I of the Dodd-Frank Act (other
than with respect to the definition of a significant nonbank financial
company), or the Board, with respect to the definition of a significant
nonbank financial company, determines, based on all the facts and
circumstances, that--
(i) The consolidated annual gross financial revenues of the company
represent 85 percent or more of the company's consolidated annual gross
revenues; or
(ii) The consolidated total financial assets of the company
represent 85 percent or more of the company's consolidated total
assets.
(b) Consolidated annual gross financial revenues. For purposes of
this section, the ``consolidated annual gross financial revenues'' of a
company means that portion of the consolidated annual gross revenues of
the company (as determined in accordance with applicable accounting
standards) that are derived, directly or indirectly, by the company or
any of its subsidiaries from--
(1) Activities that are financial in nature; or
(2) The ownership, control, or activities of an insured depository
institution or any subsidiary of an insured depository institution.
(c) Consolidated total financial assets. For purposes of this
section, the ``consolidated total financial assets'' of a company means
that portion of the consolidated total assets of the company (as
determined in accordance with applicable accounting standards) that are
related to--
(1) Activities that are financial in nature; or
(2) The ownership, control, or activities of an insured depository
institution or any subsidiary of an insured depository institution.
(d) Activities that are financial in nature--(1) In general. For
purposes of determining whether a company is predominantly engaged in
financial activities under this section, activities that are financial
in nature are set forth in the appendix to this part. Nothing in
[[Page 20778]]
this part limits the authority of the Board under any other provision
of law or regulation to modify the activities determined to be
financial in nature for purposes of this section or for purposes of the
BHC Act or to provide interpretations of section 4(k) of the BHC Act.
(2) Effect of other authority. Any activity described in the
appendix is financial in nature for purposes of this part regardless of
whether--
(i) A bank holding company (including a financial holding company
or a company that is, or is treated in the United States as, a bank
holding company) may be authorized to engage in the activity, or own or
control shares of a company engaged in such activity, under any other
provisions of the BHC Act or other Federal law including, but not
limited to, section 4(a)(2), section 4(c)(5), section 4(c)(6), section
4(c)(7), section 4(c)(9), or section 4(c)(13) of the BHC Act (12 U.S.C.
1843(a)(2), (c)(5), (c)(6), (c)(7), (c)(9), or (c)(13)) and the Board's
implementing regulations; or
(ii) Other provisions of Federal or state law or regulations
prohibit, restrict, or otherwise place conditions on the conduct of the
activity by a bank holding company (including a financial holding
company or a company that is, or is treated in the United States, as a
bank holding company) or bank holding companies generally.
(e) Rules of construction. For purposes of determining whether a
company is predominantly engaged in financial activities under this
section--
(1) Unconsolidated investments. (i) Unless otherwise determined by
the Council or the Board in accordance with paragraph (e)(1)(ii) of
this section, revenues derived from, and assets related to, an
investment by the company in an entity whose financial statements are
not consolidated with those of the company are presumed to be financial
in nature.
(ii) A company may seek to rebut the presumption described in
paragraph (e)(1)(i) of this section by providing evidence to the
Council, with respect to the definition of a nonbank financial company
for purposes of Title I of the Dodd-Frank Act (other than with respect
to the definition of a significant nonbank financial company), or the
Board, with respect to the definition of a significant nonbank
financial company, that the shares or ownership interests are not held
in connection with a bona fide merchant or investment banking activity,
are not held in connection with the activity of investing for others,
do not represent an investment in an entity engaged in activities that
are financial in nature as defined in the appendix, or are not
otherwise related to a financial activity.
(2) Accounts receivable. (i) Unless otherwise determined by the
Council or the Board in accordance with paragraph (e)(2)(ii) of this
section, an account receivable is presumed to be an asset related to
the financial activity of extending credit.
(ii) A company may seek to rebut the presumption described in
paragraph (e)(2)(i) of this section by providing evidence to the
Council, with respect to the definition of a nonbank financial company
for purposes of Title I of the Dodd-Frank Act (other than with respect
to the definition of a significant nonbank financial company), or the
Board, with respect to the definition of a significant nonbank
financial company, that the account receivable is not related to a
financial activity.
(3) Goodwill. Goodwill is excluded from a company's consolidated
total assets and consolidated total financial assets.
(4) Cash and cash equivalents. (i) Cash is excluded from a
company's consolidated total assets and consolidated total financial
assets.
(ii) Cash equivalents are assets related to a financial activity.
(5) Intangible assets. Intangible assets are treated in the same
manner as the transaction or asset that gives rise to the intangible
asset.
Sec. 242.4 Significant nonbank financial companies and significant
bank holding companies.
For purposes of Title I of the Dodd-Frank Act, the following
definitions shall apply:
(a) Significant nonbank financial company. A ``significant nonbank
financial company'' means--
(1) Any nonbank financial company supervised by the Board; and
(2) Any other nonbank financial company that had $50 billion or
more in total consolidated assets (as determined in accordance with
applicable accounting standards) as of the end of its most recently
completed fiscal year.
(b) Significant bank holding company. A ``significant bank holding
company'' means any bank holding company or company that is, or is
treated in the United States as, a bank holding company, that had $50
billion or more in total consolidated assets as of the end of the most
recently completed calendar year, as reported on either the Federal
Reserve's FR Y-9C (Consolidated Financial Statement for Bank Holding
Companies), or any successor form thereto, or the Federal Reserve's
Form FR Y-7Q (Capital and Asset Report for Foreign Banking
Organizations), or any successor form thereto.
Appendix A to Part 242--Financial Activities for Purposes of Title I of
the Dodd-Frank Act
(a) Lending, exchanging, transferring, investing for others, or
safeguarding money or securities.
(b) 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.
(c) Providing financial, investment, or economic advisory
services, including advising an investment company (as defined in
section 3 of the Investment Company Act of 1940).
(d) Issuing or selling instruments representing interests in
pools of assets permissible for a bank to hold directly.
(e) Underwriting, dealing in, or making a market in securities.
(f) Engaging in any activity that the Board has determined to be
so closely related to banking or managing or controlling banks as to
be a proper incident thereto, which include--
(1) 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.
(2) 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 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
[[Page 20779]]
that an insured depository institution may originate and own.
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\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.
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(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\
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\2\ For purposes of this section, real estate settlement
services do not include providing title insurance as principal,
agent, or broker.
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(3) 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\
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\3\ The requirement that the lease is on a nonoperating basis
means that the company does 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 is on a nonoperating basis means that
the company does 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.
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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 (f)(3)(iii)(A) of this section shall not exceed 25 percent
of the acquisition cost of the property to the lessor.
(4) 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.
(5) 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.
(6) 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.
(7) 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 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 (f)(8) of this
appendix, 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) relating to a commodity that is traded
on an exchange.
(8) 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, other than a bank-ineligible security,\5\
if--
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\5\ A bank-ineligible security is any security that a state
member bank is not permitted to underwrite or deal in under 12
U.S.C. 24 and 335.
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(1) A state member bank is authorized to invest in the asset
underlying the contract;
(2) The contract requires cash settlement;
(3) The contract allows for assignment, termination, or offset
prior to delivery or expiration, and the company--
(i) Makes every reasonable effort to avoid taking or making
delivery of the asset underlying the contract; or
(ii) Receives and instantaneously transfers title to the
underlying asset, by operation of contract and without taking or
making physical delivery of the asset; or
(4) The contract does not allow for assignment, termination, or
offset prior to delivery or expiration and is based on an asset for
which futures contracts or options on futures contracts have been
approved for trading on a U.S. contract market by the Commodity
Futures Trading Commission, and the company--
(i) Makes every reasonable effort to avoid taking or making
delivery of the asset underlying the contract; or
(ii) Receives and instantaneously transfers title to the
underlying asset, by operation of contract and without taking or
making physical delivery of the asset.
(C) Forward contracts, options,\6\ 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, if the contract
requires cash settlement.
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\6\ This reference does not include acting as a dealer in
options based on indices of bank-ineligible securities when the
options are traded on securities exchanges. These options are
securities for purposes of the federal securities laws and bank-
ineligible securities for purposes of section 20 of the Glass-
Steagall Act, 12 U.S.C. 337. Similarly, this reference does not
include acting as a dealer in any other instrument that is a bank-
ineligible security for purposes of section 20. Bank holding
companies that deal in these instruments must do so in accordance
with the Board's orders on dealing in bank-ineligible securities.
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(iii) 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
[[Page 20780]]
services such as arranging for storage, safe custody, assaying, and
shipment.
(9) Management consulting and counseling activities.
(i) Management consulting.
(A) Providing management consulting advice: \7\
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\7\ 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.
(B) Revenues derived from, or assets related to, a company's
management consulting activities under this subparagraph will not be
considered to be financial if the company:
(1) Owns or controls, directly or indirectly, more than 5
percent of the voting securities of the client institution; or
(2) Allows a management official, as defined in 12 CFR 212.2(h),
of the company or any of its affiliates to serve as a management
official of the client institution, except where such interlocking
relationship is permitted pursuant to an exemption permitted by the
Board.
(C) Up to 30 percent of a nonbank company's assets or revenues
related to management consulting services provided to customers not
described in paragraph (f)(9)(i)(A)(1) or regarding matters not
described in paragraph (f)(9)(i)(A)(2) of this appendix will be
included in the company's financial assets or revenues.
(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:
(A) A financial organization \8\ and individuals currently
employed by, or recently displaced from, a financial organization;
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\8\ 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.
(10) 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.\9\
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\9\ 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.
(11) 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 \10\ in the event of the death,
disability, or involuntary unemployment of the debtor.
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\10\ 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 (f)(3) of this
appendix.
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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 \11\ that is a subsidiary of a company, if:
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\11\ 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
\12\ and the credit is secured by the home; and
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\12\ 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 \13\ 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.\14\ Revenues derived from,
or assets related to, a company's specific insurance agency activity
under this clause will be considered financial only if the company:
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\13\ Nothing contained in this provision precludes a 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.
\14\ 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) Engages 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) Provides 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.
Revenues derived from, or assets related to, a company's insurance-
agency activities under this paragraph will be considered financial
only if the company does not engage in the sale of life insurance or
annuities except as provided in paragraphs (f)(11) (i) and (iii) of
this appendix, and does 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
[[Page 20781]]
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.
(12) 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.
(13) 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.
(14) Data processing.
(i) Providing data processing, data storage and data
transmission services, facilities (including data processing, data
storage and data transmission hardware, software, documentation, or
operating personnel), databases, advice, and access to such
services, facilities, or data-bases by any technological means, if
the data to be processed, stored or furnished are financial, banking
or economic.
(ii) Up to 30 percent of a nonbank company's assets or revenues
related to providing general purpose hardware in connection with
providing data processing products or services described in
paragraph (f)(14)(i) of this appendix will be included in the
company's financial assets or revenues.
(15) Administrative services. Providing administrative and other
services to mutual funds.
(16) Securities exchange. Owning shares of a securities
exchange.
(17) Certification authority. Acting as a certification
authority for digital signatures and authenticating the identity of
persons conducting financial and nonfinancial transactions.
(18) 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.
(19) Check cashing and wire transmission. Check cashing and wire
transmission services.
(20) Services offered in connection with banking services. 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.
(21) Real estate title abstracting.
(g) Engaging, in the United States, in any activity that a bank
holding company may engage in outside of the United States; and the
Board has determined, under regulations prescribed or
interpretations issued pursuant to section 4(c)(13) of the BHC Act
(12 U.S.C. 1843(c)(13)) to be usual in connection with the
transaction of banking or other financial operations abroad. Those
activities include--
(1) Providing management consulting services, including to any
person with respect to nonfinancial matters, so long as the
management consulting services are advisory and do not allow the
company to control the person to which the services are provided.
(2) Operating a travel agency in connection with financial
services.
(3) Organizing, sponsoring, and managing a mutual fund.
(4) Commercial banking and other banking activities.
(h) 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, engaged in any
activity not financial in nature as defined in this appendix if:
(1) 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;
(2) 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 (h)(1) of this appendix; and
(3) 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.
(i) 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, engaged in any
activity not financial in nature as defined in this appendix if--
(1) 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;
(2) 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
(3) 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.
(j) Lending, exchanging, transferring, investing for others, or
safeguarding financial assets other than money or securities.
(k) Providing any device or other instrumentality for
transferring money or other financial assets.
(l) Arranging, effecting, or facilitating financial transactions
for the account of third parties.
By order of the Board of Governors of the Federal Reserve
System, March 29, 2013.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2013-07688 Filed 4-4-13; 8:45 am]
BILLING CODE 6210-01-P