Federal Register, Volume 85 Issue 246 (Tuesday, December 22, 2020)

[Federal Register Volume 85, Number 246 (Tuesday, December 22, 2020)]
[Rules and Regulations]
[Pages 83686-83737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26225]

[[Page 83685]]

Vol. 85

Tuesday,

No. 246

December 22, 2020

Part II

Department of the Treasury

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Office of the Comptroller of the Currency

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12 CFR Parts 2, 5, 7, et al.

Activities and Operations of National Banks and Federal Savings
Associations; Final Rule

Federal Register / Vol. 85 , No. 246 / Tuesday, December 22, 2020 /
Rules and Regulations

[[Page 83686]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 4, 5, 7, 145, and 160

[Docket ID OCC-2020-0003]
RIN 1557-AE74

Activities and Operations of National Banks and Federal Savings
Associations

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

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency is issuing a
final rule to revise and reorganize its regulations relating to the
activities and operations of national banks and Federal savings
associations and to amend its rules relating Federal savings
association corporate governance. This rule clarifies and codifies
recent OCC interpretations, integrates certain regulations for national
banks and Federal savings associations, and updates or eliminates
outdated regulatory requirements that no longer reflect the modern
financial system. Additionally, this rule includes related technical
changes throughout these and other OCC regulations.

DATES: The rule is effective April 1, 2021.

FOR FURTHER INFORMATION CONTACT: Beth Kirby, Assistant Director,
Valerie Song, Assistant Director, Heidi M. Thomas, Special Counsel, or
Chris Rafferty, Attorney, Chief Counsel's Office, (202) 649-5490,
Office of the Comptroller of the Currency, 400 7th Street SW,
Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

I. Background

The Office of the Comptroller of the Currency (OCC) periodically
reviews its regulations to eliminate outdated or otherwise unnecessary
regulatory provisions and, where possible, to clarify or revise
requirements imposed on national banks and Federal savings
associations.\1\ The elimination of unnecessary regulatory impediments
together with efforts to revise regulations to reflect changes in the
financial industry help to promote economic growth for consumers,
businesses and communities.
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\1\ For example, the OCC recently issued a final rule relating
to policies and procedures for corporate activities and transactions
involving national banks and Federal savings associations, 12 CFR
part 5, that updates and clarifies these policies and procedures and
eliminate unnecessary requirements consistent with safety and
soundness. See 85 FR 80404 (Dec. 11, 2020).
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These reviews are in addition to the OCC's decennial review of its
regulations as required by the Economic Growth and Regulatory Paperwork
Reduction Act (EGRPRA).\2\ These reviews also consider, where
appropriate, opportunities to integrate rules that apply to national
banks with similar rules that apply to Federal savings associations in
light of the transfer to the OCC of all functions of the former Office
of Thrift Supervision (OTS) relating to Federal savings association by
Title III of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act).\3\
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\2\ Public Law 104-208 (1996), codified at 12 U.S.C. 3311(b).
Section 2222 of EGRPRA requires that, at least once every 10 years,
the OCC along with the other Federal banking agencies and the
Federal Financial Institutions Examination Council (FFIEC) conduct a
review of their regulations to identify outdated or otherwise
unnecessary regulatory requirements imposed on insured depository
institutions. Specifically, EGRPRA requires the agencies to
categorize and publish their regulations for comment, eliminate
unnecessary regulations to the extent that such action is
appropriate, and submit a report to Congress summarizing their
review. The agencies completed their second EGRPRA review on March
2017 and published their report in the Federal Register. 82 FR 15900
(March 30, 2017).
\3\ Public Law 111-203, 124 Stat. 1376 (2010) (transferring to
the OCC all functions of the former OTS relating to Federal savings
associations).
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As part of this process, the Office of the Comptroller of the
Currency (OCC) published a notice of proposed rulemaking (proposal or
proposed rule) on July 7, 2020 to revise and reorganize subparts A
through D of 12 CFR part 7, Activities and Operations.\4\ The OCC
proposed to update part 7 to address developing issues and industry
practices, to clarify OCC interpretive positions, and to integrate
certain national bank rules by adding Federal savings associations. As
examples, the proposed revisions to subpart A included new regulations
covering tax equity finance transactions, derivatives activities, and
payment system memberships. The proposed revisions to subpart B
addressed corporate governance issues, such as expanding the ability of
national banks to choose corporate governance provisions under State or
other law, clarifying permissible anti-takeover provisions, and adding
provisions relating to capital stock-related activities of national
banks. The OCC also proposed to update and integrate rules relating to
bank hours and closings in subpart C and to update rules relating to
loan production and deposit production offices and remote service units
in subpart D and to move these sections to subpart A to improve the
organization of part 7.\5\ As a companion to the proposed rule, the OCC
also issued an Advance Notice of Proposed Rulemaking (ANPR) inviting
ideas for revisions on the OCC's rules on electronic banking activities
located at subpart E of 12 CFR part 7 and 12 CFR part 155.\6\
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\4\ 85 FR 40794 (July 7, 2020).
\5\ The OCC has separately issued a final rule that amends 12
CFR 7.4001. See 84 FR 33530 (June 2, 2020) (Permissible Interest on
Loans That Are Sold, Assigned, or Otherwise Transferred). The OCC
also issued an interim final rule that amends 12 CFR 7.1001 and
7.1003, which this rulemaking finalizes. See 85 FR 31943 (May 28,
2020) (Director, Shareholder, and Member Meetings). Further, the OCC
has issued a final rule that adds a new Sec. 7.1031, National Banks
and Federal Savings Associations as Lenders). See 85 FR 68742
(October 30, 2020).
\6\ See 85 FR 40827 (July 7, 2020) (National Bank and Federal
Savings Association Digital Activities).
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The OCC also proposed more general changes throughout part 7
including removing outdated or superfluous regulations; consolidating
related regulations into one section; and making various technical
changes throughout part 7. In addition, the OCC proposed to integrate a
number of rules in part 7 to include Federal savings associations.
The OCC notes that pursuant to section 4(b) of the International
Banking Act,\7\ many of the provisions in part 7 apply to Federal
branches and agencies. This act provides that, subject to certain
exceptions, the operations of a foreign bank at a Federal branch or
agency shall be conducted with the same rights and privileges as a
national bank at the same location and shall be subject to all the same
duties, restrictions, penalties, liabilities, conditions, and
limitations that would apply under the National Bank Act to a national
bank doing business at the same location.\8\ This final rule amends
some of the provisions in part 7 to include Federal branches and
agencies for ease of reference. However, the lack of inclusion of
Federal branches and agencies in a particular provision does not
necessarily indicate that the provisions is inapplicable to Federal
branches and agencies.
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\7\ 12 U.S.C. 3101 et seq. (Pub. L. 95-369).
\8\ 12 U.S.C. 3102(b) (Pub. L. 95-369). See also 12 CFR 28.13.
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The OCC received 16 comment letters on the proposal from banking
organizations and other interested parties. These comments and the
OCC's response are discussed in the next section of this Supplementary
Information. As described in more detail below, the OCC is adopting the
proposal as a final rule with accompanying modifications where noted.
The final rule becomes effective on April 1, 2021.

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II. Description of the Proposed Rule

Subpart A--National Banks and Federal Savings Association Powers

Activities That Are Part of, or Incidental to, the Business of Banking
(New Sec. 7.1000)
Section 7.5001 identifies the criteria the OCC uses to determine
whether an electronic activity is authorized for national banks as part
of, or incidental to, the business of banking under 12 U.S.C.
24(Seventh) or other statutory authority. While this section details
those criteria in the context of electronic activities, the OCC uses
these same criteria to determine whether any activity is part of, or
incidental to, the business of banking. To confirm the broader
applicability of the criteria listed in Sec. 7.5001, the OCC proposed
to remove the word ``electronic'' from this section and move Sec.
7.5001 to subpart A of part 7 as new Sec. 7.1000. As part of this
move, the proposal redesignated current Sec. 7.1000 as Sec. 7.1024.
These changes better organize OCC rules and clarify that the criteria
of this new Sec. 7.1000 apply to any potential national bank activity
and not just those that are electronic in nature. Further, the OCC
believes that new Sec. 7.1000 belongs at the beginning of part 7
because it provides the framework for all national bank powers that
follow in subpart A.
The OCC also proposed a technical change to redesignated Sec.
7.1000(c)(1). The current rule provides a four factor test to determine
whether an activity is part of the business of banking. However, this
four-factor test is not necessary for activities that are specifically
included in 12 U.S.C. 24(Seventh) or other statutory authority because
they are by express statutory language within the business of banking.
Therefore, the proposed rule added language to clarify that this four-
factor test applies to activities not specifically included in 12
U.S.C. 24(Seventh) or other statutory authority. This clarification
reflects the OCC's long-standing use of the four-factor test to
determine whether an activity not expressly included in a statute is
within the business of banking.\9\
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\9\ The Supreme Court has held that the business of banking is
not limited to the enumerated powers listed in 12 U.S.C. 24(Seventh)
but encompasses more broadly activities that are part of or
incidental to the business of banking. NationsBank of N.C., N.A. v.
Variable Annuity Life Ins. Co., 513 U.S. 251, 258-60 (1995).
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The OCC received one comment that supported new Sec. 7.1000.
Therefore, the OCC is adopting Sec. 7.1000 as proposed.
The final rule also corrects a technical error in the proposed
rule. Current Sec. 7.5001(d)(3) contains an illustrative list of
electronic activities that are incidental to the business of banking.
The proposed rule inadvertently removed this list and the final rule
restores it as Sec. 7.5001, with conforming changes to the cross-
reference to new Sec. 7.1000. The OCC notes that it is reviewing this
list in the broader context of potential changes to all of subpart E
pursuant to the ANPR on National Bank and Federal Savings Association
Digital Activities and may make further changes in the future.\10\
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\10\ See 85 FR 40827.
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National Bank and Federal Savings Association Acting as Finder (Sec.
7.1002)
The OCC proposed a technical change to its regulation at Sec.
7.1002 relating to when a national bank acts as a finder and invited
comment on the inclusion of Federal savings association finder
activities in part 7. For the reasons discussed below, the OCC is
adopting this technical change and also is amending Sec. 7.1002 to
include Federal savings association finder activities.
The OCC has long permitted a national bank to act as a finder to
bring together buyers and sellers of financial and nonfinancial
products and services.\11\ The OCC's regulations include two separate
rules relating to permissible national bank finder activities. Section
7.1002, which codifies OCC interpretive letters, provides that finder
activities are part of the business of banking.\12\ This section also
describes permissible finder activities; provides an illustrative, non-
exclusive list of permissible finder activities; clarifies that a
national bank's finder authority does not allow it to engage in
brokerage activities that have not been found to be permissible for
national banks; and authorizes a national bank to advertise and accept
fees for finder services unless otherwise prohibited by Federal law.
Section 7.5002 provides that a national bank generally may perform,
provide, or deliver through electronic means and facilities any
activity, function, product, or service that is otherwise permissible.
Section 7.5002(a)(1) clarifies that a national bank may act as an
electronic finder and includes a list of permissible electronic finder
activities.
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\11\ See, e.g., OCC Interpretive Letter No. 607 (Aug. 24, 1992).
\12\ See, e.g., OCC Interpretive Letter No. 824 (Feb. 27, 1998).
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The OCC proposed amending its regulations by adding a new Sec.
7.1002(b)(8) that would cross-reference the permissible electronic
finder activities listed in Sec. 7.5002(a)(1). This change would
reference all examples of permissible finder activities for national
banks in one rule.
The OCC received one comment letter on Sec. 7.1002. The commenter
recommended revising the list of examples to reflect how finder
authority is exercised in the modern financial system. The commenter
specifically suggested that the OCC consider consolidating the finder
authority in Sec. Sec. 7.1002 and 7.5002. The OCC disagrees with this
recommendation. The cross-reference sufficiently clarifies that
additional finder activities are listed in that section. Further, the
OCC's ANPR on National Bank and Federal Savings Association Digital
Activities requested comment on the electronic finder activities list
in 12 CFR 7.5002(a)(1).\13\ Through that rulemaking process, the OCC
will consider further revisions related to electronic finder
activities. A cross-reference will capture these possible revisions
without again having to revise Sec. 7.1002. The OCC also may consider
consolidating the finder authority in Sec. Sec. 7.1002 and 7.5002
during the subpart E revision process.
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\13\ See 85 FR 40827, at 40830.
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The commenter further suggested that the final rule add to the list
in Sec. 7.1002(b) the making or receiving of a referral to or from a
third party for a fee, and more generally suggested that the rule
permit banks to accept reasonable finder fees. The OCC notes that Sec.
7.1002 contemplates making referrals for a fee, and the list of
examples in Sec. 7.1002 includes ``[a]rranging for third-party
providers to offer reduced rates to those customers referred by the
bank.'' \14\ The OCC also believes that continuing to limit fees to
those permitted by Federal law is appropriate. Therefore, the final
rule does not add a reasonableness requirement. However, the OCC notes
that the reasonableness of fees received may raise other concerns and
that Sec. 7.4002(b) provides considerations for national banks in
setting non-interest charges and fees.
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\14\ 12 CFR 7.1002(b)(3).
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The commenter's recommendation to add receiving a referral for a
fee also involves adding a bank receiving and paying for finder
services from a third party. Longstanding OCC interpretations confirm
that banks may pay for finder services, subject to fact-specific
considerations.\15\ However, Sec. 7.1002 covers banks acting as
finders, and the proposal did not address the authority

[[Page 83688]]

of banks to be finder clients. Accordingly, the OCC does not believe
that the final rule should add provisions on banks receiving and paying
for finder services.
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\15\ See, e.g., OCC Interpretive Letter No. 504 (May 18, 1990)
(describing how ``finder's fees [paid by a bank] must be high enough
to be attractive to potential sources of referrals, yet not so high
as to be financially detrimental to the Bank or create an appearance
of profit sharing, which could lead to the inference of a joint
venture or partnership'').
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The same commenter recommended the OCC confirm that payment or
collection of finder fees as a share of revenue is permitted. Section
7.1002(d) permits finder fees that do not violate Federal law and does
not expressly prohibit specific fee arrangements. The OCC has permitted
collection and payment of finder fees as a share of revenue in certain
contexts.\16\ However, revenue sharing arrangements may raise
supervisory and legal concerns, including whether they result in a
joint venture and unlimited liability, which national banks do not have
the power to assume.\17\ Rather than codify the permissibility of any
specific fee arrangement, the OCC believes that continuing to permit
banks to accept fees except as otherwise prohibited by Federal law is
appropriate. As described above, the final rule does not add provisions
on banks paying finder services, whether those fees are based on
revenue or not.
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\16\ See, e.g., id.; OCC Interpretive Letter No. 824.
\17\ See, e.g., OCC Interpretive Letter No. 504 (``National
banks are not permitted to be members of general partnerships or, by
extension, joint ventures.''); Merchants' Nat. Bank of Cincinnati v.
Wehrmann, 202 U.S. 295, 301 (1906) (describing the assumption of
unlimited personal liability as ``precisely what a national bank has
no authority to do''); OCC Interpretive Letter No. 1022 (Feb. 15,
2005).
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The commenter further recommended that the final rule codify prior
OCC interpretations finding that the sharing of revenue or profit alone
in a referral relationship would not constitute a joint venture under
State law if the parties express an intent not to create a joint
venture. The proposal did not address joint ventures, and we are not
inclined to address it in this rulemaking.
The commenter also recommended that the OCC confirm that a bank is
not required to disclose finder fees paid or collected. The proposal
did not address fee disclosure, and the OCC is not inclined to adopt
this recommendation. We also note that OCC precedent requires
disclosure of finder fees in certain contexts and inadequate disclosure
may raise supervisory and legal concerns.\18\
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\18\ See, e.g., OCC Interpretive Letter No. 850 (Jan. 27, 1999)
(citing OCC precedent on disclosure of finder fees in connection
with the marketing of trust services); OCC Corporate Decision No.
2002-11 (June 28, 2002) (describing potential conflicts of interest
from receiving finder fees and the OCC's expectation that the bank's
``interest in promoting specific'' products and services be
disclosed).
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While finder activities are part of the business of banking for a
national bank, a Federal savings association may engage in finder
activities only to the extent that the activities are incidental to
Federal savings association powers authorized under the Home Owners'
Loan Act (HOLA) (12 U.S.C. 1461 et seq).\19\ The former OTS determined
that, if certain factors are met, a Federal savings association may
collect fees for referring customers to third parties \20\ and may
provide services and products to customers indirectly through a third-
party discount program \21\ as activities incidental to their
statutorily enumerated powers. The OCC also has recognized Federal
savings association finder authority in its Retail Nondeposit
Investment Products Booklet of the Comptroller's Handbook.\22\
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\19\ The OCC and the predecessor agencies previously responsible
for the supervision of Federal savings associations ``have long
recognized that federal savings associations possess `incidental'
powers, i.e., powers that are incident to the express powers of
federal savings associations as set forth in the Home Owners' Loan
Act.'' OTS Op. Acting Ch. Couns. at 3 (Mar. 25, 1994).
\20\ OTS Op. Ch. Couns. (May 5, 2000).
\21\ OTS Op. Ch. Couns. (Aug. 5, 2008).
\22\ OCC, Comptroller's Handbook: Retail Nondeposit Investment
Products Booklet at 9 (Jan. 2015).
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As noted above, the OCC did not propose amendments to Sec. 7.1002
related to Federal savings associations but invited comment on whether
it should add a separate provision to Sec. 7.1002 to set forth Federal
savings association finder authority. In the preamble to the proposed
rule, the OCC offered options to integrate Federal savings associations
into Sec. 7.1002. It described a provision for a Federal savings
association to engage in finder activities to the extent that those
activities are incidental to Federal savings association powers
expressly authorized under the HOLA. The OCC also suggested a list of
Federal savings association finder activities that the former OTS or
the OCC have determined are permissible, such as collecting fees for
referring customers to third parties and providing services and
products indirectly to customers through a third-party discount
program. The OCC specifically requested comment on what other Federal
savings association finder activities the OCC could add to this list.
No commenters directly responded to the request for input on
Federal savings association finder activities. However, one commenter
recommended that the rule include new examples of how national banks
and Federal savings associations have exercised finder authority.
Because the current rule is limited to national banks, the OCC
interprets this comment as a recommendation to incorporate Federal
savings associations in Sec. 7.1002.
The OCC agrees that the authority of Federal savings associations
to act as finders should be codified in the OCC's regulations.
Therefore, the final rule clarifies that Federal savings associations
may act as finders to the extent those activities are incidental to
their expressly authorized powers under HOLA. In determining whether an
activity is incidental, the OCC considers whether (1) the activity
facilitates or is similar to the conduct of an activity that Congress
expressly authorized, (2) the activity relates to Federal savings
associations' intended role as financial intermediaries, (3) the
activity is necessary to enable the Federal savings association to
remain competitive and relevant in the modern economy, and (4) the
activity is consistent with the purpose and function Congress
envisioned for Federal savings associations.\23\ Each factor need not
support the permissibility of an activity, and the relative weights of
each factor may vary.\24\
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\23\ See OTS Op. Ch. Couns. (May 5, 2000). All precedents
(orders, resolutions, determinations, agreements, regulations,
interpretive rules, interpretations, guidelines, procedures, and
other advisory materials) made, prescribed, or allowed to become
effective by the former OTS or its Director that apply to Federal
savings associations remain effective until the OCC modifies,
terminates, sets aside, or supersedes those precedents. 12 U.S.C.
5414(b).
\24\ See OTS Op. Ch. Couns. (May 5, 2000).
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The source of finder authority for Federal savings associations is
more limited and fact-specific than for national banks. The former OTS'
approval of referral fees dealt with referrals to registered investment
advisors and considered how those services related to a Federal savings
association's expressly authorized powers.\25\ Similarly, the former
OTS's approval of the third-party discount program considered how the
product offerings would facilitate expressly authorized activities of
Federal savings associations.\26\ The final rule includes both
referrals and third-party discount programs as illustrative examples of
the types of finder services that a Federal savings association may
provide. However, certain referral and discount programs may not be
within the incidental powers of Federal savings associations.
Therefore, the final rule clarifies that the examples are permissible
if they are incidental to a Federal savings association's express
powers. It also states that the OCC may

[[Page 83689]]

determine that other activities are permissible.
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\25\ See id.
\26\ OTS Op. Ch. Couns. (Aug. 5, 2008).
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Consistent with the current rule's treatment of national banks, the
final rule permits Federal savings associations to advertise the
availability of and accept a fee for finder services, unless otherwise
prohibited by Federal law, and does not enable a Federal savings
association to engage in brokerage activities that have not been found
to be permissible for Federal savings associations.
As a result of adding Federal savings associations to Sec. 7.1002,
the final rule revises paragraph (a) to include the general description
of finder activity currently included in paragraph (b) and the
statement of authority for both national bank and Federal savings
association finder activity. Paragraph (b)(1) includes the nonexclusive
list of permissible finder activities for national banks. Paragraph
(b)(2) includes the nonexclusive list of permissible finder activities
for Federal savings associations. Paragraphs (c) and (d) remain
unchanged except for the addition of Federal savings associations.
Money Lent by a National Bank at Banking Offices or at Facilities Other
Than Banking Offices (Sec. 7.1003)
Twelve U.S.C. 81 provides that a national bank must transact
business in the place specified in its organization certificate and in
any branches established or maintained in accordance with 12 U.S.C. 36.
The OCC interprets 12 U.S.C. 81 to mean that money is deemed to be lent
at a bank's main office unless there is a sufficient nexus tying the
transaction to another location, in which case that location must be
licensed as a branch office.
Twelve U.S.C. 36 and 12 CFR 5.30 define ``branch'' as a place of
business established by the national bank where ``deposits are
received, or checks paid, or money lent.'' Section 7.1003 provides that
for purposes of what constitutes a branch within the meaning of 12
U.S.C. 36 and 12 CFR 5.30, ``money'' is deemed to be ``lent'' only at
the place, if any, where the borrower in-person receives loan proceeds
directly from bank funds either (1) from the lending bank or its
operating subsidiary or (2) at a facility that is established by the
lending bank or its operating subsidiary. Section 7.1003(b) further
provides that a borrower may receive loan proceeds directly from bank
funds in person at a place that is not the bank's main office and is
not licensed as a branch without violating 12 U.S.C. 36, 12 U.S.C. 81,
and 12 CFR 5.30, provided that a third party is used to deliver the
funds and the place is not established by the lending bank or its
operating subsidiary. This paragraph defines a third party to include a
person who satisfies the requirements of Sec. 7.1012(c)(2) or one who
customarily delivers loan proceeds directly from bank funds under
accepted industry practice, such as an attorney or escrow agent at a
real estate closing.
The OCC proposed amending Sec. 7.1003 to incorporate an OCC
interpretation that further clarifies when the OCC considers money to
be lent at a location other than the main office. Specifically,
proposed paragraph (c) provided that a national bank operating
subsidiary may distribute loan proceeds from its own funds or bank
funds directly to the borrower in person at offices the operating
subsidiary established without violating 12 U.S.C. 36, 12 U.S.C. 81,
and 12 CFR 5.30 if the operating subsidiary provides similar services
on substantially similar terms and conditions to customers of
unaffiliated entities, including unaffiliated banks.\27\ Based on
Supreme Court precedent,\28\ OCC interpretations have recognized that a
facility must provide a convenience to bank customers that gives the
bank a competitive advantage in obtaining customers for the facility to
be considered a branch for purposes of 12 U.S.C. 36 and 12 CFR
5.30.\29\ The OCC has found that a facility where members of the
public, customers, and noncustomers alike receive substantially similar
services on substantially similar terms is not a facility created to
attract bank customers and thus the establishment of this type of
facility offers no competitive advantage to the national bank.\30\
Proposed paragraph (c) reflects this OCC precedent.
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\27\ See Interpretive Letter No. 814 (Nov. 3, 1997).
\28\ In First National Bank in Plant City v. Dickinson, the
Supreme Court explained that because the purpose of 12 U.S.C. 36 is
to maintain competitive equality, it is relevant in construing the
term ``branch'' to consider whether the facility gives the bank an
advantage in its competition for customers. First National Bank in
Plant City v. Dickinson, 396 U.S. 122, 136-137 (1969).
\29\ See OCC Interpretive Letter No. 635 (July 23, 1993). See
also 61 FR 60342, at 60347 (Nov. 27, 1996).
\30\ See OCC Interpretive Letter No. 814 (Nov. 3, 1997).
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The OCC received two comments on this proposed change. One
commenter stated that if the distribution of loan proceeds by national
bank operating subsidiaries does not constitute lending money then,
consistent with OCC precedent, the rule should also require that the
operating subsidiary actively solicit and service noncustomers and that
providing services to noncustomers comprise the predominate share of
the subsidiary's business. Otherwise, the commenter stated, the
proposed rule will result in competitive inequality and thus be
detrimental to the dual banking system. The OCC disagrees with this
commenter and does not believe it needs to alter proposed paragraph (c)
to be consistent with OCC precedent. The provision in the proposed
regulation that the operating subsidiary ``provides similar services on
substantially similar terms and conditions to customers of unaffiliated
entities including unaffiliated banks'' should be understood to include
the requirement that the bank act substantially similarly in soliciting
business from customers and noncustomers. Therefore, the proposed
change adequately reflects OCC precedent.
The second commenter supported the proposed changes but suggested
that Sec. 7.1003 be broadened to apply equally to facilities of either
the national bank or its operating subsidiary. The OCC believes that
even if a facility of the national bank itself attempted to provide
services to both customers and noncustomers on substantially similar
terms and conditions, the public would still perceive it as favoring
bank customers and would associate it with the bank, thus giving it a
competitive advantage in attracting bank customers. Thus, the OCC
declines to extend this provision to include national bank facilities.
For the reasons discussed above, the OCC is adopting Sec. 7.1003
as proposed, with a clarifying change to the section heading,
clarifying changes throughout to reference ``national banks'' instead
of ``banks,'' and the removal of an unnecessary comma in paragraph (c).
Establishment of a Loan Production Office by a National Bank (Sec.
7.1004)
Credit Decisions at Other Than Banking Offices of a National Bank
(Sec. 7.1005)
Section 7.1004 provides that a national bank may use the services
of persons not employed by the bank for originating loans. It also
provides that an employee or agent of a national bank or its subsidiary
may originate a loan at a site other than the main office or a branch
office of the bank without violating the branching and place of
business requirements of 12 U.S.C. 36 and 12 U.S.C. 81 if the loan is
approved and made at the main office or a branch office of the bank or
at an office of an operating subsidiary located on the premises of, or
contiguous to, the main office or branch office of the bank. Section
7.1005 provides that a national bank and its operating subsidiary may
make a credit decision regarding a loan

[[Page 83690]]

application at a site other than the main office or a branch office of
the bank provided that ``money'' is not ``lent'' at those other sites
within the meaning of Sec. 7.1003.
Section 7.1004 is not intended to prescribe where a bank must
perform certain activities but rather to help avoid violations of the
branching laws by defining a ``safe harbor'' for loan origination
activities that will not constitute branching.\31\ Section 7.1005, in
turn, which addresses credit decisions made at a site other than
offices of the bank, is based on OCC precedent finding that it is
permissible for loans originated at an LPO to be approved at separate
back office facilities not located on the premises of, or contiguous
to, a main or branch office of the bank.\32\ When the OCC adopted Sec.
7.1005, it noted that it was retaining Sec. 7.1004 despite the
potential tension between the two sections because Sec. 7.1004 is a
judicially recognized safe harbor and that it did not view a lending
related activity that falls outside the scope of Sec. 7.1004, as with
Sec. 7.1005, as necessarily violating branching statutes.\33\
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\31\ OCC Interpretive Letter No. 634 (July 23, 1993).
\32\ OCC Interpretive Letter No. 667 (Oct. 12, 1994).
\33\ 61 FR 4849, at 4851 (Feb. 9, 1996).
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The OCC proposed amending Sec. 7.1004 to describe the permitted
activities as ``loan production activities,'' and to remove Sec.
7.1005 to simplify and streamline its rules. As proposed, paragraph (a)
of Sec. 7.1004 provided that a national bank or its operating
subsidiary may engage in loan production activities at a site other
than the main office or a branch office of the bank. Proposed paragraph
(a) permitted a national bank or its operating subsidiary to solicit
loan customers, market loan products, assist persons in completing
application forms and related documents to obtain a loan, originate and
approve loans, make credit decisions regarding a loan application, and
offer other lending-related services such as loan information and
applications at a loan production office without violating 12 U.S.C. 36
and 12 U.S.C. 81, provided that ``money'' is not deemed to be ``lent''
at that site within the meaning of Sec. 7.1003 and the site does not
accept deposits or pay withdrawals. This description of activities is
not intended to alter the description of ``money lent'' in Sec. 7.1003
nor affect the scope of activities that are permissible for a national
bank to perform at a non-branch location. Rather, the OCC proposed this
description to clarify the activities a national bank may conduct at a
loan production office. The OCC proposed to redesignate former
paragraph (a) as paragraph (b) and amend it to reference loan
production activities instead of originating loans.
One commenter opposed combining Sec. Sec. 7.1004 and 7.1005,
stating this would allow national bank LPOs to conduct both loan
origination and loan approval at an office accessible to the public
without causing that LPO to be a branch because under the rule it would
not be engaged in lending money. This commenter contends that OCC
interpretive rulings and regulations have consistently maintained that
money is lent at an office that conducts both loan origination and loan
approval because the combination or aggregation of these activities
constitutes the substantial equivalent of lending money for purposes of
the definition of branch (``aggregation theory''). The commenter
therefore claims that although the OCC stated that proposed Sec.
7.1004 was not intended to ``affect the scope of activities that are
permissible for a national bank to perform at a non-branch location,''
this revision does expand the scope of permissible LPO activities and
thereby narrows the scope of activities subject to branching
restrictions.
The OCC disagrees with this commenter. The proposed revisions to
Sec. Sec. 7.1004 and 7.1005 are consistent with the OCC's precedent
and practice for the last two decades.
The OCC abandoned in the 1990s the aggregation theory relied upon
by the commenter.\34\ Current Sec. 7.1004 is a safe harbor based on
specific judicial precedent.\35\ The proposed revisions remove the
Sec. 7.1004 safe harbor because it is redundant with the broader
permissibility standard in Sec. 7.1005.
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\34\ OCC Interpretive Letter No. 667 (Oct. 12, 1994); OCC
Interpretive Letter No. 902 (Nov. 16 2000); 61 FR 4849, at 4851
(Feb. 9, 1996); 60 FR 11924, at 11926 (March 3, 1995).
\35\ See Indep. Bankers Ass'n of America v. Heimann, 627 F.2d
486, 487 (D.C. Cir. 1980), as discussed in 61 FR 4849, at 4851 (Feb.
9, 1996).
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Because proposed Sec. 7.1004 is consistent with the OCC precedent
discussed, no changes are needed in response to this comment.
This commenter also stated that the proposed ``non-branch'' rules
conflict with the limits on National Bank Act preemption prescribed by
Congress that provide that National Bank Act preemption does not apply
to agents, affiliates or subsidiaries of national banks. The OCC
disagrees with this comment. The Dodd-Frank Act's limits on preemption
for agents, affiliates, or subsidiaries of national banks are not
implicated by this rulemaking. The proposal incorporated OCC
interpretations of what constitutes a branch and a non-branch office
and does not raise new preemption issues.
Lastly, this commenter stated that the proposed rule enables banks
to avoid Community Reinvestment Act (CRA) obligations associated with
licensed branches by expanding what can occur at non-branch national
bank offices. However, the new CRA regulation provides that ``[a] bank
must delineate an assessment area encompassing each location where the
bank maintains a main office, a branch, or a non-branch deposit-taking
facility that is not an ATM . . . .'' \36\ Thus, national banks cannot
use non-branch locations to avoid complying with the CRA.
---------------------------------------------------------------------------

\36\ 12 CFR 25.09; 85 FR 34734, at 34798 (June 5, 2020).
---------------------------------------------------------------------------

For the reasons discussed above, the OCC adopts Sec. 7.1004 as
proposed.
Loan Agreement Providing for a National Bank Share in Profits, Income,
or Earnings or for Stock Warrants (Sec. 7.1006)
Section 7.1006 permits a national bank to take as consideration for
a loan: (1) A share in the profit, income, or earnings from a business
enterprise of a borrower or (2) a stock warrant issued by the business
enterprise of a borrower provided the bank does not exercise the
warrant. This arrangement is known as an ``equity kicker.'' Section
7.1006 further provides that the national bank may take the share or
stock warrant in addition to, or in lieu of, interest. However, the
national bank may not condition the borrower's ability to repay
principal on the value of the profit, income, earnings of the business
enterprise or upon the value of the warrant received.
The former OTS and its predecessor, the Federal Home Loan Bank
Board, permitted a Federal savings association to take a share of
profit, income, or earnings as consideration for a loan. OTS found this
to be not inconsistent with Federal savings association lending
authority under HOLA \37\ to maintain parity with the commercial
lending practices of national banks.\38\ In addition, the former OTS
permitted a Federal savings association to acquire warrants as an
incidental power of its authority to make secured loans for commercial,
corporate, or business purposes under HOLA and applied the

[[Page 83691]]

same restrictions on exercising those warrants as applied to national
banks.\39\
---------------------------------------------------------------------------

\37\ 12 U.S.C. 1464(c)(2).
\38\ Unpublished letter from Jordan Luke, Gen. Couns., Federal
Home Loan Bank Board (Dec. 19, 1988), available on Westlaw: OTS,
1988 WL 1022319.
\39\ Id.
---------------------------------------------------------------------------

The OCC proposed to amend Sec. 7.1006 to include Federal savings
associations and to codify these interpretations to clarify this
authority and to better provide parity with national banks. The OCC
received no comments on the proposed change and adopts it in the final
rule as proposed.
National Bank Holding Collateral Stock as Nominee (Sec. 7.1009)
Section 7.1009 states that a national bank may transfer stock it
has received as collateral for a loan into the bank's name as
nominee.\40\ The OCC proposed to delete this provision as unnecessary.
---------------------------------------------------------------------------

\40\ See 12 U.S.C. 24(Seventh).
---------------------------------------------------------------------------

The OCC permits a bank to perfect its security interests in
collateral under applicable State laws consistent with the Uniform
Commercial Code.\41\ In situations where a bank holds stock as
collateral, one method to perfect that interest under State law is to
list the bank as nominee on the stock certificate. However, recent
versions of the Uniform Commercial Code \42\ provide other potentially
less burdensome methods to perfect an interest in securities
collateral, for example, by obtaining control over a brokerage account
holding the stock. Therefore, the OCC believes that Sec. 7.1009 is not
necessary. Removing this provision streamlines the rule while not
substantively changing the methods national banks may use to perfect
their interests in stock or other securities obtained as collateral for
loans, which continue to include being listed as nominee if permitted
under State law.
---------------------------------------------------------------------------

\41\ See OCC, Comptroller's Handbook: Asset-Based Lending at 21-
22 (2017).
\42\ Primarily Articles 8 and 9, which have been substantively
adopted by all U.S. jurisdictions. See https://www.uniformlaws.org/acts/ucc.
---------------------------------------------------------------------------

The OCC received one comment on this provision. The commenter
argued that removing the provision may cause national banks to believe
the OCC is now requiring the use of the least burdensome method for
perfecting stock collateral and it is now impermissible to hold
collateral stock as nominee. The commenter requested that the OCC
retain the provision in the rule.
The OCC disagrees with the commenter's suggestion. Nothing in the
former provision or in removing the provision requires a national bank
to use the least burdensome method for perfecting its interest in stock
collateral or prohibits other methods of perfection. As explained
above, the OCC permits a bank to use any legally acceptable method to
perfect its security interests in stock collateral under applicable
State laws,\43\ including by being listed as nominee. In contrast,
specifically identifying only a single method to perfect an interest in
stock collateral as in Sec. 7.1009 could lead a bank to believe that
being listed as nominee is the only acceptable method for perfection.
Therefore, the OCC is removing Sec. 7.1009 as proposed.
---------------------------------------------------------------------------

\43\ See OCC, Comptroller's Handbook: Asset-Based Lending at 21-
22 (2017).
---------------------------------------------------------------------------

Postal Services by National Banks and Federal Savings Associations
(Sec. 7.1010)
Section 7.1010 provides that a national bank may operate and
receive income from a postal substation on banking premises. It
describes permissible services and states that a national bank may
advertise to attract customers to the bank. It also requires the bank
to operate the substation in accordance with the rules and regulations
of the United States Postal Service (USPS) and to keep books and
records on the substation, which are subject to inspection by the USPS,
separate from those of other banking operations.
The OCC proposed to amend Sec. 7.1010 to also apply to Federal
savings associations. This would be consistent with the position taken
in agency guidance.\44\ The OCC also proposed to replace the phrase
``operate a postal substation'' with ``provide postal services''
because the term ``postal substation'' is no longer used in USPS
regulations. This change in terminology clarifies that national banks
and Federal savings associations may offer a limited menu of postal
services and are not required to operate full-service post offices.
---------------------------------------------------------------------------

\44\ The former OTS previously concluded that Federal savings
associations are authorized to operate a postal substation on
premises. See OTS Op. Acting Ch. Couns. (Mar. 25, 1994).
---------------------------------------------------------------------------

The OCC received no comments on these proposed amendments and
adopts Sec. 7.1010 as proposed.
National Bank and Federal Savings Association Investments in Small
Business Investment Companies (Sec. 7.1015)
Fifteen U.S.C. 682(b)(1) permits a national bank to invest in one
or more small business investment companies (SBICs) or in any entity
established solely to invest in SBICs, provided that the total amount
of all SBIC investments does not exceed five percent of the bank's
capital and surplus.\45\ Section 7.1015 provides that a national bank
may purchase stock of a SBIC and receive benefits of the stock
ownership. This section further provides that the receipt and retention
of a dividend from a SBIC in the form of stock of a corporate borrower
of the SBIC is not a purchase of stock within the meaning of 12 U.S.C.
24(Seventh).
---------------------------------------------------------------------------

\45\ National banks also may invest in SBICs pursuant to their
community development investment authority See 12 U.S.C.
24(Eleventh); 12 CFR part 24.
---------------------------------------------------------------------------

The OCC proposed to amend Sec. 7.1015 to provide that a national
bank may invest in a SBIC or in any entity established solely to invest
in SBICs, and that purchasing stock in a SBIC is one example of this
type of investment. This amendment more closely aligns Sec. 7.1015 to
15 U.S.C. 682(b). In addition, the OCC proposed to amend Sec. 7.1015
to provide that a national bank's SBIC investments are subject to
appropriate capital limitations.
Fifteen U.S.C. 682(b)(2) provides a Federal savings association
with similar authority to invest in SBICs.\46\ This authority is
codified in OCC regulations at 12 CFR 160.30. To clarify this
authority, the OCC proposed to add a reference to Federal savings
association SBIC authority in Sec. 7.1015 and cross-reference to 12
CFR 160.30.
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\46\ As with national banks, Federal savings associations also
may invest in SBICs pursuant to their community development
investment authority. See 12 U.S.C. 1464(c)(4)(B) and 12 CFR 5.59
(Service corporations of Federal savings associations).
---------------------------------------------------------------------------

The OCC also proposed to amend Sec. 7.1015 to clarify that a
national bank or Federal savings association may invest in a SBIC that
is either (1) already organized and has obtained a license from the
Small Business Administration or (2) in the process of being organized.
The OCC has previously interpreted this authority to permit a national
bank to invest in a SBIC that is in the process of being organized.\47\
---------------------------------------------------------------------------

\47\ See OCC Interpretive Letter No. 832 (June 18, 1998).
---------------------------------------------------------------------------

The OCC did not receive any comments on the proposed amendments to
this section. Therefore, the OCC adopts these changes as proposed.
However, the OCC received one comment requesting that the OCC
clarify that a national bank may retain an investment in a SBIC that
has surrendered its license to operate as a SBIC during its wind-down
period so long as it does not make new investments (other than
investments in cash equivalents). The commenter further noted that this
change would align with the Volcker Rule implementing regulations,
which exclude SBICs from the definition of ``covered fund,'' and which
were recently revised to make clear that this exclusion would continue
to apply where a SBIC issuer has voluntarily

[[Page 83692]]

surrendered its license to operate as a SBIC in accordance with 13 CFR
107.1900 and does not make new investments (other than investments in
cash equivalents) after such voluntary surrender. Further, the
commenter suggested that introducing similar clarity into part 7 would
provide certainty to banks wanting to invest in SBICs and would
increase investment in small businesses.
The OCC agrees with the commenter that it would be helpful to
clarify that a bank may retain an interest in a SBIC during its wind-
down period. This change would align with the Volcker Rule implementing
regulations, and it would provide certainty to banks planning to invest
in SBICs. Therefore, the OCC is revising its final rule to clarify that
a national bank may retain an investment in a SBIC that has surrendered
its license to operate as a SBIC during its wind-down period so long as
it does not make new investments in a SBIC that is winding down (other
than investments in cash equivalents).
Independent Undertakings Issued by a National Bank or Federal Savings
Association To Pay Against Documents (Sec. 7.1016)
Pursuant to 12 CFR 7.1016, a national bank may issue letters of
credit and other independent undertakings within the scope of the
applicable laws or rules of practice. Section 7.1016(b) provides that a
national bank entering into an independent undertaking should not
expose itself to undue risk and also outlines certain safety and
soundness considerations for these activities. Section 7.1016 also
describes specific required or recommended protections for certain
undertakings, provides that a national bank should possess operational
expertise that is commensurate with the sophistication of its
independent undertaking activities, and requires a bank to accurately
reflect its undertakings in its records.
Pursuant to Sec. 160.50, a Federal savings association may issue
letters of credit and may issue other independent undertakings as are
approved by the OCC, subject to the restrictions in Sec. 160.120.
Section 160.120 contains provisions that are largely similar to the
provisions applicable to national banks in Sec. 7.1016.\48\ However,
Sec. Sec. 160.50 and 160.120 provide that, unless it is a letter of
credit, a Federal savings association only may issue independent
undertakings that have been approved by the OCC. The OTS explained when
it updated its regulation that Federal savings associations were not
traditionally involved in international banking transactions, which
utilized these independent undertakings, as were national banks.\49\
The OTS stated that the approval requirement provided ``the appropriate
balance between giving thrifts greater flexibility to potentially
engage in new types of transactions while at the same time ensuring
that thrifts have properly evaluated the risks posed by a particular
transaction consistent with prudent banking practice.'' \50\
---------------------------------------------------------------------------

\48\ See 61 FR 50951, at 50958 (Sept. 30, 1996).
\49\ Id.
\50\ Id.
---------------------------------------------------------------------------

The OCC proposed to apply Sec. 7.1016 to Federal savings
associations and to remove Sec. Sec. 160.50 and 160.120 because of the
similarities between the national bank and Federal savings association
independent undertaking regulations. The OCC also proposed technical
changes to the footnote to Sec. 7.1016 to reflect updates to the laws
and rules of practice cited. The OCC did not receive any comments on
these amendments and adopts them as proposed.
The OCC also proposed to clarify that Federal branches and agencies
of foreign banks may issue letters of credit and other independent
undertakings, consistent with the conditions outlined in Sec.
7.1016.\51\ Two commenters requested clarification as to whether the
proposed reference to Federal branches and agencies in Sec. 7.1016
implies that other sections in part 7 are not intended to apply to
Federal branches and agencies. One commenter recommended that the final
rule clarify that nothing in proposed Sec. 7.1016 is meant to imply
that other sections of part 7 do not apply equally to Federal branches
and agencies as to national banks and Federal savings associations,
consistent with the International Banking Act. After considering these
comments, the OCC has decided to remove the language regarding Federal
branches and agencies. Although the OCC did not intend the
clarification that Federal branches and agencies of foreign banks may
issue letters of credit and other independent undertakings, consistent
with the conditions outlined in Sec. 7.1016, to affect the
applicability of the International Banking Act and 12 CFR 28.13 to
other sections of part 7, it understands that the inclusion of this
language in Sec. 7.1016 regarding Federal branches and agencies and
not in other sections in part 7 may introduce confusion. Instead, the
OCC expects to add this language to Sec. 7.1016 and other provisions
of part 7, as appropriate, in a future rulemaking.\52\
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\51\ Section 4(b) of the International Banking Act, 12 U.S.C.
3102(b) (Pub. L. 95-369) provides that the operations of a foreign
bank at a Federal branch or agency shall be conducted with the same
rights and privileges as a national bank at the same location and
shall be subject to all the same duties, restrictions, penalties,
liabilities, conditions, and limitations that would apply under the
National Bank Act to a national bank doing business at the same
location. See also 12 CFR 28.13.
\52\ As indicated below, the final rule adds Federal branches
and agencies to Sec. 7.3000, National bank and Federal savings
association hours. Because of the difference in corporate structure
of these entities as compared to national branches and Federal
savings associations, it is necessary to have separate language for
Federal branches and agencies in this provision.
---------------------------------------------------------------------------

One commenter recommended that the OCC reinforce that the risk
management considerations outlined for letters of credit and
independent undertakings in Sec. 7.1016 are not mandatory safety and
soundness conditions by removing them from the text of the rule. The
OCC disagrees. Section 7.1016(b) provides safety and soundness
considerations for banks that issue independent undertakings. Section
7.1016(b)(1) states that, as a matter of safety and soundness, banks
that issue independent undertakings should not be exposed to undue risk
and should, at a minimum, consider the following before issuing
independent undertakings: (1) Whether the terms make clear the
independence of the undertaking; (2) whether the amount of the
undertaking is limited; (3) whether the undertaking is limited in
duration or, if not, whether the bank has an ability to end the
undertaking or demand cash collateral from the applicant; and (4)
whether the undertaking will be collateralized or include a
reimbursement right. Section 7.1016(b) provides additional
considerations in special circumstances to protect against credit,
operational, and market risk. Section 7.1016(b)(3) states that the
national bank or Federal savings association should possess operational
expertise that is commensurate with the sophistication of its
independent undertaking activities. By using the word ``should,'' these
provisions clearly indicate that the listed safety and soundness
considerations are not mandatory. Furthermore, the OCC finds that it is
helpful to include these recommended considerations in the rule text so
that national banks and Federal savings associations understand what
the OCC may consider to be undue risk.
Financial Literacy Programs Not Branches of National Banks (Sec.
7.1021)
Twelve CFR 7.1021 provides that a national bank may participate in
a financial literacy program on the

[[Page 83693]]

premises of, or at a facility used by, a school. Section 7.1021 also
provides that the school premises or facility will not be considered a
branch of the bank if: (1) The bank does not establish and operate the
school premises or facility on which the financial literacy program is
conducted; and (2) the principal purpose of the program is educational.
Facilities or premises are only considered to be branches of a
national bank if they are established and operated by the national
bank. The proposal provided that the OCC would consider establishment
and operation in this context on a case by case basis, considering the
facts and circumstances. However, the proposal stated that the premises
or facility would not be a branch of the national bank if the bank met
the safe harbor test in 12 CFR 7.1012(c)(2) applicable to messenger
services established by third parties. The proposal also stated that
the factor discussed in Sec. 7.1012(c)(2)(i) could be met if bank
employee participation in the financial literacy program consisted of
managing the program or conducting or engaging in financial education
activities provided the school or other organization retained control
over the program and over the premises or facilities at which the
program is held.
Further, the OCC proposed expanding the scope of financial literacy
programs beyond schools to encompass other community-based
organizations, such as non-profit organizations, that provide financial
literacy programs. Finally, the proposal moved the definition of
financial literacy program to the beginning of the section to clarify
that, while a financial literacy program is a program for which the
primary purpose is educational, this is not a factor in determining
whether the premises or facility is a branch for purposes of section
36.
One commenter provided recommendations for simplifying the
requirements for operating financial literacy programs. This commenter
suggested incorporating the relevant standards for operating a
financial literacy program within the messenger service safe harbor
directly into the rule, without cross-referencing the messenger service
rule. This commenter also suggested that Sec. 7.1021 directly state,
as a stand-alone provision, that a bank employee may manage the
financial literacy program or engage in other financial education
activities, provided the organization retains control over the program
and premises at which the program is held. Along the same lines, this
commenter recommended expressly permitting a bank employee to accept
checks at a financial literacy program event, subject to certain
safeguards to prevent operation of the program as a branch--such as
having a school official accept the checks and deposit them in a
portable lockbox which the branch employee could then be responsible
for bringing to the branch. Further, this commenter recommended
removing language from the proposal indicating that the OCC would
consider the facts and circumstances on a case-by-case basis in
determining whether other financial literacy programs outside of the
safe harbor constitute a branch. Additionally, this commenter suggested
not referring to the messenger service safe harbor as a ``test'' in
order to avoid the implication of additional compliance and audit
requirements for the operation of financial literacy programs.
The OCC disagrees with this commenter's recommendations for the
reasons set forth below and thus adopts Sec. 7.1021 as proposed.
First, the OCC believes that cross referencing the messenger service
regulation at Sec. 7.1012 is the best approach for Sec. 7.1021
because the safe harbor for a messenger service may evolve through
regulatory changes, statutory changes, new judicial decisions, or new
OCC interpretations. By using a cross reference, the OCC automatically
incorporates into the financial literacy regulation all evolutions of
the messenger service precedent.
Second, the OCC disagrees with the commenter's suggestion that a
bank employee may manage the financial literacy program or engage in
other financial education activities without the facility being
considered a branch so long as the school or organization retains
control over the program and over the premises or facilities at which
the program is held. Whether a third party other than a national bank
owns or rents the facility involved is only one factor in the safe
harbor described in Sec. 7.1012(c)(2) for a messenger service to be
clearly ``established'' by a third-party. The OCC does not believe it
is appropriate to disregard all the other factors necessary to qualify
for the safe harbor when considering school literacy programs as
analysis of other factors in Sec. 7.1012 may be determinative under
some circumstances. However, it will continue to evaluate programs that
do not fulfill all the factors of the safe harbor on an individual
basis.
Third, the OCC disagrees with the commenter's recommendation of
setting forth a provision that expressly permits a bank employee to
accept checks at a financial literacy program event, subject to certain
safeguards to prevent operation of the program as a branch. A person
transporting items related to branching functions to the bank would be
a messenger service, and messenger services are considered branches
unless they are established by a third-party.\53\ If the service is
being performed by a bank employee as part of his duties, it is not
established by a third party.
---------------------------------------------------------------------------

\53\ See First Nat'l Bank of Plant City v. Dickinson, 396 U.S.
122 (1969); Brown v. Clarke, 878 F.2d 627 (2d Cir. 1989).
---------------------------------------------------------------------------

Fourth, the OCC is retaining the language regarding the agency's
commitment on a case-by-case basis to evaluate situations outside of
the safe harbor. This language is meant to clarify that premises and
facilities in such situations will not automatically be found to be
branches. This language is not meant to impose an obligation on banks
to always submit a request to the OCC for a determination before
implementing a financial literacy program outside of the scope of the
safe harbor. Banks may forgo asking for an OCC interpretation if they
are comfortable with how their program would fit into the OCC's
expectations and precedent.
Finally, the OCC clarifies that, by use of the term ``test,'' it
does not mean to impose any extra audit or other compliance
requirements on these programs or to suggest that these programs must
be subjected to measurement, ratings, or other performance measures.
The OCC has routinely referred to safe harbors as ``tests'' in
interpretive letters, guidance, and regulations without the implication
of additional obligations.
For the reasons explained above, the OCC is adopting Sec. 7.1021
as proposed.
National Banks' Authority To Buy and Sell Exchange, Coin, and Bullion
(Sec. 7.1022) Federal Savings Associations, Prohibition on Industrial
or Commercial Metal Dealing or Investing (Sec. 7.1023)
The OCC proposed a technical change to Sec. Sec. 7.1022 and
7.1023. Section 7.1022 prohibits a national bank from acquiring or
selling industrial or commercial metal for purposes of dealing or
investing. Section 7.1022 excludes industrial and commercial metals
from the national bank authority to ``buy and sell exchange, coin, and
bullion.'' Section 7.1023 similarly prohibits a Federal savings
association from dealing or investing in industrial or commercial
metal. Both sections require a national bank and a Federal savings
association to dispose of any industrial or commercial metal held as a
result of dealing or investing in that metal as soon as practicable,
but not later than one year from the effective date of the

[[Page 83694]]

regulation. The OCC may grant up to four separate one-year extensions
if the bank makes a good faith effort to dispose of the metal and the
retention of the metal for an additional year is not inconsistent with
the safe and sound operation of the bank. The OCC proposed to replace
the phrase ``one year from the effective date of this regulation'' with
the actual effective date of that final rule, April 1, 2018 in each
section. The OCC received no comments on this technical change and
adopts it as proposed.
Tax Equity Finance Transactions by National Banks and Federal Savings
Associations (New Sec. 7.1025)
The OCC proposed a new Sec. 7.1025 that codifies the authority of
national banks and Federal savings associations to engage in tax equity
finance (TEF) transactions under 12 U.S.C. 24(Seventh) and 1464 lending
authority, respectively.\54\ As defined in proposed paragraph (b)(1), a
TEF transaction is a transaction in which a national bank or Federal
savings association provides equity financing to fund a project that
generates tax credits and other tax benefits and the use of an equity-
based structure allows the transfer of those tax credits and other tax
benefits to the bank or savings association. Specifically, the OCC
proposed in paragraph (a) of Sec. 7.1025 that a national bank and
Federal savings association may engage in a TEF transaction pursuant to
12 U.S.C. 24(Seventh) and 1464, respectively, if the transaction is the
functional equivalent of a loan, as provided in proposed paragraph (c),
and if the TEF transaction satisfies the applicable conditions of
proposed paragraph (d). Paragraphs (c) and (d) are described below in
the context of the comments received.
---------------------------------------------------------------------------

\54\ For a discussion of existing precedent on such authority,
see 85 FR 40794 (July 7, 2020).
---------------------------------------------------------------------------

The OCC received eight comments on this section. One commenter
stated that the proposed rule would increase administrative compliance
burden and suggested the OCC should not codify a rule that addresses
the underwriting process but rather should generally require the
institutions it regulates to establish safety and soundness standards
consistent with other extensions of credit. The OCC disagrees with this
comment. Proposed Sec. 7.1025 distills current precedent and
standards. Rather than attempt to prescribe the underwriting process
for national banks and Federal savings associations, the proposal
required national banks and Federal savings associations to use
underwriting and credit approval criteria and standards that are
substantially equivalent to the underwriting and credit approval
criteria and standards used for traditional loans. This is consistent
with the notion that a permissible TEF transaction is the functional
equivalent of a loan.
One commenter stated that there is an existing rental affordability
crisis and therefore the OCC should not impose burdensome requirements
and restrictions on tax equity finance transactions that might reduce
low income housing tax credit investment. The OCC believes the clarity
and safety and soundness benefits of Sec. 7.1025 outweigh any
potential burden. Moreover, Sec. 7.1025 provides an additional
authority for national banks and Federal savings associations to make
TEF transactions. It does not limit or impede a national bank or
Federal savings association from participating in transactions under
other existing authorities. Therefore, if a national bank or Federal
savings association wishes to engage in a low income housing tax credit
investment under existing public welfare investment or community
development authority, it could do so as long as it meets the
requirements of those existing authorities.
Relatedly, the OCC received eight comments requesting that the OCC
confirm that TEF authority is separate and apart from the public
welfare investment authority and community development investment
authority. As indicated above, the authority granted under Sec. 7.1025
operates in addition to the existing public welfare investment
authority and community development investment authority under 12
U.S.C. 24(Eleventh), 12 U.S.C. 1464(c)(3)(A), 12 CFR part 24, 12 CFR
160.30, and 12 CFR 160.36, and will not be a replacement authority. To
the extent an investment would qualify under multiple authorities, the
national bank or Federal savings association may determine which
authority it is using to engage in the transaction. To eliminate any
confusion on this point, the final rule adds a sentence to Sec.
7.1025(a) indicating that the authority under Sec. 7.1025 is pursuant
to 12 U.S.C. 24(Seventh) and 1464 lending authority and is separate
from, and does not limit, other investment authorities available to
national banks and Federal savings associations.
One commenter supported the intent of the proposed rule but
suggested the OCC needs to familiarize itself with, and contemplate the
impact of, certain Internal Revenue Service (IRS) rules and standards
relating to TEF transactions and structures, including sections 49 and
50 of the Internal Revenue Code, Revenue Procedure 2007-65 and Revenue
Procedure 2014-12, and whether the proposed rule would make renewable
energy TEF transactions non-compliant with these laws and IRS
Procedures. The OCC is familiar with sections 49 and 50 of the Internal
Revenue Code, Revenue Procedures 2007-65 and 2014-12, as well as other
IRS rules and guidance on tax credits, and believes the TEF provision
would not prevent a national bank or Federal savings association from
complying with IRS rules, procedures, and standards. Therefore, OCC is
finalizing Sec. 7.1025(a) as proposed.
The OCC proposed to define a ``tax equity finance transaction'' in
Sec. 7.1025(b)(1) as a transaction in which a national bank or Federal
savings association provides equity financing to fund a project that
generates tax credits and other tax benefits and the use of an equity-
based structure allows the transfer of those credits to the bank or
savings association. The OCC received two comments on this provision.
One commenter suggested that the OCC should review current draft
legislation for impacts on the terms ``generation'' and ``renewable''
if energy storage is added to section 48 of the Internal Revenue Code.
Proposed Sec. 7.1025(b)(1) defines a tax equity finance transaction in
part to mean a transaction that generates tax credits and other
benefits. In response, the OCC notes that, because the definition does
not limit tax equity finance transactions to only those that relate to
energy generation, if section 48 were amended to add energy storage,
national banks and Federal savings associations would be able to engage
in transactions involving energy storage that met the requirements of
Sec. 7.1025.
Another commenter noted that a TEF structure may involve other tax
benefits in addition to tax credits, such as deductions and other items
that fall under the category of tax equity. The OCC acknowledges that
tax benefits may take many forms and is revising proposed Sec.
7.1025(b)(1), redesignated as Sec. 7.1025(b)(3) in the final rule, to
change ``generates tax credits and other tax benefits'' to ``generates
tax credits or other tax benefits.''
The OCC also requested comment on whether national banks and
Federal savings associations are currently participating in TEF
transactions through fund-based structures and, if not, whether
national banks and Federal savings associations would want to
participate in TEF transactions through fund-based structures. A fund-
based structure is a structure in which a national bank or Federal
savings

[[Page 83695]]

association invests in a fund that is invested or will invest in
multiple TEF transactions. Seven commenters responded to this question
and suggested that the final rule should allow TEF investments through
investment funds or other funds-based structures. For the reasons
discussed by commenters, including diversifying risk, enabling smaller
investments, and permitting less experienced national banks and Federal
savings associations to participate alongside more experienced TEF
investors, the OCC will permit TEF investments through investment funds
as long as the investment meets all of the requirements and conditions
of Sec. 7.1025. The OCC is revising proposed Sec. 7.1025(b)(1),
redesignated as Sec. 7.1025(b)(3) in the final rule, to change ``. . .
to fund a project that generates tax credits . . .'' to ``. . . to fund
a project or projects that generate tax credits . . . .''
The OCC is adopting the proposed definition of ``tax equity finance
transaction'' with these two changes discussed above.
The proposed rule included an aggregate total dollar limitation on
TEF transactions that a national bank or Federal savings association
could engage in based on a percentage of a national bank or Federal
savings association's capital and surplus. The OCC proposed to define
``capital and surplus'' in Sec. 7.1025(b)(2) by cross-referencing to
its definition in the OCC's lending limit rule at 12 CFR part 32.\55\
As defined in the lending limit rule, for qualifying community banking
organizations that have elected to use the community bank leverage
ratio framework as set forth under the OCC's Capital Adequacy Standards
at 12 CFR part 3, ``capital and surplus'' means a qualifying community
banking organization's tier 1 capital, as used under 12 CFR 3.12, plus
a qualifying community banking organization's allowance for loan and
lease losses or adjusted allowances for credit losses, as applicable,
as reported in the Consolidated Reports of Condition and Income (Call
Report). For all other national banks and Federal savings associations,
``capital and surplus'' means a national bank's or savings
association's tier 1 and tier 2 capital, calculated under the risk-
based capital standards applicable to the institution as reported in
the Call Report, plus the balance of a national bank's or Federal
savings association's allowance for loan and lease losses or adjusted
allowances for credit losses, as applicable, not included in the bank's
or savings association's tier 2 capital, for purposes of the
calculation of risk-based capital, as reported in the national bank's
or savings association's Call Report. The OCC received no comments on
proposed Sec. 7.1025(b)(2) and is finalizing it as proposed.
---------------------------------------------------------------------------

\55\ The OCC recently amended the definition of ``capital and
surplus'' in 12 CFR 32.2 in its recent community bank leverage ratio
rule. See 84 FR 61776 (November 13, 2019).
---------------------------------------------------------------------------

Under proposed Sec. 7.1025(c), a TEF transaction would qualify as
the functional equivalent of a loan if it meets seven requirements that
derive from OCC interpretations. First, paragraph (c)(1) provides that
the TEF transaction structure must be necessary for making the tax
credits and other tax benefits available to the national bank or
Federal savings association. One commenter suggested that the OCC
should clarify that the tax equity finance transaction structure may be
necessary for making the tax credits or other tax benefits available.
The OCC acknowledges that tax benefits may take many forms and is
revising proposed Sec. 7.1025(c)(1) to change ``making the tax credits
and other tax benefits available'' to ``making the tax credits or other
tax benefits available.'' With this revision, the OCC is finalizing
Sec. 7.1025(c)(1).
Second, paragraph (c)(2) provides that the TEF transaction must be
of limited tenure and not indefinite. Under this requirement, a
national bank or Federal savings association would need to be able to
achieve its targeted return in a reasonable time, and the TEF
transaction would need to have a defined termination point. A national
bank or Federal savings association could satisfy this requirement if
the TEF transaction will terminate within a reasonable time of the
transaction's initiation or if a project sponsor has an option to
purchase a national bank's or Federal savings association's interest at
or near fair market value. The national bank or Federal savings
association cannot control whether it retains the interest
indefinitely. The proposed rule permitted a national bank or Federal
savings association to retain a limited investment interest if that
interest is required by law to obtain continuing tax benefits from the
TEF transaction. The OCC received five comments on this requirement.
Three commenters requested clarification that the 15-year holding
period for LIHTC investments would not violate the limited tenure
requirement. The OCC confirms that under Sec. 7.1025(c)(2), a national
bank or Federal savings association may hold an investment in order to
obtain and retain tax benefits as required by law, including holding
the investment to comply with the 15-year recapture period for LIHTC
investments.
Three commenters suggested that a requirement that the sponsor have
a call option would have adverse tax consequences in certain TEF
transactions and suggested removing that requirement. However, proposed
Sec. 7.1025(c)(2) does not require that a sponsor must have a call
option in order to comply with Sec. 7.1025; it requires only that the
transaction is of limited tenure and is not indefinite, such as a
limited investment interest requirement by law to obtain continuing tax
benefits. The OCC used a call option as an example in the preamble to
the proposed rule as one way a national bank or Federal savings
association could comply with the limited tenure requirement. The OCC
did not intend this to be an exhaustive list.
One commenter suggested the OCC clarify in the final rule that TEF
investments may be retained for the duration needed to obtain the
expected rate of return consistent with market practices for such an
investment. The OCC agrees with the commenter and is revising Sec.
7.1025(c)(2) to require that the transaction is of limited time and is
not indefinite, including retaining a limited investment interest that
is (1) required by law to obtain continuing tax benefits or (2) needed
to obtain the expected rate of return.
One commenter suggested proposed Sec. 7.1025 could result in the
sale of an investment at a price lower than the bank could otherwise
obtain. Although a national bank or Federal savings association may
exit a TEF transaction through a sale to a third party, the OCC does
not expect that sale to be immediate if it would result in fire sale
pricing. One commenter suggested the OCC should clarify that it is
permissible to have a purchase option price that includes an amount
necessary for a national bank or Federal savings association to achieve
its expected rate of return. The OCC notes that an option to purchase
may include an amount necessary for a national bank or Federal savings
association to achieve its expected rate of return, and the OCC
believes this would be consistent with the requirements and conditions
of Sec. 7.1025.
One commenter requested the OCC explicitly permit other structures
that are required by law to obtain tax benefits. This commenter cited
to Internal Revenue Service Revenue Procedure 2014-12, which the
commenter stated provides a safe harbor for an exit structure in which
the investor ``puts'' its interest back to the

[[Page 83696]]

project instead of the sponsor having an option to purchase the
interest at or near fair market value. The OCC agrees with the
commenter that transaction structures that provide different exit
options may satisfy Sec. 7.1025(c) as long as the national bank or
Federal savings association does not control whether it retains the
interest indefinitely. However, the safe harbor provided in IRS Revenue
Procedure 2014-12, in which the national bank or Federal savings
association would have a put option that it could have the sponsor
purchase the interest at or near market value, would not satisfy, by
itself, the requirements of Sec. 7.1025(c)(2) because a put option
alone would allow the national bank or Federal savings association to
decide whether it would hold the investment indefinitely (i.e., let the
put expire). The national bank or Federal savings association could
couple the put option with another exit mechanism in which both the IRS
safe harbor and the requirements of the TEF provision are met, such as
a put option coupled with a contract provision providing that after a
certain amount of time has passed or a certain rate of return has been
reached, the interest will revert from the national bank or Federal
savings association to the sponsor. With the change described above,
the OCC is finalizing Sec. 7.1025(c)(2).
Third, paragraph (c)(3) provides that the tax benefits and other
payments received by the national bank or Federal savings association
from the TEF transaction must repay the investment and provide an
implied rate of return. As a result of this proposed requirement, the
national bank's or Federal savings association's underwriting could not
place undue reliance on the value of any residual stake in the project
and the proceeds of disposition following the expiration of the tax
credits' compliance period. The OCC received two comments on proposed
Sec. 7.1025(c)(3). One commenter suggested that the OCC should clarify
in the final rule that the calculation of the rate of return is the
expected rate of return at the time the investment is initially made
and revise Sec. 7.1025(c)(3) to refer to the expected rate of return
at original underwriting. The OCC agrees with the commenter and is
revising Sec. 7.1025(c)(3) to refer to the expected rate of return at
the time of underwriting.
One commenter suggested that the OCC consider Sacks v.
Commissioner, Internal Revenue Service \56\ and its use of ``implied
rate of return'' so that the final rule does not render moot the
decision in this case that recognized the congressional purposes
underlying Federal tax credits and held that a pretax profit was not
required for economic substance purposes. The OCC does not believe that
Sec. 7.1025(c)(3) renders this case moot. Consistent with Sacks,\57\
Sec. 7.1025(c)(3) does not require a pretax profit, rather, it simply
requires an expected rate of return that contemplates the tax credit
and other benefits.
---------------------------------------------------------------------------

\56\ Sacks v. Commissioner, Internal Review Service, 69 F.3d
982, 991 (9th Cir. 1995).
\57\ See 69 F.3d at 991.
---------------------------------------------------------------------------

One commenter suggested that in matters concerning any residual
stake in the project, the IRS true lease authority must be understood,
and the OCC should not force or cause a renewable energy project
sponsor to violate IRS requirements. Proposed Sec. 7.1025(c)(3) does
not contain residual stake language. Rather, as the preamble to the
proposed rule explained, a national bank's or Federal savings
association's underwriting should not place undue reliance on the value
of any residual stake in the project. The OCC does not believe that
this language in any way would cause or force a project sponsor to
violate IRS requirements. With the revision discussed above, the OCC is
finalizing Sec. 7.1025(c)(3).
Fourth, paragraph (c)(4) provides that the national bank or Federal
savings association must not rely on appreciation of value in the
project or property rights underlying the project for repayment. As
discussed in OCC Interpretive Letter No. 1139 (November 13, 2013), wind
turbines, solar panels, and other ancillary equipment are not
considered real property under 12 U.S.C. 29, and acquisition of
interests in real estate incidental to the provision of financing is
not inconsistent with 12 U.S.C. 29. The OCC received no comments on
this requirement and is finalizing Sec. 7.1025(c)(4) as proposed.
Fifth, paragraph (c)(5) provides that the national bank or Federal
savings association must use underwriting and credit approval criteria
and standards that are substantially equivalent to the underwriting and
credit approval criteria and standards used for a traditional
commercial loan. To comply with this requirement, the documents
governing the TEF transaction should contain terms and conditions
equivalent to those found in documents governing typical lending
relationships and transactions. The OCC received no comments on this
requirement and is finalizing Sec. 7.1025(c)(5) as proposed.
Sixth, paragraph (c)(6) provides that the national bank or Federal
savings association must be a passive investor in the transaction and
must not be able to direct the affairs of the project company. This
means that the national bank or Federal savings association is not able
to direct day-to-day operations of the project. However, the OCC does
not consider temporary management activities in the context of
foreclosure or similar proceedings as violating this requirement. One
commenter suggested that the OCC should clarify in the final rule that
customary protective rights and covenants are permitted and do not
violate the ``passive investor'' requirement of Sec. 7.1025(c)(6). The
OCC agrees that customary protective rights and covenants are permitted
and do not violate Sec. 7.1025(c)(6). However, the OCC does not
believe changing the proposed rule text is necessary. TEF transactions
are the functional equivalent of loans and many of the same terms,
conditions, and covenants found in lending and lease financing
transactions are permissible for TEF transactions. In some cases, these
terms, conditions, and covenants may be necessary to comply with the
requirement in Sec. 7.1025(c)(5) that underwriting and credit approval
criteria and standards must be substantially the same as those used for
traditional commercial loans. The OCC is finalizing Sec. 7.1025(c)(6)
as proposed.
Seventh, paragraph (c)(7) provides that the national bank or
Federal savings association must appropriately account for the
transaction initially and on an ongoing basis and document
contemporaneously its accounting assessment and conclusion. Although
TEF transactions can be the functional equivalent of loans pursuant to
a national bank's or Federal savings association's lending authority,
the accounting treatment of tax equity investments may differ from the
treatment of a loan. Two commenters noted that investments in housing
credit transactions are structured as equity investments and requested
that those investments be treated as equity investments and not loans
for Federal income purposes. The OCC acknowledges that although a
transaction may be the functional equivalent of a loan for
permissibility purposes, it may be treated as an equity investment for
accounting or tax purposes. Section 7.1025(c) provides that a national
bank or Federal savings association must appropriately account for the
transaction initially and on an ongoing basis and document its
accounting assessment and conclusion. The OCC is finalizing Sec.
7.1025(c)(7) as proposed.
Proposed paragraph (d) provides that a national bank or Federal
savings

[[Page 83697]]

association only may engage in TEF transactions if it meets the
following four additional requirements. First, proposed paragraph
(d)(1) provides that the national bank or Federal savings association
cannot control the sale of energy, if any, from the project. To satisfy
this requirement, a national bank or Federal savings association could
enter into a long-term contract with creditworthy counterparties to
sell energy from the project, as articulated in OCC Interpretive Letter
1139, or have the project sponsor bear responsibility for selling
generated power into the energy market so long as those sales are
stabilized by a hedge contract that provides reasonable price and cash
flow certainty, as articulated in OCC Interpretive Letter No. 1141
(April 22, 2014). One commenter suggested that the final rule should
clarify that national banks and Federal savings associations have
appropriate flexibility in satisfying this requirement and that the OCC
should not require a long-term contract or hedge if the national bank
or Federal savings association has otherwise determined that exposure
to cash flow certainty has been adequately mitigated. The OCC confirms
that national banks and Federal savings associations have flexibility
to satisfy this requirement. Proposed Sec. 7.1025(d)(1) requires that
national banks and Federal savings associations cannot control the sale
of energy from a project, but the provision does not prescribe that
certain agreements or arrangements must be used. Although, the preamble
for proposed Sec. 7.1025(d)(1) lists two examples of ways a national
bank or Federal savings association could comply with the requirement,
these examples are not the only ways a national bank or Federal savings
association could satisfy this requirement.
One commenter suggested the OCC should confirm that contracts for
the sale of energy can be entered into with affiliates of the national
bank or Federal savings association participating in the TEF
transaction, so long as such contracts are consistent with the TEF
requirements and do not create negative tax consequences. The OCC
confirms that a national bank or Federal savings association may enter
into energy sale contracts with affiliates as long as the requirements
of Sec. 7.1025 are met and any transaction with an affiliate complies
with 12 U.S.C. 371c, 12 U.S.C. 371c-1, 12 CFR part 223, and any other
applicable laws and regulations regarding affiliate transactions.
Similarly, one commenter requested that the OCC explicitly confirm that
the project company's hedging counterparty does not need to be an
unaffiliated third party and may be the national bank or Federal
savings association itself or an affiliate of the national bank or
Federal savings association. The OCC confirms that a project company's
hedging counterparty need not be an unaffiliated third party and may be
an affiliate of the national bank or Federal savings association so
long as the sale meets the requirements of Sec. 7.1025 and any
applicable affiliate transactions laws and regulations, including 12
U.S.C. 371c and 371c-1, and 12 CFR part 223, and is conducted in a safe
and sound manner (e.g., the counterparty is creditworthy). However, a
national bank or Federal savings association itself may not be the
hedging counterparty for one of its TEF investments.
One commenter requested the OCC clarify that the right of a
national bank or Federal savings association to prohibit certain sales
does not constitute inappropriate control of the right to sell power.
The OCC confirms a national bank or Federal savings association may
prohibit certain sales or institute certain credit or other
requirements for third party purchasers of the energy if done pursuant
to prudent underwriting to ensure the project's success and not in an
attempt to control, influence, or manipulate the energy market. One
commenter requested the OCC recognize that a TEF project may sell a
portion of the electricity that it generates into the merchant market,
and not pursuant to a power purchase agreement or a hedge contract, and
permit a national bank or Federal savings association to invest in such
projects as long as it has reasonably determined that any merchant
sales by the project company contribute favorably to the overall
financial health of the project company. The OCC confirms a TEF project
may sell energy into a merchant market as long as the national bank or
Federal savings association is not controlling the sale of the energy
and the TEF transaction otherwise complies with the requirements and
conditions of Sec. 7.1025.
One commenter suggested that certain terms, such as ``long term,''
``creditworthy,'' and ``sell'' make the provision unworkable given
market realities. The OCC recognizes that there may be changes in
market practice and standards in the evolving space of TEF
transactions, and renewable energy transactions in particular. For that
reason, Sec. 7.1025(d)(1) does not prescribe how a national bank or
Federal savings association must comply with the requirement not to
control energy from the sale of the project. Rather, Sec. 7.1025(d)(1)
simply requires that a national bank or Federal savings association
must not control the sale of energy from the project. In the preamble
to the proposed rule, the OCC provided a couple of examples of how a
national bank or Federal savings association may satisfy the
requirement, but these examples are illustrative only. The terms
``creditworthy'' and ``sell'' do not appear in the proposed rule text
and instead are used in the proposed rule's preamble to describe
examples of how a national bank or Federal savings association may
satisfy the requirement in Sec. 7.1025(d)(1). The OCC is finalizing
Sec. 7.1025(d)(1) as proposed.
Second, proposed paragraph (d)(2) provides that the national bank
or Federal savings association must limit the total dollar amount of
TEF transactions to no more than five percent of its capital and
surplus unless the OCC determines, by written approval of a written
request by the national bank or Federal savings association to exceed
the five percent limit, that a higher aggregate limit will not pose an
unreasonable risk to the national bank or Federal savings association
and that the TEF transactions in the national bank's or Federal savings
association's portfolio will not be conducted in an unsafe or unsound
manner. In no case may a bank's or Federal savings association's total
dollar amount of TEF transactions exceed fifteen percent of its capital
and surplus. As provided for public welfare investments under 12 U.S.C.
24(Eleventh) and 12 CFR part 24, a national bank is generally subject
to a five percent aggregate investment limit and this limit encourages
a national bank to maintain appropriate risk diversification.\58\ The
OCC specifically requested comment on whether the OCC should use an
alternate measure when calculating the aggregate investment limit and
whether the proposed five percent aggregate investment limit is
appropriate. One commenter suggested that the final rule should not
impose a cap on TEF transactions and instead should continue to be
subject to the limits set forth in 12 CFR part 32 and other
concentration risk limits, which are appropriate and adequate to any
concentration or similar risks presented by TEF transactions. One
commenter also suggested that only a small number of national banks and
Federal savings associations are able to participate in TEF
transactions and that these banks would quickly hit this arbitrary five
percent limit. The OCC is retaining the proposed five percent aggregate
limit,

[[Page 83698]]

which can be increased up to 15 percent with written approval from the
OCC. The OCC interpretations that this provision is codifying include a
three percent cap on TEF transactions.\59\ The OCC believes that a
limit is necessary but that the limit can be safely increased to five
percent. Although TEF transactions will be subject to the legal lending
limits on loans to one borrower as the commenter correctly pointed out,
the OCC believes maintaining the aggregate transaction limitation will
allow the OCC to assess how the authority is implemented and any safety
and soundness concerns that may arise. The OCC is finalizing Sec.
7.1025(d)(2) as proposed.
---------------------------------------------------------------------------

\58\ 12 U.S.C. 24(Eleventh); 12 CFR 24.4(a).
\59\ OCC Interpretive Letter 1139 (Nov. 13, 2013); OCC
Interpretive Letter 1141 (Apr. 22, 2014).
---------------------------------------------------------------------------

Third, proposed paragraph (d)(3) provides that the national bank or
Federal savings association must have provided written notification to
the OCC prior to engaging in each TEF transaction that includes its
evaluation of the risks posed by the transaction. The OCC received four
comments on this requirement. The commenters suggested that the OCC
should not require national banks and Federal savings associations to
provide prior written notification and instead should be allowed to
provide after-the-fact notification or follow the post-notification
procedures available under the public welfare investment authority.\60\
One commenter also suggested that prior notice for each transaction is
overly burdensome and of little value to examiners, and, if necessary,
the OCC should limit it to when a bank first engages in TEF activity
and not require it for each subsequent transaction. The OCC disagrees
with these comments. A national bank or Federal savings association may
use the appropriate post-investment notification procedures for
investments made pursuant to the public welfare investment authority or
other applicable existing authorities, but to the extent that a
national bank or Federal savings association is using TEF authority
under Sec. 7.1025, it must comply with the requirements and conditions
contained in the provision, including prior written notification,
before engaging in each transaction. Examiner-in-Charge (EIC) non-
objection was required under the OCC's existing interpretations for TEF
transactions. The OCC is not creating a new requirement but, rather, is
modifying the non-objection requirement to a less onerous notice
requirement. The OCC may assess over time whether prior notices are
necessary for subsequent transactions or whether after-the-fact notices
would be sufficient, and may revise Sec. 7.1025 as appropriate at that
time. A well-managed national bank or Federal savings association
engaging in TEF transactions under Sec. 7.1025 authority must provide
prior notice as required by Sec. 7.1025 whether engaging in the
activity at the bank or savings association-level or through an
operating subsidiary. The OCC is finalizing Sec. 7.1025(d)(3) as
proposed, with one clarifying change. The final rule clarifies that the
notice is to be provided to the appropriate OCC supervisory office, and
adds a definition of this term at Sec. 7.1025(b)(1) to mean the OCC
office that is responsible for the supervision of a national bank or
Federal savings association, as described in subpart A of 12 CFR part
4.\61\
---------------------------------------------------------------------------

\60\ 12 CFR 24.5(a).
\61\ This final rule also makes technical changes to part 4,
subpart A. See the ``Technical Changes'' section of this
SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------

Fourth, proposed paragraph (d)(4) provides that the national bank
or Federal savings association must be able to identify, measure,
monitor, and control the associated risks of its tax equity finance
transaction activities individually and as a whole on an ongoing basis
to ensure that it conducts such activities in a safe and sound manner.
The OCC received one comment related to this provision regarding the
use of the word ``control.'' The commenter suggested that the final
rule should eliminate the word ``control'' or otherwise acknowledge
that it is not meant to suggest that national banks and Federal savings
associations should have more than the limited control over TEF
transaction activities that is consistent with the passive nature of
these investments. The OCC clarifies that use of the word ``control''
in relation to risk management of TEF activities is consistent with the
passive nature of these transactions and a national bank or Federal
savings association satisfying this condition would not be in conflict
with the passivity requirement of Sec. 7.1025(c)(6). Similar to how a
national bank or Federal savings association identifies, measures,
monitors, and controls risks related to loans and other extensions of
credit but does not exercise control over the business of the borrower,
a national bank or Federal savings association would identify, measure,
monitor and control risks related to the transaction but would not be
exercising control over the operations of the project or projects
underlying the TEF transaction. The OCC is finalizing Sec.
7.1025(d)(4) as proposed.
The OCC requested comment on whether national banks or Federal
savings associations routinely obtain legal opinions regarding the
availability of tax credits in connection with these types of finance
transactions. One commenter suggested that a national bank or Federal
savings association should not be required to obtain a legal opinion on
the tax benefits of a TEF transaction, but rather the OCC should
require a good faith, reasoned basis for making that determination. The
commenter suggested that it is not market practice to obtain a legal
opinion that says a TEF structure is ``necessary'' in order for the tax
benefits to be available. Instead, the commenter suggested the OCC
should recognize that national banks and Federal savings associations
employ a range of approaches to evaluating the tax benefits of TEF
transactions.
The OCC agrees with the commenter that there should be flexibility
related to the legal analysis underlying the tax availability
determination. However, the OCC believes that the final rule should
require the national bank or Federal savings association to have a
reasonable basis for determining the availability of tax credits in
connection with TEF transactions. Therefore, the OCC is including in
the final rule a more flexible provision. Specifically, new Sec.
7.1025(d)(5) requires a national bank or Federal savings association to
obtain a legal opinion, or to have other good faith, reasoned bases for
making the determination that tax credits or other tax benefits are
available before engaging in a TEF transaction. A legal opinion
includes either an outside counsel opinion or an opinion provided by a
national bank or Federal savings association's internal or in-house
counsel. Although a legal opinion is not the only means to fulfill this
requirement, a good faith, reasoned basis requires more than simply
accepting a statement from a person or entity promoting an investment.
A national bank or Federal savings association may not rely solely on
the assurances of a person or entity promoting a TEF transaction that
tax credits will be available.
Proposed paragraph (e) provides that the TEF transaction must be
subject to the substantive legal requirements of a loan, including the
lending limits prescribed by 12 U.S.C. 84, as implemented by 12 CFR
part 32, and, if the active investor or project sponsor of the
transaction is an affiliate of the national bank or Federal savings
association, the restrictions on

[[Page 83699]]

transactions with affiliates prescribed by 12 U.S.C. 371c and 371c-1,
as implemented by 12 CFR part 223. If a national bank or Federal
savings association is relying on its lending authority to participate
in a TEF transaction, the TEF transaction would be subject to
regulatory requirements applicable to loans, including any applicable
legal lending limits and affiliate transaction restrictions to the
extent applicable. However, the regulatory capital treatment of a
national bank or Federal savings association's participation in a TEF
transaction would be determined according to the regulatory capital
rule (12 CFR part 3). The OCC received no comments on Sec. 7.1025(e)
and is finalizing this provision as proposed.
The OCC specifically requested comment on whether the final rule
should prohibit a national bank or Federal savings association from
entering into TEF transactions for projects involving residential
installation TEF transactions not involving utility-scale standalone
power-generation facilities. One commenter suggested that the final
rule should not prohibit these transactions so as not to arbitrarily
reserve it for only one segment of the market. The OCC concurs with
this comment and will not limit TEF transactions to only those
involving standalone utility-scale power generation facilities in the
final rule. A national bank or Federal savings association may
participate in a TEF transaction if it meets the requirements and
conditions of Sec. 7.1025 and the OCC has not raised safety and
soundness concerns related to the particular transaction.
The OCC also requested comment on whether the final rule should
permit national banks or Federal savings associations to invest in TEF
transactions involving detached single-family residences, multi-family
residences, or non-utility commercial buildings. Five commenters
suggested that the OCC should permit national banks and Federal savings
associations from entering into these transactions, with one commenter
suggesting the OCC should affirm longstanding OCC precedent that the
legal permissibility of a TEF transaction is agnostic as to end-user
segment and underlying asset. The OCC confirms that it will not
prohibit a national bank or Federal savings association from entering
into TEF projects involving detached single-family residences, multi-
family residences, or non-utility-scale commercial buildings. As is the
case with loans and leases, the legal permissibility of a TEF
transaction is not dependent on the end-user segment and underlying
asset. Therefore, the OCC is finalizing Sec. 7.1025 without a
prohibition on residential TEF transactions.
One commenter also requested that the OCC confirm there is no
prohibition on, and that tax credit availability would not be affected
by, national banks funding a portion of their TEF investment during
late stage construction if required to qualify for the tax benefits and
adequate protections are in place. The OCC confirms that there is no
prohibition on national banks or Federal savings associations funding a
portion of their TEF investment during late stage construction if
required to qualify for the tax benefits and adequate protections are
in place. However, the OCC cannot opine on whether late stage
investment would affect the availability of the tax credit and such
inquiries should be directed to the IRS.
Further, the OCC requested comment on whether national banks and
Federal savings associations should have other contractual remedies
available before entering into a TEF transaction. Two commenters
suggested that the final rule should not prescribe any particular
contractual remedies for TEF transactions, including guarantees or
indemnities, but rather, should allow national banks and Federal
savings associations the flexibility to choose the most appropriate
remedies for a given transaction. Another commenter suggested that
requiring certain contractual provisions is not necessary, noting that
it is common for national banks and Federal savings association to
require such remedies as a business practice when making other
investments even though the OCC does not require them and that such
remedies are best left up to national banks and Federal savings
associations. The OCC agrees with these commenters that national banks
and Federal savings associations should be afforded the flexibility to
choose contractual remedies as appropriate. Therefore, the OCC is
finalizing Sec. 7.1025 without requiring specific contractual
remedies.
National Bank and Federal Savings Association Payment System
Memberships (New Sec. 7.1026)
Section 7.1026 Payment System Memberships. National banks may join
payment systems.\62\ OTS precedent also permits Federal savings
associations to join payment systems.\63\ The OCC proposed a new rule
that would codify OCC interpretations regarding national bank
membership in payment systems and apply this new provision to Federal
savings associations. Specifically, proposed Sec. 7.1026 required a
national bank or Federal savings association to provide 30-day prior
notice to the OCC before joining a payment system if the bank or
savings association would be exposed to open-ended liability. The
national bank or Federal savings association would need to provide the
OCC with a 30-day after-the-fact notice before joining any other
payment system where the bank or savings association is not exposed to
open-ended liability. These notices must contain representations that
the national bank or Federal savings association has identified and
evaluated the risks posed by membership in the payment system and will
measure, monitor, and control those risks after membership. The
proposal permitted a national bank or Federal savings association to
consider its liability to a particular payment system to be limited if
the bank or savings association obtains an independent legal opinion
confirming this limited liability prior to joining the payment system.
Finally, the proposal required a national bank or Federal savings
association to notify its appropriate OCC supervisory office if its
ongoing review identifies a safety and soundness concern as soon as
that concern is identified and to take appropriate actions to remediate
the risk. Several commenters expressed general support for the proposed
approach for joining payment systems and, as explained further below,
the OCC is adopting the proposal largely as proposed.
---------------------------------------------------------------------------

\62\ See, e.g., OCC Conditional Approval Letter No. 220 (Dec. 2,
1996); OCC Interpretive Letter No. 993 (May 16, 1997); OCC
Interpretive Letter No. 1140 (Jan. 13, 2014); OCC Interpretive
Letter No. 1157 (Nov. 12, 2017).
\63\ See, e.g., 12 CFR 145.17; OTS Op. Ch. Couns. (Sept. 15,
1995); OTS Op. Ch. Couns. (Dec. 22, 1995).
---------------------------------------------------------------------------

Definitions. In proposed Sec. 7.1026(b), the OCC defined several
terms used throughout the new section. First, the proposal defined
``appropriate OCC supervisory office'' as the OCC office that is
responsible for the supervision of a national bank or Federal savings
association, as described in subpart A of 12 CFR part 4. The OCC
received no comments on this definition and is adopting it as proposed.
Second, because different payment systems may use different
terminology, the OCC defined ``member'' to include a national bank or
Federal savings association designated as a ``member,'' a
``participant,'' or other similar role by a payment system, including
by a payment system that requires the

[[Page 83700]]

national bank or Federal savings association to share in operational
losses or maintain a reserve with the payment system to offset
potential liability for operational losses. The OCC received one
comment that indirect members of payment systems should not be included
in the definition of ``member'' unless they are bound by the rules of
the payment system and such rules, including any open-ended liabilities
imposed, purport to extend to such indirect members. The OCC agrees
with this commenter that it would be appropriate to include indirect
members only in these specific circumstances and, thus, is amending the
definition of ``member'' in the final rule to reflect this comment.
Third, the OCC defined ``open-ended liability'' as liability for
operational losses that is not capped under the rules of the payment
system and includes indemnifications provided to third parties as a
condition of membership in the payment system. For example, as a
condition of membership in particular payment systems, national banks
and Federal savings associations may provide open-ended
indemnifications to Federal Reserve Banks that act as service providers
for the payment systems.\64\ This definition is consistent with the
definition of open-ended liability in OCC Interpretive Letter 1140.
---------------------------------------------------------------------------

\64\ OCC Interpretive Letter No. 1157 (Nov. 12, 2017).
---------------------------------------------------------------------------

The OCC received one comment on this definition expressing concern
that it did not clearly include a situation in which the
indemnification giving rise to an open-ended liability is imposed
directly upon the participant by the Federal Reserve Bank, which is
acting as a service provider to payment system participants. The OCC
agrees with this commenter that the participant would be exposed to
open-ended liability in that case and is modifying the definition of
``open-ended liability'' to reflect the situation described by the
commenter. As a result, open-ended liability in the final rule means
liability for operational losses that is not capped under the rules of
the payment system, and includes indemnifications of third parties
provided as a condition of membership in the payment system.
Fourth, although memberships in payment systems expose national
banks and Federal savings associations to a variety of risks, OCC legal
precedent only has addressed whether a national bank may assume open-
ended liability for operational losses at the payment system. The OCC
defined ``operational loss'' as a charge resulting from sources other
than defaults by other members of the payment system. The OCC pointed
to examples listed in OCC Interpretive Letter 1140 \65\ and requested
comment on whether these examples should be included in the definition
of ``operational loss.'' The OCC also asked whether other examples
should be included in that list. One commenter supported including the
examples in the text of the regulation and recommended adding
cybersecurity breaches. A second comment letter also supported adding
cybersecurity breaches but did not believe the list of examples should
be included in the definition of ``operational loss'' in the regulatory
text. The OCC believes that adding the non-exhaustive list of examples
to the body of the regulation will provide greater clarity. The OCC
also agrees that it is appropriate to add cybersecurity breaches to the
list. Thus, the final rule defines operational loss to mean a charge
resulting from sources other than defaults by other members of the
payment system. The final rule also adds examples of these operational
losses. This nonexclusive list cites losses due to: employee
misconduct, fraud, misjudgment, or human error; management failure;
information systems failures; disruptions from internal or external
events that result in the degradation or failure of services provided
by the payment system; security breaches or cybersecurity events; or
payment or settlement delays, constrained liquidity, contagious
disruptions, and resulting litigation.
---------------------------------------------------------------------------

\65\ OCC Interpretive Letter No. 1140 (Jan. 13, 2014).
---------------------------------------------------------------------------

Finally, the OCC defined ``payment system'' in Sec. 7.1026 to mean
a ``financial market utility'' as defined in 12 U.S.C. 5462(6),
wherever operating, and that includes both retail and wholesale payment
systems. Section 5462(6) provides that ``a financial market utility''
means ``any person that manages or operates a multilateral system for
the purpose of transferring, clearing, or settling payments,
securities, or other financial transactions among financial
institutions or between financial institutions and the person'' with
certain exclusions.\66\ This definition excluded derivatives clearing
organizations registered under the Commodity Exchange Act \67\ and
clearing agencies registered under the Securities Exchange Act of
1934,\68\ and foreign organizations that would be considered a
derivatives clearing organization or clearing agency were it operating
in the United States.\69\ This definition therefore includes payment
systems that operate either in the U.S. or in a foreign jurisdiction.
The OCC requested comment on whether this definition appropriately
encompasses both foreign and domestic payment systems that national
banks and Federal savings associations may join. One commenter
requested that the OCC provide guidance for banks and savings
associations applying this definition to international clearing
organizations or agencies that may not meet the technical requirements
necessary to register under the Commodity Exchange Act or Securities
Exchange Act of 1934. The OCC notes that the carve-out for clearing
organizations and clearing agencies reflects that OCC precedent
distinguishes between companies and organizations performing payments,
clearing, and settlement functions.\70\ While the proposed rule would
codify OCC precedent related to payment system memberships, it would
not affect OCC precedent applicable to memberships in clearing and
settlement organizations. For example, a national bank or Federal
savings association wishing to join a foreign organization subject to
OCC Interpretive Letter Nos. 929 or 1102 would continue to follow the
process outlined in that precedent rather than the process outlined in
Sec. 7.1026. The OCC believes this is sufficiently clear in the
proposed rule

[[Page 83701]]

and, therefore, finalizes this definition as proposed.
---------------------------------------------------------------------------

\66\ Financial market utility ``does not include: designated
contract markets, registered futures associations, swap data
repositories, and swap execution facilities registered under the
Commodity Exchange Act, or national securities exchanges, national
securities associations, alternative trading systems, security-based
swap data repositories, and swap execution facilities registered
under the Securities Exchange Act of 1934, solely by reason of their
providing facilities for comparison of data respecting the terms of
settlement of securities or futures transactions effected on such
exchange or by means of any electronic system operated or controlled
by such entities, provided that the exclusions in this clause apply
only with respect to the activities that require the entity to be so
registered'' nor ``any broker, dealer, transfer agent, or investment
company, or any futures commission merchant, introducing broker,
commodity trading advisor, or commodity pool operator, solely by
reason of functions performed by such institution as part of
brokerage, dealing, transfer agency, or investment company
activities, or solely by reason of acting on behalf of a financial
market utility or a participant therein in connection with the
furnishing by the financial market utility of services to its
participants or the use of services of the financial market utility
by its participants, provided that services performed by such
institution do not constitute critical risk management or processing
functions of the financial market utility.'' 12 U.S.C. 5462(6)(B).
\67\ 7 U.S.C. 1 et seq.
\68\ 15 U.S.C. 78a et seq.
\69\ The OCC maintains separate precedent relevant to
memberships in these organizations. See, e.g., OCC Interpretive
Letter No. 929 (Feb. 11, 2002); OCC Interpretive Letter No. 1102
(Oct. 14, 2008).
\70\ Id.
---------------------------------------------------------------------------

Notice requirements. Proposed Sec. 7.1026(c) required a national
bank or Federal savings association to provide written notice to the
appropriate OCC supervisory office at least 30 days prior to joining a
payment system that would expose it to open-ended liability. If the
payment system does not expose the national bank or Federal savings
association to open-ended liability, the proposed rule required the
national bank or Federal savings association to provide after-the-fact
written notice within 30 days of joining a payment system. The OCC
believes membership in a payment system that exposes members to open-
ended liability creates additional risks for national banks and Federal
savings associations. Thus, the OCC believes prior notice to the OCC is
appropriate in these situations.\71\
---------------------------------------------------------------------------

\71\ The proposed notice requirement would not apply to existing
payment system memberships. However, as explained below, the
proposed rule required national banks and Federal savings
associations to continuously inform the OCC of changes to bank or
savings association operations that would affect the institution's
risk profile. Thus, the OCC would be made aware of any payment
system membership at a bank or savings association even though the
specific timing and information required by this proposed rule would
not apply to existing payment systems memberships.
---------------------------------------------------------------------------

One comment letter supported this process. A second commenter,
however, argued that the proposal may make it more difficult for a
national bank or Federal savings association to join a new payment
system because it would impose an additional regulatory burden not
required for non-OCC regulated institutions. The OCC does not agree
with this commenter. As explained above and in the preamble to the
proposed rule, the notice requirement for payment system memberships
codifies existing requirements from a series of interpretive letters
governing national bank payment system memberships. Since the
publication of these interpretive letters, OCC-regulated institutions
have continued to join new payment systems. The OCC believes that this
clarity facilitates payment systems memberships by OCC-regulated
institutions rather than hindering them and therefore the OCC adopts
paragraph (c) as proposed.
Content of notice. Proposed Sec. 7.1026(d) provided that all
notices filed under Sec. 7.1026(c) must include representations that
the national bank or Federal savings association has complied with the
safety and soundness review required by proposed Sec. 7.1026(e)(1)
before joining the payment system and will comply with the safety and
soundness review and the notification requirements in proposed Sec.
7.1026(e)(2) and (3) after joining the system. For after-the-fact
notices pursuant to paragraph (c)(2), the proposed rule required a
national bank or Federal savings association to include a
representation that either the rules of the payment system do not
impose liability for operational losses on members or that the national
bank's or Federal savings association's liability for operational
losses is limited by the rules of the payment system to specific and
appropriate limits that do not exceed the lower of the legal lending
limit specified by 12 CFR part 32 or a limit established for the
national bank or Federal savings association by the OCC. One comment
letter noted that the proposed notice requires that national banks and
Federal saving associations complete their risk assessment of the
payment system before joining. However, this commenter explained that
some aspects of a national bank's or Federal savings association's risk
management processes may occur after joining. Specifically, the
commenter cited integration with a payment system's IT functions. The
OCC recognizes that full access to the payment system's IT
infrastructure may be necessary to analyze fully its potential risks.
However, the OCC still expects banks and savings associations to
identify in advance these limitations. Thus, the OCC is finalizing
paragraph (d) as proposed, with a minor change in wording of the
section heading in paragraph (d)(2).
Safety and soundness procedures. The OCC relies upon a number of
resources to communicate in detail its safety and soundness guidance
for national bank and Federal savings association memberships in
payment systems.\72\ At a minimum, the OCC believes a national bank or
Federal savings association must be able to identify, evaluate, and
control its risks from membership in a particular payment system before
joining the system and on an ongoing basis.\73\ As a prerequisite to
joining a payment system and on a continual basis after joining,
proposed Sec. 7.1026(e) required the national bank or Federal savings
association to (1) identify and evaluate the risks posed by membership
in the payment system, taking into account whether the liability of the
bank or savings association is limited, and (2) measure, monitor, and
control those risks. The preamble to the proposal explained that
national banks and Federal savings associations should review the
standards outlined in OCC Interpretive Letter 1140 and OCC Banking
Circular 235 to assist with the requirements in paragraph (e). The
proposal also required a national bank or Federal savings association
to notify the appropriate OCC supervisory office if its ongoing risk
management identifies a safety and soundness concern, such as a
material change to the bank's or savings association's liability or
indemnification responsibilities, as soon as that concern is identified
and to take appropriate actions to remediate the risk. The OCC received
several comments related to this section.
---------------------------------------------------------------------------

\72\ See, e.g., FFIEC IT Examination Handbook on Retail Payment
Systems (Apr. 2016); FFIEC IT Examination Handbook on Wholesale
Payment Systems (July 2004); Comptroller's Handbook: Payment Systems
and Funds Transfer Activities (March 1990); OCC Banking Circular 235
(May 10, 1989).
\73\ For example, OCC Banking Circular 235 states ``Management
of each national bank is responsible for assessing risk in each
payment, clearing, and settlement system in which the bank
participates. Management must adopt adequate policies, procedures,
and controls with respect to these activities.'' The OCC applied
this Banking Circular to Federal savings associations on Oct. 1,
2014.
---------------------------------------------------------------------------

First, several commenters responded favorably to the OCC's question
about whether the characteristics from Interpretive Letter 1140 should
be included in the final rule. In Interpretive Letter 1140, the OCC
identified key components of a payment system that appropriately
mitigates risk and indicated it would expect a national bank to
consider these characteristics when analyzing the payment system. The
OCC also explained in Interpretive Letter 1140 the characteristics of
an effective risk management program at a national bank. These
commenters thought doing so would provide greater certainty about the
OCC's expectations. Although not an exhaustive list, the OCC agrees
that listing the risk management program criteria from Interpretive
Letter 1140 in the regulatory text would assist banks and savings
associations as they conduct reviews of payment system memberships. The
OCC is including in the final rule a new paragraph (f) that recites the
criteria it previously outlined in Interpretive Letter 1140.
One commenter also asked the OCC to provide additional guidance
about which of these criteria are most important and the circumstances
under which each component should be considered in the analysis of a
bank or savings association. The OCC does not believe it would be
appropriate to identify further individual scenarios in which specific
factors would apply because national banks and Federal savings
associations are best positioned to evaluate the applicability and

[[Page 83702]]

importance of each factor given the wide variety of global payment
systems as well as the varied complexity of and risk tolerances at
individual banks and savings associations. The OCC expects banks and
savings associations to review the standards and identify the
components that are applicable to the payment system and financial
institution at issue. Thus, the OCC is not including this information
in the final rule.
Finally, a commenter asked that where the open-ended liability
derives from a Federal Reserve Bank acting as a service provider to the
payment system participant, the OCC clarify that due diligence and risk
management activities should be related to the entity providing the
service for which the indemnity or open-ended liability is imposed. The
OCC agrees that national banks and Federal savings associations should
evaluate the risks that derive from all aspects of the payment system
membership, including the risks from service providers to whom the
payment system member must indemnify or provide open-ended liability as
a condition of membership. However, the OCC expects the due diligence
and risk management analysis to apply whether the payment system
membership introduces open-ended liability or not. The OCC believes
that the language in paragraph (e) of the proposal is sufficiently
clear and is adopting this section as proposed.
The OCC noted in the preamble to the proposed rule that a national
bank's or Federal savings association's liability will vary from
payment system to payment system. The rules of some payment systems may
expose members to open-ended liability for operational losses but, in
reality, the national bank's or Federal savings association's liability
may be capped in some other way. For example, a jurisdiction could have
a law that prohibits open-ended liability or restricts the amount of
liability to the assets of the entity located in that jurisdiction. If
that law applies to the payment system, it could effectively cap a
member's operational liability. In other situations, a member may
negotiate a separate agreement with a payment system that allows the
member to limit its potential liability and, as a result, the risks of
membership in that payment system. In recognition of these situations,
the proposed rule permitted a national bank or Federal savings
association to consider its open-ended liability to a particular
payment system to be limited for purposes of the review required by
proposed Sec. 7.1026(e)(1) and (2) if the bank or savings association
obtains an independent legal opinion prior to joining the payment
system. That legal opinion must describe how the payment system
allocates liability for operational losses and conclude the potential
liability for the national bank or Federal savings association is
limited to specific and appropriate limits that do not exceed the legal
lending limit specified by 12 CFR part 32 or a lower limit established
for the national bank or Federal savings association by the OCC. This
legal opinion would enable the OCC to verify that the liability of the
national bank or Federal savings association is limited even though the
rules of the payment system do not provide any limits.
Two commenters objected to the independent legal opinion
requirement. These commenters argued that the OCC should instead
require national banks and Federal savings associations to follow a
lower standard and provide just a reasonable basis for concluding that
its liability is limited. These commenters also suggested that an
opinion from in-house counsel should suffice. The OCC does not agree
that lowering the standard would be appropriate. However, the OCC
believes it is important to make clear that the legal opinion is not
required to join any payment system; it is only required for the bank
or savings association to treat its liability as limited when the
payment systems rules indicate open-ended liability. The OCC, however,
is persuaded by the commenters' view that an in-house legal opinion is
sufficient. Thus, the OCC is amending the final rule to remove the
requirement that the legal opinion be independent of the bank or
savings association. The final rule does, however, specifically provide
for a written opinion. Even with this change, the OCC expects that this
option will be exercised rarely. In fact, the OCC believes that this
option will be available only in unusual circumstances, typically for a
payment system that operates in a foreign jurisdiction where the laws
of that jurisdiction effectively limit the liability of the national
bank or Federal savings association. The OCC is offering the written
legal opinion as an additional option for institutions wishing to join
a payment system in which the rules do not limit the liability of
members, but the national bank or Federal savings association believes
another factor effectively limits its potential liability. If a payment
system's rules impose open-ended liability, national banks and Federal
savings associations still may join the payment system even if they do
not elect--or are unable to obtain--a written legal opinion provided
that they conduct the appropriate safety and soundness analysis and
provide the appropriate OCC supervisory office with the 30-day prior
notice required by Sec. 7.1026(c)(1). As the OCC explained in the
preamble to the proposed rule, a national bank or Federal savings
association that obtains a legal opinion may consider its open-ended
liability to be limited so long as there were no material changes to
the liability or indemnification requirements of the national bank or
Federal savings association after the bank or savings association
joined the payment system. If there is a material change, the national
bank or Federal savings association may no longer rely on that written
legal opinion to demonstrate that its liability is limited and must
notify the appropriate OCC supervisory office and remediate its risks
as described in Sec. 7.1026(e)(3).
One commenter asked for clarification that, once a bank or savings
association has joined a payment system and obtained a legal opinion,
it does not need to undertake that process again unless there is a
material change to the liability or indemnification provisions
applicable to the bank or savings association. The OCC intended this
result and, thus, is modifying the final rule to clarify that, so long
as there are no material changes to the liability or indemnification
requirements applicable to the bank or savings association since the
issuance of the written legal opinion, the bank or savings association
may consider its open-ended liability to be limited.
Establishment and Operation of a Remote Service Unit by a National Bank
(New Sec. 7.1027/Former Sec. 7.4003)
Section 7.4003 provides that a national bank can establish and
operate a remote service unit (RSU) pursuant to 12 U.S.C. 24(Seventh).
This section also states that an RSU does not constitute a branch under
12 U.S.C. 36(j) and is not subject to State geographic or operational
restrictions or licensing laws. Section 7.4003 defines an RSU as an
automated facility, operated by a customer of a bank, that conducts
banking functions, such as receiving deposits, paying withdrawals, or
lending money. This section provides examples of an RSU, specifically
listing an automated teller machine (ATM), automated loan machine,
automated device for receiving deposits, personal computer, telephone,
and other similar electronic devices. Finally, this section provides
that an RSU may be equipped with a telephone or tele-video device that
allows contact with bank personnel.

[[Page 83703]]

The OCC proposed to amend Sec. 7.4003 to expand the definition of
an RSU to include either an automated or unstaffed facility and to add
drop boxes to the list of RSU examples. Although the OCC has
historically treated drop boxes as branches, the OCC believes that
interpreting both the terms ATM and RSU to require automation leads to
incongruous results where a non-automated facility such as a drop box
is considered a branch but an automated facility such as an ATM is not,
despite a drop box functioning less like a full branch than an ATM. The
OCC also proposed to move Sec. 7.4003 to subpart A of part 7 as new
Sec. 7.1027 so that it would be in the same subpart as other branching
provisions of part 7.
The OCC received one comment on the proposed amendments to Sec.
7.4003. The commenter opposes the changes to Sec. 7.4003 and states
that excluding drop boxes from the definition of branch by including
them in the definition of RSU is inconsistent with Supreme Court
precedent. The commenter states that the change is inconsistent with
OCC precedent and the OCC does not have the authority to include drop
boxes and other unstaffed facilities within the RSU/ATM exclusion. The
commenter also states that when Congress amended 12 U.S.C. 36(j) to
exclude ATMs and RSUs from the definition of branch, it chose to only
exclude automated facilities and purposefully chose not to exclude drop
boxes or other unstaffed facilities that lack automation. Finally, the
commenter states that regardless of where the RSU regulations are
placed, to the extent that the OCC maintains that State operational and
licensing restrictions are preempted with respect to non-branch
offices, then, in expanding the scope of permissible non-branch office
activities, the OCC is making a ``preemption determination'' under the
National Bank Act that must comply with the procedural and substantive
requirements applicable to such determinations.
These comments misunderstand the interaction between judicial
precedent and the insertion of the term ``remote service unit'' into 12
U.S.C. 36(j) and ignore the plain language of 12 U.S.C. 36(j). The
Supreme Court decision in First National Bank in Plant City, Florida v.
Dickinson, 396 U.S. 122 (1969) (Plant City), which held that a drop box
constituted a branch, was decided before Congress amended 12 U.S.C.
36(j) to exclude RSUs and ATMs from the definition of branch.\74\
Therefore, the Plant City decision did not address whether drop boxes
fit within the definition of an RSU and thus are exempted from the 12
U.S.C. 36 branching restrictions.
---------------------------------------------------------------------------

\74\ EGRPRA, Section 2204 (1996).
---------------------------------------------------------------------------

Interpreting 12 U.S.C. 36(j) in a way that defines ATMs and RSUs in
a distinct manner is a better reading of the plain language of 12
U.S.C. 36(j) and leads to the logical conclusion that non-automated,
unstaffed facilities such as drop boxes should be included in the
definition of RSU. Specifically, interpreting ``automated teller
machine'' and ``remote service unit'' to be synonymous (i.e.,
automated, unstaffed facilities) would construe two different phrases
to have the same meaning and renders the second phrase useless.
Congress included the term ``automated'' in the phrase ``automated
teller machine'' but did not include the term ``automated'' in the
phrase ``remote service unit,'' suggesting that Congress did not
necessarily intend for the term ``remote service unit'' to only apply
to automated facilities. Though the OCC has historically treated drop
boxes as branches based on the fact that drop boxes are not automated,
the agency is now adopting a new position based on a reading of the
plain language of the statute that avoids rendering statutory language
superfluous and producing illogical results whereby drop boxes are
considered branches despite having less branch-like functionality than
ATMs.
The OCC also disagrees with the commenter's statement that the
proposed amendments to Sec. 7.4003 constitute a ``preemption
determination'' under the National Bank Act. Case law is clear that it
is Federal law, not State law, that determines what is considered a
``branch'' of a national bank for the purposes of 12 U.S.C. 36(j).\75\
The OCC is merely clarifying how it interprets the ambiguous language
in 12 U.S.C. 36(j). As noted above, Congress did not define ``automated
teller machine'' or ``remote service unit'' in 12 U.S.C. 36(j), so the
OCC must interpret these phrases to resolve this silence.\76\ This is
not a ``preemption determination'' pursuant to the National Bank Act.
Accordingly, the OCC adopts these changes as proposed.
---------------------------------------------------------------------------

\75\ See First National Bank in Plant City, Florida v.
Dickinson, 396 U.S. 122, 133-34 (1969) (rejecting the contention by
amicus curiae National Association of Supervisors of State Banks
that State law definitions of what constitutes ``branch banking''
must control the content of the Federal definition of ``branch.'').
\76\ See Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc.,
467 U.S. 837, 843 (1984) (``[I]f the statute is silent or ambiguous
with respect to the specific issue, the question for the court is
whether the agency's answer is based on a permissible construction
of the statute.''); see also Robinson v. Shell Oil Co., 519 U.S.
337, 341 (1997) (``The plainness or ambiguity of statutory language
is determined by reference to the language itself, the specific
context in which that language is used, and the broader context of
the statute as a whole.'').
---------------------------------------------------------------------------

Establishment and Operation of a Deposit Production Office by a
National Bank (New Sec. 7.1028/Former Sec. 7.4004)
Section 7.4004 provides that a national bank or its operating
subsidiary may engage in deposit production activities at a site other
than the main office or a branch of the bank, and further provides that
a deposit production office (DPO) may solicit deposits, provide
information about deposit products, and assist persons in completing
application forms and related documents to open a deposit account.
Section 7.4004 specifically states that a DPO is not a branch so long
as the site does not receive deposits, pay withdrawals, or make loans.
It further states that all deposit and withdrawal transactions of a
bank customer using a DPO must be performed by the customer, either in
person at the main office or a branch office of the bank or by mail,
electronic transfer, or a similar method of transfer. Finally, this
section states that a national bank may use the services of, and
compensate, persons not employed by the bank in its deposit production
activities. As with Sec. 7.4003, the OCC proposed to move Sec. 7.4004
to subpart A of part 7 as new Sec. 7.1028 to place it in the same
subpart as other interpretations regarding branching and non-branching
functions. This change improves the organization of part 7. The OCC
proposed no other changes to this section except for a non-substantive
change to its wording. The OCC received no comments on new Sec. 7.1028
and adopts it as proposed.
Combination of National Bank Loan Production Office, Deposit Production
Office, and Remote Service Unit (New Sec. 7.1029/Former Sec. 7.4005)
Section 7.4005 provides that a location at which a national bank
operates a loan production office (LPO), a DPO, and an RSU is not a
``branch'' within the meaning of 12 U.S.C. 36(j) by virtue of that
combination of operations because none of these locations individually
constitutes a branch. The OCC proposed to add language regarding the
extent of the permissible interaction between bank personnel and the
RSU at a facility that combines an LPO or a deposit production office
with an RSU. Specifically, the OCC proposed to add language that
provides that an RSU at a combined location must be primarily operated
by the customer with at most delimited assistance from bank

[[Page 83704]]

personnel.\77\ The OCC also proposed to move Sec. 7.4005 to subpart A
of part 7, as new Sec. 7.1029. The OCC received no comments on these
changes and adopts them as proposed.
---------------------------------------------------------------------------

\77\ This language is based on published OCC precedent. See OCC
Interpretive Letter No. 1165 (June 28, 2019).
---------------------------------------------------------------------------

Permissible Derivatives Activities for National Banks (New Sec.
7.1030)
The proposal included a new Sec. 7.1030 addressing derivatives
activities permissible for national banks.\78\ This new section
incorporated and streamlined the framework in OCC interpretive letters
discussing bank-permissible derivatives activities.\79\ The proposed
rule addressed five functional categories of permissible derivatives
activities: (1) Derivatives referencing underlyings a national bank may
purchase directly as an investment; (2) derivatives with any underlying
to hedge the risks arising from bank-permissible activities; (3)
derivatives with any underlying that are customer-driven, cash-settled
and either perfectly-matched or portfolio-hedged; (4) derivatives with
any underlying that are customer-driven and physically-settled by
transitory title transfer; and (5) derivatives with any underlying that
are customer-driven, physically-settled (other than by transitory title
transfer), and physically-hedged. The OCC is adopting Sec. 7.1030 with
the substantive and technical changes described below.
---------------------------------------------------------------------------

\78\ Permissible financial derivatives transactions for Federal
savings associations are addressed separately in 12 CFR 163.172.
\79\ OCC legal interpretations have confirmed certain
derivatives activities are permissible for national banks under 12
U.S.C. 24(Seventh). Congress has recognized national banks'
authority to engage in derivatives activities in various statutes.
See, e.g., 12 U.S.C. 84 (incorporating credit exposure from
derivatives into the legal lending limit); Gramm-Leach-Bliley Act,
Public Law 106-102, 113 Stat. 1338, section 206(a)(6) (defining
``identified banking product'' to include any swap agreement except
an equity swap with a retail customer); 12 U.S.C. 371c (defining
``covered transaction'' between a bank and its affiliates to include
a derivative transaction); Dodd-Frank Act section 716 (15 U.S.C.
8305); Dodd-Frank Act section 731 (7 U.S.C. 6s); Dodd-Frank Act
section 764 (15 U.S.C. 78o-10).
---------------------------------------------------------------------------

Authority. Under the proposal, paragraph (a) of new Sec. 7.1030
specified that the section is issued pursuant to 12 U.S.C. 24(Seventh).
Paragraph (a) further specified that a national bank may only engage in
derivatives transactions in accordance with the requirements of this
section. The OCC did not receive any comments on this paragraph and is
adopting paragraph (a) as proposed.
Definitions. In paragraph (b), the proposed rule incorporated
several terms that are commonly used in OCC derivatives interpretive
letters. The proposed rule also defined certain terms for the first
time to promote transparency and consistency among institutions. For
the reasons described below, the OCC is adopting these definitions as
proposed.
Customer-driven. The proposed rule defined ``customer-
driven'' to mean a transaction entered into for a customer's valid and
independent business purpose. As explained in the preamble to the
proposed rule,\80\ this approach is consistent with the definition used
in OCC interpretive letters.\81\ The preamble explained that this focus
on the customer recognizes that a number of derivatives activities are
permissible for a national bank because the bank is acting as a
financial intermediary for the customer. A customer-driven transaction
would not include a transaction entered into for the purpose of
speculating in derivative, currency, commodity, or security prices.\82\
Similarly, a customer-driven transaction would not include a
transaction the principal purpose of which is to deliver to a national
bank assets that the national bank could not invest in directly.
---------------------------------------------------------------------------

\80\ 85 FR 40794, at 40804.
\81\ E.g., OCC Interpretive Letter No. 1160 (Aug. 22, 2018).
\82\ OCC interpretations have specified that customer-driven
derivatives transactions do not include transactions entered into by
the bank for the purpose of speculating in the underlying commodity
or security prices. See e.g., OCC Interpretive Letter No. 1033 (Jun.
14, 2005); OCC Interpretive Letter No. 892 (Sept. 13, 2000); OCC
Interpretive Letter No. 684 (Aug. 4, 1995); OCC No-Objection Letter
90-1 (Feb. 16, 1990).
---------------------------------------------------------------------------

The OCC received one comment on this proposed definition. The
commenter said that the final rule should clarify that ``customer-
driven'' derivatives activities continue to include the types of
permissible derivatives transactions described in Interpretive Letter
1018. The commenter also said the final rule should make clear that,
while speculation cannot be the purpose for which the national bank
enters into the transaction, no such limitation is imposed as to the
purpose for which the customer enters into the transaction and that the
OCC should confirm that an otherwise bank-permissible derivative
transaction entered into by a national bank as a financial intermediary
would be viewed as ``customer-driven,'' so long as the national bank
and its customer have bilaterally negotiated and agreed to the terms of
the transaction, regardless of the execution mechanism selected by the
bank and its customer. Finally, the commenter said that the limitation
in the proposed definition specifying that a customer-driven
transaction does not include ``a transaction the principal purpose of
which is to deliver to a national bank assets that the national bank
could not invest in directly'' does not prohibit physically settled
derivatives.
The OCC intended the proposed definition to reflect the term
``customer-driven'' as it has been used in prior OCC interpretations,
and the OCC does not believe any changes to the definition are
necessary in response to the commenter. First, the definition does not
prohibit customer-driven mirror trades through affiliates as described
in Interpretive Letter 1018.\83\ National banks should be aware that
these activities are subject to sections 23A and 23B of the Federal
Reserve Act and 12 CFR part 32.\84\
---------------------------------------------------------------------------

\83\ Interpretive Letter 1018 specified that the bank would only
mirror derivative transactions with subsidiaries and affiliates that
are customer-driven and bank permissible. OCC Interpretive Letter
No. 1018 (Feb. 10, 2005).
\84\ See also Margin and Capital Requirements for Covered Swap
Entities, 85 FR 39754, at 39764 (July 1, 2020) (discussing the views
of the Board of Governors of the Federal Reserve System (Federal
Reserve Board) on the application of sections 23A and 23B to swaps
between a bank and its affiliate).
---------------------------------------------------------------------------

Second, the OCC does not believe any changes to the definition of
``customer-driven'' are necessary to confirm that a national bank,
rather than its customer, may not have a speculative purpose. The
proposed definition applies to a transaction entered into for a
customer's ``valid and independent business purpose.'' The OCC
recognizes that bank customers' valid and independent business purposes
may include the customer obtaining directional exposure to an
underlying, for example, as part of the customer's investment
strategy.\85\ The requirement that a transaction be ``customer-driven''
applies only to the national bank; it does not apply to the bank's
customer. Therefore, the OCC does not believe that any changes to the
definition of ``customer-driven'' are necessary to confirm that the
rule does not limit a national bank's customer's valid and independent
business purpose.
---------------------------------------------------------------------------

\85\ See, e.g., OCC Interpretive Letter No. 1090 (Oct. 25,
2007).
---------------------------------------------------------------------------

Third, the OCC declines to adopt the commenter's proposed
interpretation that a derivative transaction entered into by a national
bank as a financial intermediary would be viewed as ``customer-
driven,'' so long as the national bank and its customer have
bilaterally negotiated and agreed to the terms of the transaction,
regardless of the execution mechanism selected by the bank and its
customer. A national bank may use both over-the-counter trades or
trading platforms to execute

[[Page 83705]]

customer-driven transactions. However, the fact that a trade is
bilaterally negotiated does not, on its own, mean that the trade is
customer-driven (i.e., is entered into for a customer's valid and
independent business purpose and does not have the principal purpose of
delivering to a national bank assets that the national bank could not
invest in directly). For example, a bilaterally negotiated transaction
between a national bank and a third party that, under the facts and
circumstances, has the purpose of giving the national bank speculative
exposure to underlying commodity or security prices would not be
considered customer-driven under this definition.
Finally, the OCC confirms that the language in the definition of
``customer-driven'' stating that the principal purpose of the
transaction cannot be to deliver to a national bank assets that the
national bank could not invest in directly does not preclude a bank
from engaging in permissible physically-settled derivatives activities.
Paragraphs (c)(4) and (5) of the final rule explicitly permit national
banks to engage in customer-driven physically-settled derivatives
financial intermediation transactions. For the foregoing reasons, the
OCC is adopting the definition of ``customer-driven'' as proposed.
Perfectly-matched. The proposal included a definition of
``perfectly-matched'' that was substantially similar to prior OCC
interpretive letters. Specifically, the proposal defined perfectly-
matched to mean two back-to-back derivative transactions that offset
risk with respect to all economic terms (e.g., amount, maturity,
duration, and underlying). The preamble to the proposal specified that,
consistent with OCC interpretive letters, this definition would allow
transactions to be considered ``perfectly-matched'' despite a
difference in price between two derivatives when that difference
reflects the bank's intermediation fee (in the form of a spread).\86\
---------------------------------------------------------------------------

\86\ OCC Interpretive Letter No. 1110 (Jan. 30, 2009).
---------------------------------------------------------------------------

The OCC received one comment on this proposed definition. First,
this commenter said the OCC should adopt a broader concept of
``appropriately hedged'' rather than distinguishing between the
definitions of ``perfectly-matched'' and ``portfolio-hedged,'' which
the commenter viewed as unnecessary. This commenter argued that a
bifurcated definitional approach could potentially create ambiguity as
to whether there may be certain types of derivative transactions that,
while appropriately hedged in some manner so as to offset the market
risk of such transactions, may not fall within either technical
definition, and thus would not be bank-permissible. This commenter
further argued that, if the final rule maintains the distinction
between ``perfectly-matched'' and ``portfolio-hedged,'' it should
expressly confirm that any derivative transaction the risks of which
are appropriately offset, whatever the technique, will fall under one
of these two definitions. The commenter argued that, if a permissible
hedging technique does not fall within the definition of ``perfectly-
matched,'' then it should be assumed to fall within the definition of
``portfolio-hedged.''
The OCC disagrees with the commenter's view that these definitions
are unnecessary and that they create ambiguity. OCC interpretations
have long used the terms ``portfolio-hedged'' and ``perfectly-matched''
in analyzing the permissibility of national bank derivatives
activities, and the distinction between these two activities is well-
established and useful to the OCC's supervisory activities. The
commenter describes certain types of transactions that they believe may
not fall into the definition of either perfectly-matched or portfolio-
hedged, such as using two or more derivatives to hedge a single
customer transaction.\87\ The OCC agrees these transactions generally
would not fall into the definition of perfectly-matched, as OCC
interpretive letters have used this definition consistently to describe
mirror transactions with matching economic terms. Customer-driven
intermediation transactions that are not perfectly-matched are still
permissible if they are conducted as part of a portfolio-hedged
derivatives program. As described further below, national banks may
permissibly conduct such transactions as part of a portfolio-hedged
derivatives program if the portfolio of transactions is hedged based on
net unmatched positions or exposures in the portfolio. In response to
the commenter's example of hedging a single derivative with multiple
offsetting derivatives, the OCC confirms that a national bank would not
be precluded from managing derivatives within a portfolio-hedged
program on such a basis. The transactions may be permissible as
portfolio-hedged derivatives transactions as long as the bank
appropriately hedges net residual risks resulting from the offsetting
derivatives transactions.
---------------------------------------------------------------------------

\87\ The commenter also raised the example of hedging an equity
derivative by holding physical equity positions. This example is
discussed below in the section addressing physical hedging
activities.
---------------------------------------------------------------------------

The commenter also proposed that the OCC adopt a unified term such
as ``appropriately hedged'' in lieu of ``perfectly-matched'' and
``portfolio-hedged.'' The commenter suggested that such a definition
should permit ``appropriate and effective'' hedging but does not
specifically propose how this term should be defined. The definitions
``perfectly-matched'' and ``portfolio-hedged'' encompass the methods of
hedging a national bank's market risk arising from permissible
derivatives financial intermediation activities--whether at the
individual transaction level through back-to-back transactions or at
the level of net risks within a derivatives portfolio. The OCC believes
that incorporating and defining these longstanding hedging approaches
reflecting the OCC's interpretive letters will not cast doubt on the
permissibility of currently-recognized national bank derivatives
activities; furthermore, it reflects the OCC's established expectation
that, for derivatives activities relying on portfolio hedging for their
permissibility, the national bank should have the appropriate hedging
skills and sophistication to manage the net risks of its derivatives
portfolio. Accordingly, the final rule retains the definitions for
``perfectly-matched'' and ``portfolio-hedged'' as proposed.
The commenter further said that, if the distinction between
perfectly-matched and portfolio hedged is retained, the definition of
``perfectly-matched'' should be revised to treat corresponding
transactions as perfectly-matched hedges so long as they substantially
offset risk with respect to all material terms, so as to make clear
that differences between the transaction with little or no effect on
market risk (e.g., different maturity dates between the customer
derivative and the offsetting future, or different margin arrangements)
do not bar the transactions from being treated as perfectly-
matched.\88\ The OCC disagrees with this proposed interpretation. OCC
precedents have long defined perfectly-matched transactions as
transactions that offset risk with respect to all economic terms (e.g.,
amount, maturity, duration, and underlying). The OCC has described a
perfectly-matched

[[Page 83706]]

transaction as one that does not expose the national bank to price risk
associated with the underlying so that the main risk to the bank is
credit risk.\89\ Two transactions with different economic terms could
expose the national bank to other risks. For example, two transactions
with different maturity dates could expose the national bank to price
risk in the time period between the two maturity dates. Accordingly,
the OCC is not expanding the definition of ``perfectly-matched'' to
incorporate such transactions. However, as described above, such
transactions may be permissible as part of a portfolio-hedged
derivatives program if the national bank appropriately manages net
unmatched exposures in the derivatives portfolio.
---------------------------------------------------------------------------

\88\ The commenter also discussed physically-hedged transactions
that are hedged on a transaction-by-transaction basis. This example
is discussed below in relation to the permitted physical hedging
activities under Sec. 7.1030(c)(5). As discussed below, such
transactions are not considered perfectly-matched under the final
rule but are addressed in Sec. 7.1030(c)(5).
\89\ See, e.g., OCC Interpretive Letter No. 1060 (Apr. 26,
2006).
---------------------------------------------------------------------------

Portfolio-hedged. The proposal included a definition of
portfolio-hedged that was substantially similar to prior OCC
interpretive letters. Specifically, the OCC proposes to define
``portfolio-hedged'' to mean that a portfolio of derivatives
transactions is hedged based on net unmatched positions or exposures in
the portfolio. The proposed definition refers to unmatched ``positions
or exposures'' to clarify that hedging on a portfolio basis may involve
hedging based on various risk exposures with different instruments in
accordance with applicable policies and procedures and risk limits of
the national bank. This definition is consistent with OCC
interpretations that have typically used ``portfolio-hedged'' to
describe the practice of hedging based on net residual risk position in
a portfolio of positions.\90\ The OCC has explained that this method of
hedging can reduce transactional costs and operational risks because
fewer transactions need to be executed relative to the number of
transactions executed under perfectly-matched hedging (in which the
national bank must offset each transaction on an individual basis).\91\
As described above, a national bank would not be precluded from
managing derivatives within a portfolio-hedged program on a more
specific basis (for example, by managing the risk of a particular
derivative transaction by entering into two or more offsetting
transactions). The OCC did not receive any additional comments on the
definition of portfolio-hedged and is adopting the definition as
proposed.
---------------------------------------------------------------------------

\90\ See e.g., OCC Interpretive Letter No. 1073 (Oct. 19, 2006);
OCC Interpretive Letter No. 1060.
\91\ Id.
---------------------------------------------------------------------------

Physical hedging or physically-hedged. The proposal
defined ``physical hedging'' and ``physically-hedged'' to mean holding
title to or acquiring ownership of an asset (for example, by warehouse
receipt or book entry) to solely manage the risks arising out of
permissible customer-driven derivatives transactions. The OCC intended
this definition to be consistent with the description of commodities
physical hedging activities that the OCC has identified as permissible
in prior interpretive letters and in OCC Bulletin 2015-35 (Aug. 4,
2015). Under the proposal, this definition also applies to physical
hedging of customer-driven derivatives referencing securities. The OCC
did not receive any comments on the definition of ``physically-hedged''
and is adopting the definition as proposed.
Physical settlement or physically-settled. The proposal
defined ``physical settlement'' or ``physically settled'' to mean
accepting title to or acquiring ownership of an asset. The preamble to
the proposal explained that physical settlement stands in contrast to
cash-settled transactions, in which counterparties do not exchange the
underlying assets. The preamble to the proposal also explained that
physical settlement includes transitory title transfer, which is
discussed below. The OCC did not receive any comments on the definition
of ``physical settlement'' or ``physically-settled'' and is adopting
the definition as proposed.
Transitory title transfer. The proposal defined
``transitory title transfer'' to mean a transaction that is settled by
accepting and immediately relinquishing title to an asset. The proposal
explained that this definition is intended to be consistent with prior
OCC interpretive letters, which explain that transitory title transfer
is a means of physical settlement in which a counterparty only briefly
holds title to the underlying asset.\92\ The preamble explained that,
consistent with prior OCC interpretations, transitory title transfer
does not entail a national bank taking physical possession of a
commodity.\93\ The OCC did not receive any comments on the definition
of transitory title transfer and is adopting the definition as
proposed.
---------------------------------------------------------------------------

\92\ See, e.g., OCC Interpretive Letter No. 962 (Apr. 21, 2003).
\93\ See, e.g., OCC Interpretive Letter No. 1073; OCC
Interpretive Letter No. 1060; OCC Interpretive Letter No. 1025 (Apr.
25, 2005); OCC Interpretive Letter No. 962; OCC Interpretive Letter
No. 684. See also 81 FR 96353, at 96355 (Dec. 30, 2016) (explaining
``transitory title transfer typically does not entail physical
possession of a commodity; the ownership occurs solely to facilitate
the underlying transaction and lasts only for a moment in time.'').
---------------------------------------------------------------------------

Underlying. The proposal defined the term ``underlying''
to mean the reference asset, rate, obligation, or index on which the
payment obligation(s) between counterparties to a derivatives
transaction is based. The OCC included ``underlying'' as a defined term
because the notice requirement in paragraph 7.1030(d) is triggered when
a national bank expands its derivatives activities to include
additional types of underlyings. The OCC received one comment on this
definition. The commenter said the OCC should clarify that the
definition of ``underlying'' should be construed broadly and flexibly
over time, so as not to inadvertently introduce ambiguity with respect
to whether a particular asset or quantitative measure may constitute an
underlying of a permissible derivative transaction. However, the
commenter did not provide examples of any particular asset or
quantitative measure that would not be encompassed within the proposed
definition. The OCC does not believe any changes to the definition of
underlying are necessary to provide appropriate flexibility over time.
The proposed definition encompasses any ``asset, rate, obligation, or
index,'' which the OCC believes sufficiently encompasses the
underlyings used by national banks as part of their permissible
derivatives financial intermediation activities, and that these
categories are in and of themselves sufficiently flexible. Accordingly,
the final rule adopts the definition of underlying as proposed.
The OCC requested comment on whether the final rule should include
a definition of the term ``derivative'' and whether a definition of
this term would be necessary to appropriately scope the proposed
provision and whether any definition would be workable in practice. The
OCC received one comment that did not support defining ``derivative''
in the final rule. This commenter said that there is no need for the
rule to define ``derivative,'' as there is generally a common
understanding of the term, as reflected in existing precedent. The OCC
agrees that there is a common understanding of the term ``derivative''
and notes that prior OCC interpretations generally have not defined the
term. Accordingly, the final rule does not include a specific
definition of the term ``derivative.'' The OCC intends to implement the
rule based on the common industry and supervisory understanding
regarding the type of transactions that constitute derivatives.
Permissible Derivatives Activities Generally. The proposal
addressed five categories of permissible derivatives activities. For
the reasons described below the final rule retains these five

[[Page 83707]]

categories as proposed. These categories are discussed below.
Derivatives Referencing Underlyings in which a National
Bank May Invest Directly. Section 7.1030(c)(1) of the proposed rule
specified that a national bank may engage in derivatives transactions
with payments based on underlyings that a national bank is permitted to
purchase directly as an investment. The OCC intended this provision to
reflect OCC interpretive letters that have recognized that national
banks may engage in derivatives activities where the derivative
references assets that a national bank could purchase directly as an
investment.\94\ The OCC did not receive any comments on paragraph
(c)(1) and is adopting this paragraph as proposed. As specified in the
preamble to the proposal, paragraph (c)(1) addresses only derivatives
on underlyings that a national bank would be permitted to purchase
directly as principal. For example, an underlying that a national bank
could hold only as a nonconforming investment under 12 CFR part 1 or
only in satisfaction of debts previously contracted would not be a
permissible underlying under this paragraph.
---------------------------------------------------------------------------

\94\ See, e.g., OCC Interpretive Letter No. 494 (Dec. 20, 1989);
OCC Interpretive Letter No. 422 (Apr. 11, 1988); OCC No Objection
Letter No. 86-13 (Aug. 8, 1986). See also, ``Report to Congress and
the Financial Stability Oversight Council Pursuant to Section 620 of
the Dodd-Frank Act'' at 86-90 (September 2016), available at https://www.occ.treas.gov/publications-and-resources/publications/banker-education/files/pub-report-to-congress-sec-620-dodd-frank.pdf
(Section 620 Report).
---------------------------------------------------------------------------

Hedging Bank-Permissible Activities with Derivatives.
Section 7.1030(c)(2) of the proposed rule provided that a national bank
may engage in derivatives transactions with any underlying to hedge the
risks arising from bank-permissible activities after providing notice
to its EIC.\95\ The preamble to the proposal explained that the OCC has
recognized that a national bank may hedge the risks of bank-permissible
activities using derivatives on underlyings in which a national bank
may not invest directly.\96\ The OCC did not receive any comments on
this section and is adopting it as proposed.
---------------------------------------------------------------------------

\95\ In contrast, if a national bank engaged in hedging using
derivatives on underlyings in which a national bank could invest
directly, the bank would not need to provide notice because this
activity could be conducted under Sec. 7.1030(c)(1) of the rule.
\96\ The OCC has also long recognized that a national bank may
hedge its risk using derivatives on underlyings that a national bank
would be permitted to invest in directly. For example, a national
bank may use futures contracts on exchange, coin, or bullion to
hedge activities conducted pursuant to a national bank's statutory
authority to buy and sell exchange, coin, or bullion. Similarly, a
national bank may use futures to hedge against the risk of loss due
to the interest rate fluctuations inherent in bank loan operations,
U.S. Treasury Bills, and certificates of deposit. These activities
may be conducted under Sec. 7.1030(c)(1) of the final rule.
---------------------------------------------------------------------------

Derivatives Financial Intermediation for Customers.
Sections 7.1030(c)(3) through (5) of the proposal addressed derivatives
financial intermediation activities. These sections of the proposal
were intended to reflect the conclusions of OCC interpretive letters
that have recognized that a national bank may act as a financial
intermediary in customer-driven \97\ derivatives transactions on a
variety of reference assets as part of the business of banking.\98\
These letters have recognized national banks' authority to enter into
cash-settled, customer-driven derivatives transactions both on a
perfectly-matched \99\ and portfolio-hedged basis.\100\ These letters
have also recognized in this context the permissibility of physical
settlement by transitory title transfer.\101\ Additionally, these
letters have recognized that a national bank may engage in customer-
driven financial intermediation derivatives activities that are
physically-settled (other than by transitory title transfer) and to
physically hedge those derivatives in certain circumstances.\102\ The
OCC proposed to incorporate and streamline the framework contained in
its interpretive letters addressing derivatives financial
intermediation activities in paragraphs 7.1030(c)(3) through (5). These
paragraphs are adopted largely as proposed but with the targeted
changes discussed below.
---------------------------------------------------------------------------

\97\ A ``customer-driven'' transaction is one entered into for a
customer's valid and independent business purposes. See, e.g., OCC
Interpretive Letter No. 1160; OCC Interpretive Letter No. 892. This
definition is addressed in Sec. 7.1030(b) of the rule.
\98\ See, e.g., OCC Interpretive Letter No. 937 (Jun. 27, 2002);
OCC Interpretive Letter No. 892; No-Objection Letter 87-5 (Jul. 20,
1987).
\99\ See, e.g., OCC Interpretive Letter No. 1110 (longevity
indexes); OCC Interpretive Letter No. 1101 (Jul. 7, 2008) (certain
risk indexes); OCC Interpretive Letter No. 1089 (Oct. 15, 2007);
(specific property indexes); OCC Interpretive Letter No. 1081 (May
15, 2007) (specific property indexes); OCC Interpretive Letter No.
1079 (Apr. 19, 2007) (inflation indexes); OCC Interpretive Letter
No. 1065 (Jul. 24, 2006) (petroleum products, agricultural oils,
grains and grain derivatives, seeds, fibers, foodstuffs, livestock/
meat products, metals, wood products, plastics and fertilizer); OCC
Interpretive Letter No. 1063 (Jun. 1, 2006) (hogs, lean hogs, pork
bellies, lumber, corrugated cardboard, and polystyrene); OCC
Interpretive Letter No. 1059 (Apr. 13, 2006) (old corrugated
cardboard #11, polypropylene: injection molding (copoly),
polypropylene: All grades, Dow Jones AIG Commodity Index); OCC
Interpretive Letter No. 1056 (Mar. 29, 2006) (frozen concentrate
orange juice, polypropylene); OCC Interpretive Letter No. 1039
(Sept. 13, 2005) (crude oil, natural gas, heating oil, natural
gasoline, gasoline, unleaded gas, gasoil, diesel, jet fuel, jet-
kerosene, residual fuel oil, naphtha, ethane, propane, butane,
isobutane, crack spreads, lightends, liquefied petroleum gases,
natural gas liquids, distillates, oil products, coal, emissions
allowances, benzene, dairy, cattle, wheat, corn, soybeans, soybean
meal, soybean oil, cocoa, coffee, cotton, orange juice, sugar,
paper, rubber, steel, aluminum, zinc, lead, nickel, tin, cobalt,
iridium, rhodium, freight, high density polyethylene (plastic),
ethanol, methanol, newsprint, paper (linerboard), pulp (kraft), and
recovered paper (newsprint)).
\100\ See, e.g., OCC Interpretive Letter No. 1073 (aluminum,
nickel, lead, zinc, and tin); OCC Interpretive Letter No. 1060
(coal); OCC Interpretive Letter No. 1040 (emissions allowances); OCC
Interpretive Letter No. 937 (electricity).
\101\ See OCC Interpretive Letter No. 1073 (aluminum, nickel,
lead, zinc, and tin); OCC Interpretive Letter No. 1060 (coal); OCC
Interpretive Letter No. 1025 (electricity); Interpretive Letter No.
962 (electricity). The term ``transitory title transfer'' means
accepting and instantaneously relinquishing title to the commodity,
as a party in a ``chain of title'' transfer. OCC Interpretive Letter
No. 1025.
\102\ See, e.g., OCC Interpretive Letter No. 1040; OCC
Interpretive Letter No. 892; OCC Interpretive Letter No. 684. OCC
interpretive letters have explained that physical delivery can help
to reduce the risk in customer-driven commodity derivatives
transactions if the activity is conducted in accordance with safe
and sound banking practices and would achieve a more accurate and
precise hedge than a cash-settled transaction.
---------------------------------------------------------------------------

The OCC received one comment addressing these sections. This
commenter recommended revising Sec. 7.1030(c) to allow national banks
to physically hedge cash-settled derivatives, in addition to
physically-settled derivatives. This commenter also said, to the extent
the final rule continues to differentiate between cash- and physically-
settled trades, the final rule should also confirm that, where a
national bank has a physically-settled trade, the settlement of which
it directs to an affiliate, the trade would be deemed to be cash-
settled. The final rule incorporates one change in response to this
comment to clarify the rule's application to physical hedging involving
transactions other than commodity derivatives. OCC interpretive letters
and guidance addressing physical hedges of commodity derivatives are
typically limited to hedges of physically-settled transactions.\103\
The OCC therefore disagrees with the commenter's suggestion that OCC
interpretations generally permit physical hedging for

[[Page 83708]]

cash-settled derivatives. However, the OCC recognizes that interpretive
letters addressing physical hedges of equity derivatives do not always
include the same condition.\104\ In light of prior interpretations'
treatment of equity derivatives transactions, the final rule removes
the condition that a physical hedge of a derivative other than a
commodity derivative must hedge a physically-settled transaction. The
final rule effects this change by removing ``physically-settled (other
than by transitory title transfer)'' from Sec. 7.1030(c)(5) and
including physical settlement as a requirement for physical hedging
involving commodities in new Sec. 7.1030(e)(5)(iii). These changes
clarify that physical hedging involving securities is permissible for
cash-settled transactions, but physical hedging involving commodities
is permissible only to hedge physically-settled transactions. In
response to the comment regarding physically-settled transactions where
physical settlement is directed to an affiliate, the OCC confirms that
the type of transactions described in Interpretive Letter 949 are
permissible under the final rule as long as the transactions are cash-
settled with respect to the national bank.\105\
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\103\ See OCC Interpretive Letter No. 1040 (``The Bank may
conduct the proposed customer-driven, physically settled emissions
derivative business and hedge risks arising from these permissible
banking activities as an extension of its existing energy-related
commodities derivatives business . . . .''); OCC Interpretive Letter
No. 684 (``the OCC concludes that it is legally permissible for a
national bank to hedge the financial exposure arising from otherwise
permissible banking activities in markets that involve physical
delivery of commodities and, in connection with such hedging
activities, to make or take physical delivery of commodities . . .
.); OCC Bulletin 2015-35, Quantitative Limits on Physical Commodity
Transactions (Aug. 4, 2015).
\104\ See OCC Interpretive Letter No. 892; OCC Interpretive
Letter No. 1090.
\105\ OCC Interpretive Letter No. 949 provides that the equity
derivatives transactions under consideration in that letter would be
cash settled with respect to the national bank and ``[i]f under the
terms of certain contracts the customer is permitted to elect
physical settlement, an affiliate of the bank will make or receive
physical delivery.'' OCC Interpretive Letter No. 949 (Sept. 19,
2002).
---------------------------------------------------------------------------

Additionally, this commenter recommended that the OCC clarify the
application of the definitions ``perfectly-matched'' and ``portfolio-
hedged'' to physically-hedged derivatives transactions. The commenter
described that a derivative transaction that is physically hedged on an
individual basis, such as a total return swap that is hedged via
holding the underlying equity position would not necessarily be covered
by the definition of ``perfectly-matched'' which is limited to two
back-to-back derivatives transactions. As discussed above, the OCC
believes it is preferable to retain the definition of ``perfectly-
matched'' as used in prior OCC interpretations. However, to address the
commenter's concern that the activities described in Sec. 7.1030(c)(5)
will not be perfectly matched under this definition, the final rule
replaces the term ``perfectly-matched'' with ``hedged on a transaction-
by-transaction basis.'' This change is consistent with prior
interpretations that describe physical hedging on a transaction-by-
transaction basis rather than on a ``perfectly-matched'' basis.\106\
---------------------------------------------------------------------------

\106\ OCC Interpretive Letter No. 1040 (``The Bank also proposes
to hedge the market risk associated with the proposed emissions
derivatives transactions on a transaction-by-transaction or
portfolio basis, primarily with physical emissions allowances.'').
---------------------------------------------------------------------------

Relative to prior OCC interpretations, the final rule makes fewer
distinctions based on the particular underlying or how the national
bank hedges its derivatives financial intermediation activity. While
prior interpretations typically analyzed both the underlying and the
bank's method for hedging the customer-driven derivative (i.e.,
perfectly-matched versus portfolio-hedged), the final rule permits
customer-driven, cash-settled derivatives transactions on any
underlying, whether perfectly-matched or portfolio-hedged. The OCC
recognizes that financial intermediation in derivatives continues to
evolve and that the markets for derivatives on underlyings that the OCC
has not previously addressed through interpretations may have
sufficient liquidity and depth to allow a bank to conduct the activity
as a financial intermediary. Similarly, the OCC recognizes that these
same factors may allow a national bank to hedge its customer-driven
derivatives activities in evolving ways--whether by portfolio hedging
or physical hedging--consistent with conducting the activity as a
financial intermediary. Accordingly, the OCC is adopting these
provisions with the targeted changes described above.
The proposal requested comment on whether the rule should reflect
any additional safety and soundness standards regarding the underlyings
that are permissible for financial intermediation in derivatives and
how national banks may hedge these activities. The proposal
specifically requested comment on whether the regulation should include
additional language relating to the liquidity of the market for
permissible customer-driven derivatives activities. The OCC did not
receive any comments on this request and is not adopting any additional
safety and soundness standards or language related to the underlyings
that are permissible for derivatives financial intermediation
activities. As with any national bank permissible activity, general
safety and soundness standards apply to these activities.\107\ In
addition, the final rule adopts specific requirements for physical
hedging activities in Sec. 7.1030(e) and (c)(5) (prohibiting a
national bank from taking physical delivery of any commodity by receipt
of physical quantities of the commodity on bank premises).
---------------------------------------------------------------------------

\107\ As discussed below, the final rule includes new paragraph
(f), which explicitly provides that a national bank must adhere to
safe and sound banking practices in conducting the activities
described in Sec. 7.1030.
---------------------------------------------------------------------------

Notice requirement. Section 7.1030(d) of the proposal required a
national bank to provide written notice to its EIC prior to engaging in
activity using derivatives referencing assets that a national bank
could not invest in directly. The OCC intended this provision to be
consistent with OCC interpretations that included a process in which
the national bank provides notice to its EIC about the business and
management practices the bank will employ in performing the derivatives
activity as financial intermediation.\108\ The OCC received one comment
addressing the notice process. This commenter said that the notice
requirements should be revised to ensure consistency in supervisory
standards and to clarify that the proper role of supervisors in
evaluating derivatives activities relates to consistently applying
safety and soundness standards, not evaluating legal permissibility.
Specifically, this commenter said the final rule should clearly
distinguish between the legal permissibility of derivatives
transactions (to be governed by Sec. 7.1030 and the OCC's legal
interpretations thereof) from firm-specific prudential concerns, to be
reviewed by the EIC and supervisory team; require an EIC to consult
with OCC leadership before raising any categorical safety and soundness
concerns about an activity; and provide for consistent and uniform
standards with respect to evaluating the safety and soundness of
certain types of derivatives activities as a categorical matter, with
the EIC and supervisory team focusing only on idiosyncratic, bank-
specific aspects of the relevant activity.
---------------------------------------------------------------------------

\108\ For example, OCC Interpretive Letter No. 1160 contemplates
that a bank would provide written notification to its EIC prior to
commencing a derivatives financial intermediation business for a
reference asset addressed in prior OCC interpretive letters. This
process replaced the no-objection process that was typically
included in prior OCC interpretive letters. See, e.g., OCC
Interpretive Letter No. 1065. The notice provision of the final rule
also replaces the no-objection process contemplated in OCC
interpretive letters addressing hedging activities using derivatives
on underlyings in which a national bank could not invest directly.
See OCC Interpretive Letter No. 896 (Aug. 21, 2000).
---------------------------------------------------------------------------

First, the OCC believes the rule appropriately identifies safety
and soundness and legal permissibility considerations. For example,
paragraph (c) identifies the legally permissible categories of
derivatives activities, while paragraphs (d) and (e) establish the
supervisory notice requirement and

[[Page 83709]]

additional safety and soundness requirements, respectively. For further
clarity, however, the final rule adds a new paragraph (f) confirming
that a national bank must adhere to safe and sound banking practices in
conducting the activities described in Sec. 7.1030. The provision
specifically requires a bank to have a risk management system
(policies, processes, personnel, and control system) that effectively
manages (i.e., identifies, measures, monitors, and controls) these
activities' interest rate, credit, liquidity, price, operational,
compliance, and strategic risks. This provision clarifies that, in
addition to being within a national bank's legal authority, derivatives
activities must also be conducted in a safe and sound manner. As part
of their regular supervisory activities, OCC supervisors consider both
whether activities are safe and sound, as well as if they are conducted
in compliance with applicable law.
The final rule does not require supervisory staff to consult with
OCC leadership before raising ``categorical safety and soundness
concerns'' about a derivatives activity as the commenter suggested. Nor
does the final rule prescribe uniform regulatory standards specific to
evaluating the safety and soundness of certain types of derivatives
activities. Making assessments with respect to the safety and soundness
of an activity is the key function of OCC supervisors. The OCC has
established generally applicable safety and soundness standards by
regulation \109\ and has issued extensive guidance on the examination
process.\110\ Requiring additional internal processes before an
examiner may raise concerns regarding an activity could interfere with
this important function. Accordingly, OCC supervisors will examine
national bank derivatives activities as part of their regular and
ongoing examination and supervision activities.
---------------------------------------------------------------------------

\109\ 12 CFR part 30.
\110\ See, e.g., the Examination Process Series of the
Comptroller's Handbook (June 2018).
---------------------------------------------------------------------------

The OCC expects the notice requirement in the final rule to enhance
prudential supervision of national bank derivatives activities by
ensuring that banks evaluate the risks of the activities both at
inception and on an ongoing basis. In addition, the OCC expects that
incorporating notice as a regulatory requirement will ensure
consistency in notice practices across OCC-supervised institutions.
Like the proposal, the final rule requires the written notice to
include information that is substantially similar to the information
that is discussed in Interpretive Letter 1160. Specifically, the
written notice must include a detailed description of the proposed
activity, including the relevant underlying(s); the anticipated start
date of activity; and a detailed description of the national bank's
risk management system (policies, processes, personnel, and control
systems) for identifying, measuring, monitoring, and controlling the
risks of the activity.
The notice requirement does not impose a prior approval
requirement. Rather, the notice is designed to make OCC supervisors
aware of a national bank's derivatives activities so that such
activities can be appropriately scoped into OCC's ongoing supervision
and oversight of the bank's safety and soundness. In addition, having
awareness of a bank's derivatives activities will enable the OCC to
raise questions as to whether the derivatives activity can be conducted
in a safe and sound manner, or whether the derivatives activity is
within the scope of those legally authorized for a national bank,
before the bank activities commence or at any time, as is the case with
any other permissible bank activities.
Like the proposal, Sec. 7.1030(d)(1) of the final rule requires a
national bank to provide its EIC notice prior to engaging in any of the
derivatives hedging or financial intermediation activities described in
Sec. 7.1030(c)(2) through (5) for the first time. This notice
requirement applies, for example, if a bank has previously engaged in
cash-settled derivatives with respect to a particular underlying as
described in Sec. 7.1030(c)(3) but seeks to begin physically settling
transactions as described in Sec. 7.1030(c)(4) or (5). Likewise, a
national bank must provide notice prior to first engaging in
derivatives hedging activities pursuant to Sec. 7.1030(c)(2) or
expanding the bank's derivatives hedging activities to include a new
category of underlying. Also like the proposal, under Sec.
7.1030(d)(2) of the final rule, the bank must submit written notice at
least 30 days before the national bank commences the derivatives
activity.
The OCC requested comment on whether it was sufficiently clear when
a notice would be required and what would constitute a ``new category
of underlying.'' The OCC specifically requested comments on whether the
regulation text should list these categories and, if so, whether the
regulation should specify that any new derivatives activities not
falling within one of the specified categories also requires notice.
The OCC received one comment in response to this request. This
commenter said that the final rule should not define categories of
``underlying'' by regulation, but rather should take a substantially
more principles-based approach to determining when prior notice is
required that looks primarily to the risk management implications and
challenges of any potential new derivatives activity. Specifically,
this commenter said the final rule should make clear that prior notice
is required only when a national bank commences a new activity or
modifies an existing activity that would expose the bank to, and
require the bank to manage and control, a material and substantially
new type of market risk. The commenter also said that no notice should
be required under the final rule where a national bank engages in
permissible derivatives activity that is hedged either (1) using
mirrored transactions that involve no market risk or (2) on a nearly
perfectly-matched basis that involve only de minimis residual market
risk. In contrast, this commenter argued, where a national bank is
engaged in derivatives activities that are hedged on a portfolio basis
pursuant to which the bank is actively managing an inventory of market
risks, imposing a notice requirement is appropriate as it would
facilitate supervisory review of a bank's risk management and internal
controls in implementing that hedging strategy.
The OCC disagrees and finds that, even when a national bank
believes it is not exposed to a materially new type of market risk,
there is supervisory value in receiving notice of the new activities.
The considerations identified by the commenter--facilitating
supervisory review of a bank's risk management and internal controls in
implementing its hedging strategy--are relevant whether the activity is
hedged on a perfectly-matched or portfolio-hedged basis.\111\ Receiving
a notice will allow supervisors to incorporate the activities into
their overall supervisory strategy. The OCC disagrees that notice
should not be required for derivatives transactions that the national
bank determines involve de minimis market risk. Receiving notices in
such circumstances is particularly important for banks that are
engaging in derivatives activities for the first time or

[[Page 83710]]

expanding a limited derivatives business to incorporate additional
derivatives products. The OCC believes that the notice process is a
reasonable requirement in light of its value to supervisors. The notice
process requires a limited amount of information that should be readily
available to the bank and does not require that the bank receive
approval prior to conducting the activity. Accordingly, the OCC
continues to believe the notice process will provide an efficient
notice standard for national banks engaging in derivatives activities.
For the foregoing reasons, the OCC is adopting the notice requirement
as proposed.
---------------------------------------------------------------------------

\111\ The notice requirement is expected to enhance supervision
by providing OCC supervisors with comprehensive, up-to-date
information on the activities in which the national bank is engaged.
This information will assist OCC supervisors by ensuring they have
an opportunity to assess a bank's ability to engage in derivatives
activities in a safe and sound manner prior to the bank commencing
the activity and provide them ongoing information as those
activities expand to new categories.
---------------------------------------------------------------------------

One commenter said that the final rule should make clear that
national banks may continue to rely on guidance that they have
previously received regarding the permissibility of derivatives
activities and need not provide notice under proposed new Sec. 7.1030
to continue to engage in activities that were commenced under the prior
interpretive and supervisory framework before the final rule became
effective. As described in the proposal, national banks that have
provided notice to or received statements of no-objection from their
EICs for particular derivatives activities consistent with the process
in prior OCC interpretive letters would not be required to submit new
notices for those activities.
Additional requirements for physical hedging activities. Section
7.1030(e) of the proposal incorporated the practices from prior
interpretive letters and guidance related to physical hedging with
securities and commodities.\112\ The proposal included certain
modifications to these practices to promote consistency in the
practices national banks employ with respect to physical hedging
activities. Specifically, the proposal applied the framework in
interpretive letters addressing physical hedging using securities to
all physical hedging activities involving underlyings in which a
national bank could not invest directly. Under the proposed rule, a
national bank could engage in physical hedging only if: (1) The
national bank holds the underlying solely to hedge risks arising from
derivatives transactions originated by customers for the customers'
valid and independent business purposes; (2) the physical hedging
activities offer a cost-effective means to hedge risks arising from
permissible banking activities; (3) the national bank does not take
anticipatory or maintain residual positions in the underlying except as
necessary for the orderly establishment or unwinding of a hedging
position; and (4) the national bank does not acquire equity securities
for hedging purposes that constitute more than five percent of a class
of voting securities of any issuer.\113\ The OCC did not receive any
comments on these proposed requirements for physical hedging
activities. Because these requirements continue to accurately reflect
OCC supervisory expectations for physical hedging activities, the OCC
is adopting the requirements as proposed.
---------------------------------------------------------------------------

\112\ See OCC Bulletin 2015-35; OCC Interpretive Letter No. 935
(May 14, 2002); OCC Interpretive Letter No. 892; OCC Interpretive
Letter No. 684.
\113\ Certain of the practices described in prior OCC
interpretive letters were not included in the proposed rule text
because they are generally applicable safety and soundness standards
that can be evaluated and addressed under other existing sources of
law, including, as applicable, 12 U.S.C. 1818. For example, several
interpretive letters discuss that a national bank should have
appropriate risk management policies and procedures for its physical
hedging activities. In addition, several interpretive letters have
also specified that a bank may not engage in physical hedging
activities for the purpose of speculating in security or commodity
prices. As described above, customer-driven financial intermediation
as defined in the proposal (and adopted in the final rule) would not
include activities entered into for the purpose of speculation.
---------------------------------------------------------------------------

Consistent with OCC interpretive letters and guidance concerning
physical hedging with commodities in which a national bank could not
invest directly,\114\ the proposed rule imposed additional requirements
on physical hedging with commodities. Under the proposed rule, a
national bank would be permitted to engage in physical hedging with
commodities only if the national bank's physical position in a
particular physical commodity (including, as applicable, delivery
point, purity, grade, chemical composition, weight, and size) is no
more than five percent of the gross notional value of the national
bank's derivatives that (1) are in that same particular commodity and
(2) allow for physical settlement within 30 days. Title to commodities
acquired and immediately sold in a transitory title transaction would
not count against this five percent limit.\115\ Consistent with OCC
interpretive letters,\116\ the proposed rule permitted physical hedging
involving commodities only if the physical position more effectively
reduces risk than a cash-settled hedge involving the same commodity.
The proposal also specified that a national bank may not take physical
delivery of any commodity by receipt of physical quantities of the
commodity on bank premises. The OCC explained in the preamble to the
proposal that these requirements apply to physical hedging activities
involving commodities due to the unique risks of physical commodity
activities.\117\
---------------------------------------------------------------------------

\114\ See OCC Bulletin 2015-35; OCC Interpretive Letter No. 684.
\115\ Consistent with OCC Interpretive Letter No. 1040, this
five percent limit would not apply to physical hedging using
emissions allowances.
\116\ See OCC Interpretive Letter No. 684; OCC Interpretive
Letter No. 632 (Jun. 30, 1993).
\117\ See 85 at 40809. See also Section 620 Report (describing
the price risks and operational risks specific to physical
commodities activities).
---------------------------------------------------------------------------

The OCC received one comment addressing these requirements. First,
this commenter said the final rule should require that any physical
hedge be ``at least as effective as,'' not more effective than, a cash-
settled hedge. Second, this commenter said, to better align the five
percent limit with financial risk management practices, this limit
should be calculated based on the type of market risk (i.e., the
denominator with respect to a given transaction should include all
transactions that implicate substantially equivalent market risk).
Third, the commenter said the OCC should expressly confirm that the
five percent limit is intended to be calculated in the same manner
described in OCC Bulletin 2015-35 and that the OCC should provide
greater clarity and specificity regarding the derivatives that are
included in the five percent test's denominator because they ``allow
for physical settlement within 30 days.''
The OCC disagrees with the first two comments. The purpose of Sec.
7.1030(e) of the proposal was to incorporate the OCC's existing
interpretations and supervisory guidance into regulation. Under
existing interpretations, a physical hedge should be more effective
than a cash-settled hedge involving the same commodity in light of the
additional risks associated with physical hedging.\118\ In other words,
if a national bank has a choice between hedging with a cash-settled
derivative or a physical commodity, all else being equal, the bank
should choose the cash-settled derivative that involves less risk to
the bank. This general principle is consistent with OCC interpretations
that have found cash-settled transactions raise fewer supervisory
concerns compared to physically-settled transactions.\119\ Accordingly,
the final rule continues to require a national bank to utilize cash-
settled transactions when such transactions are equally effective as
physical hedges.
---------------------------------------------------------------------------

\118\ See OCC Interpretive Letter No. 684; OCC Interpretive
Letter No. 632.
\119\ See generally OCC Interpretive Letter No. 1039; OCC
Interpretive Letter No. 632; No-Objection Letter 87-5.
---------------------------------------------------------------------------

Under existing OCC guidance, the five percent limit on physical
hedging activities applies to a particular

[[Page 83711]]

commodity, as defined by the commodity's delivery point, purity, grade,
chemical composition, weight, and size (as applicable).\120\ This
condition is intended to ensure a bank's physical hedging activities
remain a nominal portion of the national bank's risk management
activities.\121\ Further, applying the limit based on a particular
commodity ensures that the national bank keeps physical inventory of a
particular commodity to levels commensurate with its need to make or
take physical delivery of that commodity.\122\ It remains important
that a national bank's physical hedging activities amount to no more
than a nominal portion of a bank's risk management activities and that
the inventory of a particular commodity is limited to levels
commensurate with the bank's need to make or take physical delivery of
that commodity. Accordingly, the final rule continues to apply the
limit to each particular physical commodity (including, as applicable,
delivery point, purity, grade, chemical composition, weight, and size).
The OCC believes that applying the limit based on a broader category,
such as all transactions that implicate substantially equivalent market
risk, would not be administrable and could lead to inconsistent
calculation of the limit.
---------------------------------------------------------------------------

\120\ OCC Bulletin 2015-35.
\121\ Id.
\122\ Id.
---------------------------------------------------------------------------

In response to the commenter's third comment on the five percent
limit, the OCC confirms that the limit is meant to align with OCC
Bulletin 2015-35. In particular, a national bank's physical position in
a particular physical commodity (including, as applicable, delivery
point, purity, grade, chemical composition, weight, and size) must not
be more than five percent of the gross notional value of the bank's
derivatives that are in that particular physical commodity and allow
for physical settlement within 30 days. Like OCC Bulletin 2015-35, this
limit applies to transactions that contemplate physical delivery within
30 days, i.e., the denominator includes derivatives that can or will
physically settle within 30 days.

Subpart B--National Bank Corporate Practices

National Bank Corporate Governance (Sec. 7.2000)
As noted, the OCC continually seeks to update its regulations to
stay current with industry changes and technological advances, subject
to Federal law and consistent with the safe and sound operation of the
banking system. As part of this process, the OCC proposed updating and
modernizing Sec. 7.2000, which provides a regulatory framework for
national bank corporate governance. As described by the OCC in various
conditional approvals,\123\ ``corporate governance procedures''
generally refer to requirements involving the operation and mechanics
of the internal organization of a national bank, including relations
among owners-investors, directors, and officers, and do not include
requirements that relate to the banking powers or activities of a
national bank or relationships between a national bank and customers or
third parties. Examples of corporate governance procedures include, but
are not limited to, share exchanges, anti-takeover provisions, and the
use of blank check procedures in issuing preferred stock. The OCC
issued Sec. 7.2000 in 1996 to provide national banks with increased
flexibility to structure their corporate governance procedures
consistent with the particular needs of the bank while providing
shareholders and others with adequate notice of the corporate standards
on which a bank will rely.\124\ The OCC has not substantively changed
Sec. 7.2000 since its adoption.\125\
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\123\ See e.g., OCC Conditional Approval No. 859 (June 13,
2008); OCC Conditional Approval No. 696 (June 9, 2005).
\124\ 61 FR 4849, at 4854 (Feb. 9, 1996).
\125\ Non-substantive amendments to Sec. 7.2000 changed the
address and telephone number of the OCC Communications Office. See
79 FR 15641 (March 21, 2014); 80 FR 28345 (May 18, 2015).
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Section 7.2000 currently provides that a national bank proposing to
engage in a corporate governance procedure must comply with applicable
Federal banking statutes and regulations and safe and sound banking
practices. In addition, Sec. 7.2000 provides that to the extent not
inconsistent with applicable Federal banking statutes or regulations,
or bank safety and soundness, a national bank may elect to follow the
corporate governance procedures of the law of the State in which the
main office of the bank is located, the law of the State in which the
holding company of the bank is incorporated, Delaware General
Corporation Law, or the Model Business Corporation Act. Further, Sec.
7.2000 requires that a national bank designate in its bylaws the body
of law selected for its corporate governance procedures. Finally, Sec.
7.2000 describes the process for obtaining OCC staff positions on the
ability of a national bank to engage in a particular corporate
governance procedure.
The OCC proposed to amend Sec. 7.2000 to reduce burden, provide
greater clarity, and modernize the national bank charter with respect
to corporate governance provisions. The proposed amendments also would
address anomalous results that may arise when a national bank
eliminates its holding company. As a general matter, the OCC proposed
changing the term ``corporate governance procedure'' used in Sec.
7.2000 to ``corporate governance provisions'' and to revise paragraph
(a) of Sec. 7.2000 accordingly. As discussed in the proposal, the OCC
believes that ``corporate governance procedure'' may be construed more
narrowly than intended and omit corporate governance practices that are
not procedural in nature. The OCC proposed revising paragraph (a) to
provide the corporate governance provisions in a national bank's
articles of association and bylaws and the bank's conduct of its
corporate governance affairs must comply with applicable Federal
banking statutes and regulations and safe and sound banking practices.
The OCC received no comments on proposed paragraph (a) and adopts it as
proposed. As discussed in the proposal, the OCC does not intend this
change to affect the application of prior OCC interpretations of
corporate governance procedures to Sec. 7.2000.
The OCC also proposed increasing a national bank's flexibility in
choice of corporate governance provisions in three ways. First, the OCC
proposed revising paragraph (b) of Sec. 7.2000 to authorize a national
bank to elect the corporate governance provisions of the law of any
State in which any branch of the bank is located in addition to the law
of the State in which the bank's main office is located, to the extent
not inconsistent with applicable Federal banking statutes or
regulations or safety and soundness. The OCC received no comments on
this change and adopts it as proposed. Accordingly, a national bank is
no longer limited to using the corporate governance provisions of the
State where its main office is located. For example, a national bank
with its main office in State A and branches in State B and State C may
elect to use the corporate governance provisions of the law of one of
State A, State B, or State C.
Second, the OCC proposed revising paragraph (b) to authorize the
national bank to use the law of the State where one holding company of
the bank is incorporated. The current rule indicates that a national
bank may use the law of the State where the holding company of the bank
is incorporated. This amendment expressly recognizes the

[[Page 83712]]

possibility that a national bank may be controlled by more than one
holding company and that those holding companies may be incorporated by
different States. Under this amendment, the bank is able to pick the
law of the State of any one of its holding companies. The OCC received
no comments on this change and adopts it as proposed, with a technical
change for consistency within paragraph (b).
Third, the OCC proposed adding a new paragraph (c) that would allow
a national bank to continue to use the corporate governance provisions
of the law of the State where its holding company is incorporated even
if the holding company is later eliminated or no longer controls the
bank, and the national bank is not located in that State. This
amendment removes an impediment to a national bank that may choose to
eliminate its holding company or is no longer controlled by that
holding company but wishes to retain longstanding and familiar
corporate governance provisions. The OCC received one comment
supporting proposed paragraph (c) and adopts it as proposed.
The OCC also proposed revising current paragraph (c) of Sec.
7.2000 (proposed to be redesignated as Sec. 7.2000(d)). Current
paragraph (c) provides that the OCC considers requests for the OCC
staff's position on the ability of a national bank to engage in a
particular State corporate governance procedure in accordance with the
no-objection procedures set forth in OCC Banking Circular 205 or any
subsequently published agency procedures, and that requests should
demonstrate how the proposed practice is not inconsistent with
applicable Federal statutes or regulations and is consistent with bank
safety and soundness. The OCC issued Banking Circular 205 on July 26,
1985 and has not modified it since. However, a national bank also may
request the views of the OCC on an interpretation of national banking
statutes and regulations independent of the process in Banking Circular
205, which has been the more common approach since 1985.
In order to update paragraph (c), the OCC proposed removing the
requirement that banks requesting the OCC's views on State corporate
governance law use the no-objection procedure. The proposal also listed
the information that a request must contain. Similar to what is set
forth in OCC Banking Circular 205, this information, includes: (1) The
name of the bank; (2) citations to the State statutes or regulations
involved; (3) a discussion as to whether a similarly situated State
bank is subject to or may adopt the corporate governance provision; (4)
identification of all Federal banking statutes or regulations that are
on the same subject as, or otherwise have a bearing on, the subject of
the proposed State corporate governance provision; and (5) an analysis
of how the proposed corporate governance provision is not inconsistent
with applicable Federal statutes or regulations nor with bank safety
and soundness. The OCC received no comments on proposed paragraph (d)
and adopts it as proposed. The OCC notes that this provision does not
preclude a national bank from seeking informal consultation with OCC
staff. However, if the bank wants to receive a written response from
OCC staff, it must follow the procedure in this proposed paragraph (d).
The final rule revises the heading of Sec. 7.2000 to reflect the
change in terminology from corporate governance procedures to corporate
governance provisions. The final rule also makes a technical change to
the heading not previously proposed to clarify that this provision
applies to national banks. As a result, the heading now reads
``National bank corporate governance.''
The OCC requested comment on whether a national bank also should be
able to adopt a combination of corporate governance provisions from the
laws of several different States where the national bank and any
holding companies are located, thus potentially resulting in a national
bank following corporate governance provisions that derive from a
combination of States' laws, or whether a national bank should be
limited to electing and using the corporate governance provisions of a
single State. The OCC received one comment on this request. The
commenter raised potential litigation issues with adopting a
combination of corporate governance provisions, questioning whether
courts will respect combined elections of law where there are minimal
contacts with a State whose law has been elected, and citing a trend in
court decisions on the validity of choice of law as part of contractual
agreements. Given this concern and the lack of positive comments
regarding this change, as well as the possible confusion for the bank,
shareholders, the OCC, and others that may arise with the use of
multiple States' corporate governance laws, the OCC is not amending the
final rule at this time to permit the adoption of corporate governance
provisions from the laws of several different States.
Further, the OCC requested comment on whether it should make, to
the extent appropriate, similar revisions to the regulations pertaining
to corporate governance provisions for Federal savings associations in
12 CFR 5.21 and 5.22. Under current law, all Federal savings
associations may elect to use the corporate governance provisions of
the laws of the State where the home office of the association is
located. Federal stock savings associations also may elect the laws of
the State where any holding company of the association is incorporated
or chartered; Delaware General Corporation law; or the Model Business
Corporation Act, provided that such procedures may be elected to the
extent not inconsistent with applicable Federal statutes and
regulations and safety and soundness, and such procedures are not
prohibited by part 5. One commenter stated that Federal mutual savings
associations should have the same leeway in making a choice of law as
national banks. Accordingly, the OCC is revising Sec. Sec. 5.21 and
5.22 to permit additional flexibility for Federal savings associations
to allow parity with national banks, as applicable and pursuant to
permissible law. As a result of this final rule, Federal savings
associations also may elect to use the corporate governance provisions
of any State in which a branch of the association is located and, in
the case of Federal stock savings associations, the law of any State in
which any current or former holding company of the association is
incorporated or chartered. The final rule also changes ``institution''
to ``association'' in Sec. 5.21 for consistency.
In addition, the OCC requested comment on whether the final rule
should change the term ``corporate governance procedures'' to
``corporate governance provisions'' in Sec. Sec. 5.21 and 5.22 to be
consistent with the change in terminology proposed for Sec. 7.2000.
The OCC did not receive any comments on this request. For clarity and
conformity, the OCC is making this technical change to Sec. Sec. 5.21
and 5.22.
The OCC received two additional comments regarding Sec. 7.2000.
One commenter requested that the OCC review the form articles of
association and bylaws to confirm that they are consistent with
applicable Federal banking statutes and regulations. The commenter
asserted that these forms contain requirements that are not mandated by
Federal banking statutes and regulations. As the commenter's request
does not specifically request any specific revisions to Sec. 7.2000,
the OCC is adopting the amendments as proposed. However, the OCC notes
that it periodically reviews its model articles of association and
bylaws in the ordinary course of business.

[[Page 83713]]

Another commenter recommended that the OCC add a provision to part
7 recognizing the authority of a national bank to adopt exculpatory
clauses in their articles and/or bylaws under applicable State law or
the Model Code. The commenter's request for a provision on national
bank authority to adopt exculpatory clauses raises an issue that the
OCC did not specifically address in the proposal. The proposed
revisions were not intended to address or sanction specific substantive
provisions of State corporate law. As the OCC did not contemplate the
commenter's requested provision in the proposed rule, the OCC declines
to further revise Sec. 7.200 at this time. However, the agency may
consider this and similar issues in future rulemakings.
National Bank Adoption of Anti-Takeover Provisions (Sec. 7.2001)
The OCC proposed to add a new Sec. 7.2001 to address the extent to
which a national bank may include anti-takeover provisions in its
articles of association or bylaws.\126\ Anti-takeover provisions are
examples of corporate governance provisions \127\ covered by 12 CFR
7.2000. As discussed above, under Sec. 7.2000(b) a national bank may
elect to follow the corporate governance provisions of specified State
law to the extent it is (1) not inconsistent with applicable Federal
banking statutes or regulations and (2) not inconsistent with bank
safety and soundness.
---------------------------------------------------------------------------

\126\ OCC regulations currently include provisions addressing
adoption of anti-takeover provisions by stock Federal savings
associations. See 12 CFR 5.22(g)(7), (h) and (j)(2)(i)(A). The OCC
did not propose to amend those provisions.
\127\ The final rule changes this terminology in Sec. 7.2000 to
``corporate governance provisions.''
---------------------------------------------------------------------------

The OCC received one comment related to proposed Sec. 7.2001. The
commenter raised several concerns about how the provision would apply
to mutual institutions. The OCC notes that proposed Sec. 7.2001
applies only to national banks, not Federal mutual savings
associations. Further, national banks may only be organized as
corporations and not as banks in the mutual form of organization. The
proposal noted it did not apply to Federal savings associations and
that existing provisions on this subject applicable to stock Federal
savings associations were not affected by the proposal.\128\ Therefore,
the OCC adopts Sec. 7.2001 as proposed, with one clarifying change to
paragraph (d).
---------------------------------------------------------------------------

\128\ See 85 FR 40794, at 40810, note 108.
---------------------------------------------------------------------------

As noted in the proposed rule, the purpose of Sec. 7.2001 is to
provide the OCC's views about the permissibility of several types of
anti-takeover provisions. Specifically, paragraph (a) of Sec. 7.2001
provides that a national bank may, pursuant to 12 CFR 7.2000(b), adopt
anti-takeover provisions included in State corporate governance law if
the provisions are not inconsistent with Federal banking statutes or
regulations and not inconsistent with bank safety and soundness.
Paragraph (b) of Sec. 7.2001 sets forth the type of anti-takeover
provisions in State corporate governance provisions that the OCC
specifically has determined are not inconsistent with Federal banking
statutes or regulations.\129\ This list is not exclusive and the OCC
may find that other State anti-takeover laws are not inconsistent with
Federal banking statutes or regulations. A national bank may elect to
follow these provisions, subject to the bank safety and soundness
limitation discussed below.
---------------------------------------------------------------------------

\129\ Permitting the use of staggered boards is another anti-
takeover provision. New Sec. 7.2001 does not include staggered
boards because they are now expressly permitted under the National
Bank Act. 12 U.S.C. 71; 12 CFR 7.2024.
---------------------------------------------------------------------------

Restrictions on business combinations with interested shareholders.
These State provisions prohibit, or permit the corporation to prohibit
in its certificate of incorporation or other governing document, the
corporation from engaging in a business combination with an interested
shareholder or any related entity for a specified period of time (e.g.,
three years) from the date on which the shareholder first becomes an
interested shareholder (subject to certain exceptions, such as board
approval). An interested shareholder is one that owns an amount of
stock specified in the State statute, e.g., at least fifteen percent.
Federal banking statutes and regulations do not address, directly or
indirectly, this type of restriction for national banks. Although
Federal banking statutes authorize national banks to engage in
specified consolidations and mergers,\130\ this authorization does not
preclude a bank's shareholders from adopting a provision that limits
the consolidations and mergers into which the bank would enter.
Therefore, State restrictions on business combinations with interested
shareholders are not inconsistent with Federal law.
---------------------------------------------------------------------------

\130\ See 12 U.S.C 215, 215a, 215a-1, 215a-3, and 215c.
---------------------------------------------------------------------------

Poison pill. A ``poison pill'' is a State statutory provision that
provides, or that permits the corporation to provide in its certificate
of incorporation or other governing document, that all shareholders,
other than the hostile acquiror, have the right to purchase additional
stock at a substantial discount upon the occurrence of a triggering
event. Because no Federal banking statutes or regulations directly or
indirectly address these shareholder purchase rights, State poison pill
laws are not inconsistent with Federal law.\131\
---------------------------------------------------------------------------

\131\ However, shareholders, including the hostile acquiror,
should consider the implications under the Change in Bank Control
Act or Bank Holding Company Act if a shareholder, or shareholders
acting in concert, acquire sufficient shares to constitute
``control.''
---------------------------------------------------------------------------

Requiring all shareholder actions to be taken at a meeting. These
State provisions provide, or permit the corporation to provide in its
certificate of incorporation or other governing document, that all
actions to be taken by shareholders must occur at a meeting and
prohibit shareholders from taking action by written consent. Certain
Federal banking statutes require shareholder approval to be taken at a
meeting \132\ while other sections require shareholder approval but do
not specify a meeting.\133\ There is no provision in Federal law
authorizing national bank shareholders to take action by written
consent in lieu of a meeting. Furthermore, nothing in Federal law
precludes a national bank's articles of association from requiring a
meeting for any action. Therefore, this type of State provision is not
inconsistent with Federal law.
---------------------------------------------------------------------------

\132\ See 12 U.S.C. 71, 214a, 215, 215a, and 215a-2.
\133\ See 12 U.S.C. 30, 51a, 57, and 59. However, 12 U.S.C. 21a
provides that any action requiring approval of the stockholders be
obtained by approval by a majority vote of the voting shares at a
meeting, unless the statutory provision addressing the action
requires greater level of approval.
---------------------------------------------------------------------------

Limits on shareholders' authority to call special meetings. These
State provisions provide, or permit the corporation to provide in its
certificate of incorporation or other governing document, that only the
board of directors, and not shareholders, have the right to call
special meetings of the shareholders or, if shareholders have the
right, require a high percentage of shareholders to call the meeting.
Because Federal banking statutes or regulations do not address,
directly or indirectly, the right of shareholders of a national bank to
call special meetings, these type of State laws are not inconsistent
with Federal law.
Shareholder removal of a director only for cause. These State
provisions provide, or permit the corporation to provide in its
certificate of incorporation or other governing document, that
shareholders may remove a director only for cause, rather than both for
cause and without cause. The National Bank Act and OCC regulations do
not have a specific provision addressing director removal

[[Page 83714]]

by shareholders. Removal only for cause is consistent with the OCC's
model national bank Articles of Association, which provide for removal
for cause and for failure to meet statutory director
qualifications.\134\ Therefore, State provisions requiring shareholder
removal of a director only for cause are not inconsistent with Federal
law.
---------------------------------------------------------------------------

\134\ See Articles of Association, Charters, and Bylaw
Amendments (Forms), Comptroller's Licensing Manual (June 19, 2017)
(Model Articles of Association, Article Fourth, last paragraph).
---------------------------------------------------------------------------

Paragraph (c) of Sec. 7.2001 sets forth the type of anti-takeover
provisions in State corporate governance provisions that the OCC has
determined are inconsistent with Federal banking statutes or
regulations. A national bank may not elect to follow these provisions.
These provisions are set forth below.
Supermajority voting requirements. These State statutory provisions
require, or permit the corporation to require in its certificate of
incorporation or other governing document, that a supermajority of the
shareholders approve specified matters. A requirement that a
supermajority vote of shareholders must approve some transactions is
inconsistent with Federal law when applied to transactions for which a
Federal statute or regulation includes an express specific shareholder
approval level. Certain provisions of the National Bank Act specify
shareholder approval by a two-thirds vote \135\ and other provisions
require majority shareholder approval.\136\ When a provision in the
National Bank Act specifies the level of shareholder vote required for
approval, it is inconsistent with Federal law to follow a State
corporate governance provision that permits or requires a different
level or an additional shareholder approval requirement for a subset of
shareholders.
---------------------------------------------------------------------------

\135\ See 12 U.S.C. 30, 57, 59, 181, 214a, 215, 215a, and 215a-
2.
\136\ See 12 U.S.C. 21a and 51a.
---------------------------------------------------------------------------

Restrictions on a shareholder's right to vote all the shares it
owns. These State statutory provisions prohibit, or permit the
corporation in its certificate of incorporation or other governing
document to prohibit, a person from voting shares acquired that
increase their percentage of ownership of the company's stock above a
certain level. This type of provision is inconsistent with the National
Bank Act, which expressly provides that each shareholder is entitled to
one vote on each share of stock held by the shareholder on all matters
other than elections for directors, where cumulative voting may be
allowed if so provided in the articles of association.\137\ A State
corporate governance provision that interferes with this express right
to vote is inconsistent with Federal law.
---------------------------------------------------------------------------

\137\ 12 U.S.C. 61.
---------------------------------------------------------------------------

As indicated above, Sec. 7.2000(b) permits a national bank to
elect to follow a State corporate governance provision only if it is
not inconsistent with Federal law and bank safety and soundness.
Paragraph (d) of Sec. 7.2001 addresses the impact of bank safety and
soundness on adoption of anti-takeover provisions.
Anti-takeover provisions may make it harder for a bank to be
acquired by another bank or by investors or to raise capital by
discouraging share purchases by a potential acquiror. Thus, when a bank
is in a weak condition, anti-takeover provisions the OCC has determined
are not inconsistent with Federal law nevertheless would be
inconsistent with bank safety and soundness if they would impair the
possibility of restoring the bank to sound condition. These provisions
would then be impermissible.
Accordingly, paragraph (d) provides that any State corporate
governance provision, including anti-takeover provisions, that would
render more difficult or discourage an injection of capital by purchase
of bank stock, a merger, the acquisition of the bank, a tender offer, a
proxy contest, the assumption of control by a holder of a large block
of the bank's stock, or the removal of the incumbent board of directors
or management is inconsistent with bank safety and soundness if: (1)
The bank is less than adequately capitalized (as defined in 12 CFR part
6); (2) the bank is in troubled condition (as defined in 12 CFR
5.51(c)(7)); (3) grounds for the appointment of a receiver under 12
U.S.C. 191 are present, as determined by the OCC; or (4) the bank is
otherwise in less than satisfactory condition, as determined by the
OCC. The OCC notes that the final rule adds ``as determined by the
OCC'' to paragraph (d)(3) to clarify for a bank when this condition
would be present.
However, paragraph (d) also provides that an anti-takeover
provision is not inconsistent with bank safety and soundness if, at the
time it adopts the provision, the national bank: (1) Is not subject to
any of the foregoing conditions and (2) includes along with the
provision a limitation that the provision is not effective if one or
more of the foregoing conditions occur or if the OCC otherwise directs
the bank not to follow the provision for supervisory reasons.
Paragraph (e) provides for OCC case-by-case review of anti-takeover
provisions. The OCC reviewed each type of State anti-takeover provision
described in paragraph (b) for consistency with Federal banking
statutes and regulations only at a general level, without reviewing the
specific terms of a proposed provision to be adopted by a particular
bank. While the OCC has concluded that the types of provisions set out
in paragraph (b) are not inconsistent with Federal banking statutes and
regulations in general, the specific provision a particular bank adopts
may contain features that could change the result of the OCC's review.
Similarly, some anti-takeover provisions may be inconsistent with bank
safety and soundness for a particular national bank because of its
individual circumstances, even if it is not subject to the conditions
listed in paragraph (d).
In order to address the need for individual determinations when
appropriate, paragraph (e) provides that the OCC may determine that a
State anti-takeover provision, as proposed or adopted by an individual
national bank, is (1) inconsistent with Federal banking statutes or
regulations, even if it is of a type included in paragraph (b) or (2)
inconsistent with bank safety and soundness other than as provided in
paragraph (d). The OCC may begin a case-by-case review on its own
initiative. In addition, a bank that wishes the OCC to review the
permissibility of the specific State anti-takeover provisions it has
adopted or proposes to adopt may request the OCC's review, under the
procedures set forth at 12 CFR 7.2000(d).
Finally, paragraph (f) addresses the method a national bank, its
shareholders, and its directors must use to adopt each anti-takeover
provision. In general, the bank must follow the requirements for board
of director and shareholder approval set out in the State corporate
governance statute it is electing to follow. However, if the provision
is included in the bank's articles of association, the bank's
shareholders must approve the amendment of the articles pursuant to 12
U.S.C. 21a, even if the State law does not require approval by the
shareholders. Further, if the State corporate governance law requires
the provision to be in the company's articles of incorporation,
certificate of incorporation, or similar document, the national bank
must include the provision in its articles of association. If the State
corporate governance law does not require the provision to be in the
company's articles of incorporation,

[[Page 83715]]

certificate of incorporation, or similar document but allows it to be
in the bylaws, then the national bank must include the provision in
either its articles of association or in its bylaws. However, if the
State corporate governance law requires shareholder approval for
changes to the corporation's bylaws, then the national bank must
include the provision in its articles of association.
National Bank Director or Attorney as Proxy (Sec. 7.2002)
Twelve U.S.C. 61 prohibits an officer, clerk, teller, or bookkeeper
of the national bank from acting as proxy for shareholder voting.
Section 7.2002 codifies this prohibition in OCC regulations and
provides that any person or group of persons, except the bank's
officers, clerks, tellers, or bookkeepers, may be designated to act as
proxy. The OCC proposed to amend this section to clarify that the proxy
referenced in the section is for shareholder voting, as provided in the
statute. The OCC received no comments on this clarification and adopts
it as proposed with technical changes. The final rule revises the
section heading and rule text to clarify that this provision applies to
national banks. The OCC intends no substantive changes to Sec. 7.2002.
National Bank Shareholder Meetings; Board of Directors Meetings (Sec.
7.2003)
The OCC is finalizing changes it made to part 7 in an interim final
rule entitled Director, Shareholder, and Member Meetings, published in
the Federal Register on May 28, 2020.\138\ Among other things, this
interim final rule amended Sec. 7.2003 to permit national banks to
provide for telephonic or electronic participation at shareholder and
board of directors meetings.\139\ To accomplish this, the OCC combined
former 12 CFR 7.2001, which provided for procedures for notifying
shareholders of shareholder meetings, into former Sec. 7.2003, which
provided the rule for annual shareholder meetings that fall on a
holiday; added new telephonic and electronic participation language to
12 CFR 7.2003 as new paragraphs (c) and (d); and retitled Sec. 7.2003
as ``Shareholder meetings; Board of directors meetings.'' Former Sec.
7.2001 became Sec. 7.2003(a). Former Sec. 7.2003 become Sec.
7.2003(b). Combining Sec. Sec. 7.2001 and 7.2003 put all amendments
related to shareholder meetings in one section.
---------------------------------------------------------------------------

\138\ 85 FR 31943 (May 28, 2020). This rule was effective May
28, 2020.
\139\ The OCC finalized amendments made by this interim final
rule to part 5 in its recent Licensing Amendments final rule. See 85
FR 80404 (Dec. 11, 2020).
---------------------------------------------------------------------------

The OCC received one substantive comment letter that supported
these amendments. In response to a request for comment included in the
preamble to this interim final rule, this commenter opposed any new
risk management standards to mitigate any security risks arising from
telephonic or electronic meetings, noting that new standards would be
unnecessary given current safeguards and regulatory requirements. The
OCC is finalizing the amendments made by the interim final rule to
Sec. Sec. 7.2001 and 7.2003 with conforming and technical changes. The
final rule replaces references in Sec. 7.2003 to ``corporate
governance procedures'' to ``corporate governance provisions,'' to
conform to the change in this terminology made by Sec. 7.2000 of this
final rule. The final rule also makes a technical change to the heading
to add national banks. The OCC notes that it is not imposing any new
risk management standards for telephonic or electronic meetings though
this final rule.
Specifically, Sec. 7.2003(c) permits a national bank to provide
for telephonic or electronic participation at shareholder meetings.
Further, paragraph (c) requires a national bank to have procedures for
telephonic or electronic participation in shareholder meetings. A
national bank may choose these procedures from several sources: (1) The
corporate governance provisions it has elected to follow pursuant to
Sec. 7.2000(b), if those elected procedures include telephonic or
electronic participation procedures; (2) the Delaware General
Corporation Law; or (3) the Model Business Corporation Act. However,
these procedures must not be inconsistent with applicable Federal
statutes and regulations and safety and soundness. This provision
ensures that a national bank has procedures in place for remote
participation at shareholder meetings even if the corporate governance
law it has elected to follow does not contain procedures for remote
participation at shareholder meetings or if it has not elected to
follow any particular corporate governance law pursuant to Sec.
7.2000(b). To inform shareholders of its choice of procedures, this
paragraph requires the national bank to indicate the use of these
procedures in its bylaws.
Paragraph (d) of Sec. 7.2003 provides that a national bank may
provide for telephonic or electronic participation at a meeting of its
board of directors. This provision codifies OCC Interpretive Letter No.
860 \140\ and makes the national bank rule consistent with rules for
Federal savings associations.
---------------------------------------------------------------------------

\140\ OCC Interpretive Letter No. 860 (Apr. 5, 1999).
---------------------------------------------------------------------------

Oath of National Bank Directors (Sec. 7.2008)
The OCC is making technical changes to Sec. 7.2008 in this final
rule not included in the proposed rule. Currently, Sec. 7.2008
provides that a notary public, including one who is a director but not
an officer of the national bank, may administer the oath of directors,
and that any person, other than an officer of the bank, having an
official seal and authorized by the State to administer oaths, also may
administer the oath. However, the statute governing the oath of bank
directors, 12 U.S.C. 73, requires that the oath be taken before a
notary public or any other State authorized officer other than an
officer of the director's bank. Further, OCC instructions conform to
the statute by requiring the director to take the oath before a notary
public or other authorized State official.\141\ The final rule corrects
the regulation to require that this oath be administered by a notary
public or any person having an official seal and authorized by the
State to administer oaths, other than an officer of the national bank,
thereby conforming this rule to the statute. Further, the final rule
clarifies that the State-authorized officer not a notary may be a
director of the bank, as may the notary public under the current rule,
as long as that person is not also an officer of the bank.
---------------------------------------------------------------------------

\141\ See ``General Instructions--Oath of Bank Directors'' at
www.occ.gov/static/licensing/Instructions-Oaths-NB.pdf.
---------------------------------------------------------------------------

Quorum of a National Bank Board of Directors; Proxies Not Permissible
(Sec. 7.2009)
Section 7.2009 requires a national bank to provide in its articles
of association or bylaws that a quorum of the board of directors is at
least a majority of the entire board then in office. Section 7.2009
also prohibits bank officers from voting by proxy. The OCC did not
propose any substantive changes to this section. However, the OCC
received one comment on Sec. 7.2009 requesting that the OCC revise it
to allow national banks to adopt the quorum requirements of the law of
the relevant State, the Delaware General Corporate Law, or the Model
Business Corporation Act. Both the Model Business Corporation Act and
Delaware General Corporate Law permit corporate boards to deem one
third of all members sufficient to establish a quorum.
The OCC disagrees with this comment. The current requirement in

[[Page 83716]]

Sec. 7.2009 that at least a majority of the Board meet to constitute a
quorum is designed to ensure the safety and soundness of bank
operations. Any lesser quorum requirement could result in greater
absenteeism in managing the affairs of the bank and enable a smaller
minority of directors to dictate the direction of corporate affairs,
which would heighten risks to safety and soundness. The OCC did not
propose an amendment to the quorum requirements of Sec. 7.2009 and
declines to do so in this final rule.
National Bank Directors' Responsibilities (Sec. 7.2010)
Twelve CFR 7.2010 provides that the business and affairs of a bank
shall be managed by or under the direction of the board of directors
and that boards of directors should refer to published OCC guidance for
additional information regarding responsibilities of directors. The OCC
did not propose substantive changes to Sec. 7.2010.
Two commenters discussed the second sentence of Sec. 7.2010, which
states that the board of directors should refer to OCC published
guidance for additional information regarding responsibilities of
directors. One commenter stated that the sentence might be read as
codifying guidance and suggested that the referenced guidance may be
incorrect, inconsistent, or omit information that is germane to the
duties and responsibilities of bank directors. Another commenter stated
that the reference to guidance in Sec. 7.2010 should be revised to
avoid suggesting that guidance has the force of law. This commenter
recommended that the OCC revise Sec. 7.2010 to delete the second
sentence and establish any specific legal standards regarding director
responsibilities through the rulemaking process. The OCC notes that
Sec. 7.2010 only refers boards of directors to OCC guidance for
additional information and does not suggest that guidance has the force
of law nor that the guidance contains all pertinent information. This
guidance may be helpful to boards of directors by discussing existing
legal requirements applicable to directors and, consistent with the
Interagency Statement Clarifying the Role of Supervisory Guidance,\142\
outlining the OCC's supervisory expectations.
---------------------------------------------------------------------------

\142\ Interagency Statement Clarifying the Role of Supervisory
Guidance, https://www.occ.gov/news-issuances/news-releases/2018/nr-ia-2018-97a.pdf (Sept. 11, 2018). The OCC, Federal Deposit
Corporation (FDIC), and Federal Reserve Board issued a proposed rule
codifying this statement on November 5, 2020. 85 FR 70512.
---------------------------------------------------------------------------

One commenter also suggested that the OCC repeal Sec. 7.2010 in
its entirety or revise it to replace the current text with a statement
that the standards of conduct applicable to directors are governed by
the law of the State elected by the bank or the Model Business
Corporation Act. The OCC is not including this suggested revision in
the final rule. The OCC has not previously interpreted directors to be
subject only to the standards of conduct established by the law of the
State elected by the bank or the Model Business Corporation Act and
doing so may conflict with other statutory or regulatory standards
applicable to bank directors.
President as Director of a National Bank (Sec. 7.2012)
Twelve U.S.C. 76 provides that the president of the bank must be a
member of the board and be chairman thereof, but that the board may
designate a director in lieu of the president to be chairman, who must
perform duties as assigned by the board. Section 7.2012 codifies this
statutory requirement in the OCC's rules by providing that pursuant to
12 U.S.C. 76, the president of a national bank must be a member of the
board of directors, but a director other than the president may be
elected chairman of the board. This section further provides that a
person other than the president may serve as the chief executive
officer, and that this person is not required to be a director of the
bank. When first proposing this rule, the OCC acknowledged that it was
adding this second sentence to provide that a person other than the
president or a director may serve as chief executive officer of a
bank.\143\
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\143\ 60 FR 11924 (March 3, 1995). This rule was finalized in
1996. 61 FR 4849 (Feb. 9, 1996).
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The OCC proposed two changes to this section and did not receive
any comments. As a result, the OCC is adopting these changes to Sec.
7.2012 as proposed. First, the final rule provides that the person
serving as, or in the function of, president of a national bank,
regardless of title, must be a member of the board of directors. This
change aligns the regulation with the OCC's view that the bank officer
positions in 12 U.S.C. 76 and other provisions of the National Bank Act
refer to functions rather than required titles. If a national bank does
not have an individual serving in the position of president but does
have another officer serving the function of president, the individual
serving in the function of president must be a member of the board of
directors. The person serving the function of president is generally
the individual appointed to oversee the national bank's day-to-day
activities.\144\ This change provides national banks with flexibility
in employee titles and management organization. The OCC notes that 12
U.S.C. 24(Fifth) provides national banks with the authority to set the
duties of their officers. National banks should ensure that their
employee titles do not create unnecessary confusion.
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\144\ See OCC, ``The Director's Book: Role of Directors for
National Banks and Federal Savings Associations'' (November 2020)
available at www.OCC.gov.
---------------------------------------------------------------------------

Second, the final rule removes the provision in Sec. 7.2012 that
states that a person other than the president may serve as chief
executive officer, and this person is not required to be a director of
the bank. This provision is unnecessary. The position of chief
executive officer is not referenced in statute and, as indicated above,
national banks have discretion to set the duties of their officers.
Further, this provision would conflict with the first revision to this
section. Because function rather than title govern under this
amendment, the final rule requires a chief executive officer that
serves the function of president to be a member of the board.
The OCC also is making a technical change to the section heading
not included in the proposed rule to reflect that fact that Sec.
7.2012 applies only to national banks.
Indemnification of National Bank and Federal Savings Association-
Affiliated Parties (Sec. Sec. 7.2014, 145.121)
The OCC proposed amending and reorganizing Sec. 7.2014,
Indemnification of institution-affiliate parties (by national banks),
applying revised Sec. 7.2014 to Federal savings associations, and
removing Sec. 145.121, Indemnification of directors, officers and
employees (by Federal savings associations). As discussed below, the
OCC is adopting Sec. 7.2014 as proposed, with a technical change to
the section heading.
Section 7.2014 addresses indemnification of institution-affiliated
parties (IAPs) by national banks in cases involving an administrative
proceeding or civil action initiated by a Federal banking agency, as
well as cases that do not involve a Federal banking agency. Under Sec.
7.2014(a), a national bank only may make or agree to make
indemnification payments to an IAP with respect to an administrative
proceeding or civil action initiated by a Federal banking agency if
those payments are reasonable and consistent with the requirements of
12 U.S.C.

[[Page 83717]]

1828(k) and the implementing regulations thereunder. Pursuant to
section 1828(k), the FDIC may prohibit, by regulation or order, any
indemnification payment made with regard to an administrative
proceeding or civil action instituted by the appropriate Federal
banking agency that results in a final order under which the IAP: (1)
Is assessed a civil money penalty; (2) is removed or prohibited from
participating in conduct of the affairs of the insured depository
institution; or (3) is required to take certain affirmative actions in
regards to an insured depository institution.\145\ Section 1828(k)
defines ``indemnification payment'' to mean any payment (or any
agreement to make any payment) by any insured depository institution to
pay or reimburse an IAP for any liability or legal expense with regard
to any administrative proceeding or civil action instituted by the
appropriate Federal banking agency that results in a final order under
which the IAP: (1) Is assessed a civil money penalty; (2) is removed or
prohibited from participating in conduct of the affairs of the insured
depository institution; or (3) is required to take certain affirmative
actions in regards to an insured depository institution.\146\ Section
7.2014(a) defines ``institution-affiliated party'' by reference to 12
U.S.C. 1813(u).
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\145\ In prohibiting such payments, the FDIC may take into
account several factors listed in the statute, such as whether there
is a reasonable basis to believe the IAP has committed fraud,
breached a fiduciary duty, or committed insider abuse; is
substantially responsible for the insolvency of the depository
institution; has violated any Federal or State banking law or
regulation that has had a material effect on the financial condition
of the institution; or was in a position of managerial or fiduciary
responsibility. See 12 U.S.C. 1828(k)(2). The FDIC has forbidden
certain indemnification payments by regulation. See 12 CFR
359.1(l)(1) (definition of ``prohibited indemnification payment'');
12 CFR 359.3 (forbidding prohibited indemnification payments, except
as provided in part 359).
\146\ See 12 U.S.C. 1828(k)(5)(A); see also 12 U.S.C. 1818(b)(6)
(defining affirmative actions that an IAP may be required to take in
regard to insured depository institutions for purposes of section
1828(k)(5)(A)).
---------------------------------------------------------------------------

Section 7.2014(b)(1) permits a national bank to indemnify IAPs for
damages and expenses, including the advancement of legal fees and
expenses, in cases involving an administrative proceeding or civil
action that is not initiated by a Federal banking agency in accordance
with the law of the State in which the main office of the bank is
located, the law of the State in which the bank's holding company is
incorporated, or the relevant provisions of the Model Business
Corporation Act or Delaware General Corporation Law, provided such
payments are consistent with safe and sound banking practices.
Additionally, pursuant to Sec. 7.2014(b)(2), a national bank may
provide for the payment of reasonable premiums for insurance covering
the expenses, legal fees, and liability of IAPs to the extent that
these costs could be indemnified under administrative proceedings or
civil actions not initiated by a Federal banking agency, as provided in
Sec. 7.2014(b)(1).
Twelve CFR 145.121 addresses indemnification of directors, officers
and employees by Federal savings associations. Section 145.121(b)
requires a Federal savings association to indemnify any person against
whom an action is brought or threatened because that person is or was a
director, officer, or employee of the association. This indemnification
is subject to the requirements of Sec. 145.121(c) and (g). Section
145.121(c) provides that indemnification only may be made available to
the IAP if (1) there is a final judgment on the merits in the IAP's
favor; or (2) in the case of settlement, final judgment against the
IAP, or final judgment in the IAP's favor other than on the merits, if
a majority of the disinterested directors of the Federal savings
association determine that the IAP was acting in good faith. It also
provides that the association give the OCC at least 60 days' notice of
its intention to indemnify an IAP and provides that the association may
not indemnify the IAP if the OCC advises the savings association in
writing that the OCC objects. Section 145.121(g) makes the
indemnification subject to 12 U.S.C. 1821(k).
Pursuant to Sec. 145.121(d), a Federal savings association may
obtain insurance to protect it and its directors, officers, and
employees from potential losses arising from claims for acts committed
in their capacity as directors, officers, or employees. However, a
Federal savings association may not obtain insurance that provides for
payment of losses incurred as a consequence of willful or criminal
misconduct.
Pursuant to Sec. 145.121(e), if a majority of the directors of a
Federal savings association conclude that, in connection with an
action, a person may become entitled to indemnification, the directors
may authorize payment of reasonable costs and expenses arising from the
defense or settlement of the action. Before making advance payment of
expenses, the savings association is required to obtain an agreement
that the savings association will be repaid if the person on whose
behalf payment is made is later determined not to be entitled to the
indemnification.
Pursuant to Sec. 145.121(f), an association that has a bylaw in
effect relating to indemnification of its personnel must be governed
solely by that bylaw, except that its authority to obtain insurance
must be governed by Sec. 145.121(d), which, as described above,
authorizes the purchase of indemnification insurance unless the
insurance pays for losses created by willful or criminal misconduct.
Section 145.121(g) states that the indemnification provided for in
Sec. 145.121 for Federal savings associations is subject to and
qualified by 12 U.S.C. 1821(k), which addresses personal liability for
directors and officers in certain civil actions.
The OCC proposed adding Federal savings associations to Sec.
7.2014 so that both charters would be required to comply with Sec.
7.2014 and removing Sec. 145.121. Because Sec. 7.2014 applies to IAPs
as well as officers, directors, and employees, and Sec. 145.121
applies only to officers, directors and employees, this amendment
enlarges the scope of indemnification rules for Federal savings
associations. As a result, the OCC's indemnification rules also would
apply to certain Federal savings association controlling shareholders,
independent contractors, consultants, and other persons identified in
12 U.S.C. 1813(u). The OCC received no comments on this integration of
Federal savings associations into Sec. 7.2014 and therefore adopts
this integration as proposed.
The OCC also proposed other amendments to Sec. 7.2014. First, the
OCC proposed amending current Sec. 7.2014(b)(1), redesignated as Sec.
7.2014(a) and retitled, to provide that State law on indemnification
may apply to all administrative proceedings or civil actions for which
an IAP can be indemnified, not just actions that are initiated by a
person or entity not a Federal banking agency as under the current
rule. This revision clarifies the application of State law on
indemnification to actions initiated by Federal banking agencies.
However, current Sec. 7.2014(a), redesignated as Sec. 7.2014(b),
would still apply. Specifically, under redesignated Sec. 7.2014(b),
with respect to proceedings or civil actions initiated by a Federal
banking agency, a national bank or Federal savings association only may
make or agree to make indemnification payments to an IAP that are
reasonable and consistent with the requirements of

[[Page 83718]]

section 1828(k) and implementing regulations thereunder.\147\
---------------------------------------------------------------------------

\147\ The OCC also proposed to move the cross-reference to the
definition of IAP in redesignated Sec. 7.2014(b) to redesignated
paragraph (a) and to make stylistic changes to the wording of
redesignated Sec. 7.2014(b).
---------------------------------------------------------------------------

The OCC also proposed a technical change to redesignated Sec.
7.2014(a). As indicated above, the current rule states that in cases
involving an administrative proceeding or civil action not initiated by
a Federal banking agency, a national bank may indemnify an IAP in
accordance with the law of the State in which the main office of the
bank is located, the law of the State in which the bank's holding
company is incorporated, or the relevant provisions of the Model
Business Corporation Act or Delaware General Corporation Law, provided
such payments are consistent with safe and sound banking practices.
Because these sources of law are identical to the law a national bank
may elect to follow pursuant to current Sec. 7.2000(b) or the law a
Federal savings association may elect to follow pursuant to current
Sec. 5.21 or Sec. 5.22, the OCC proposed to replace the language on
sources of State law in this provision with a statement that the bank
or savings association may indemnify an IAP for damages and expenses in
accordance with the law of the State the bank or savings association
has designated for its corporate governance under the provisions of
Sec. 7.2000, Sec. 5.21, or Sec. 5.22, as applicable. Because the OCC
is enlarging the choice of law for both national banks and Federal
savings associations in this final rule, this cross-reference
incorporates these new State law options.\148\
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\148\ As explained supra, the OCC is amending Sec. 7.2000 to
also allow national banks to follow the corporate governance
provisions of the law of any State in which any branch of the bank
is located or where a holding company of the bank is incorporated
even if the holding company is later eliminated or no longer
controls the bank and the national bank is not located in that
State. The final rule makes this same change to Sec. Sec. 5.21 and
5.22 for Federal savings associations.
---------------------------------------------------------------------------

One commenter suggested that the OCC clarify in the final rule
under redesignated Sec. 7.2014(a) how the OCC would evaluate whether
indemnification payments to IAPs are ``consistent with safety and
soundness.'' For example, the commenter suggested that the OCC confirm
that the types of indemnification permissible under Delaware General
Corporation Law generally would be permissible for national banks and
Federal savings associations, except where such payment would introduce
safety and soundness risk by measurably reducing bank capital and/or
liquidity levels. The OCC disagrees with this comment. OCC
determinations of whether indemnification payments to IAPs are
``consistent with safety and soundness'' are made on a case-by-case
basis based on the specific facts and circumstances of a particular
case, and do not depend on State law. In the absence of specific facts
and circumstances, the OCC declines to expound in the final rule upon
how the OCC would evaluate the safety and soundness of indemnification
payments to IAPs.
The commenter also suggested that the OCC include in the final rule
under redesignated Sec. 7.2014(a) a process for appealing the OCC's
invalidation of indemnification payments or an indemnification
agreement on safety and soundness grounds. The OCC did not propose an
appeals process, and therefore is not including one in the final rule.
If a national bank or Federal savings association disputes an OCC
invalidation of an indemnification payment or agreement, it may file an
appeal with the OCC pursuant to the OCC's Bank Appeals Process.\149\
---------------------------------------------------------------------------

\149\ Information about the OCC's Bank Appeals Process is
available at occ.gov.
---------------------------------------------------------------------------

For the reasons discussed above, the OCC adopts redesignated Sec.
7.2014(a) as proposed.
Second, the OCC proposed amending Sec. 7.2014(b)(2), redesignated
as Sec. 7.2014(d), to allow a national bank or Federal savings
association to provide for the payment of reasonable insurance premiums
in connection with all actions involving an IAP that could be
indemnified under Sec. 7.2014, whether or not initiated by a Federal
banking agency. The OCC received no comments on this change and adopts
it as proposed. The OCC believes this change will resolve confusion
regarding how current Sec. 7.2014(b)(2) is applied. This change also
will better align OCC regulations on the payment of insurance premiums
with the FDIC's regulations and 12 U.S.C. 1828(k).\150\
---------------------------------------------------------------------------

\150\ The FDIC's implementing regulations under section 1828(k),
12 CFR part 359, explicitly allow the payment of insurance premiums
in anticipation of actions brought by a Federal banking agency,
provided the insurance is not used to reimburse the cost of a
judgment or civil monetary penalty. See 12 CFR 359.1(l)(2).
---------------------------------------------------------------------------

Third, the OCC proposed adding a new paragraph (c) to require a
national bank or Federal savings association, before advancing funds to
an IAP under Sec. 7.2014, to obtain a written agreement that the IAP
will reimburse the bank or savings association for any portion of
indemnification that the IAP is ultimately found not to be entitled to
under 12 U.S.C. 1828(k) and implementing regulations, except to the
extent the bank's or savings association's expenses have been
reimbursed by an insurance policy or fidelity bond.\151\ This
requirement is similar to the requirement in Sec. 145.121(e) currently
applicable to Federal savings associations and therefore will not
impose any additional burdens on Federal savings associations. Further,
FDIC regulations,\152\ State law,\153\ and the Model Business
Corporation Act \154\ contain similar requirements for IAPs to
reimburse institutions for funds to which they are later found not to
be entitled. As most national banks are subject to the FDIC's
indemnification regulations \155\ or have elected under 12 CFR
7.2000(b) to follow State corporate law imposing reimbursement
requirements for advancement of funds, the OCC believes that this
change will not impose any additional burden on national banks and will
merely codify existing practices. This change also will ensure that
national banks, and Federal savings associations, do not provide
indemnification to IAPs that is ultimately in contravention of the
statutory limits of section 1828(k).
---------------------------------------------------------------------------

\151\ National banks are required to purchase fidelity coverage
by 12 CFR 7.2013.
\152\ See 12 CFR 359.5(a)(4).
\153\ See, e.g., 8 Del. C. section 145(e); Utah Code section 16-
10a-904; 805 Ill. Comp. Stat. 5/8.75(e); see also N.Y. Bus. Corp.
Law section 725(a) (requiring repayment, but not explicitly
requiring a written agreement).
\154\ See Model Bus. Corp. Act section 8.53(a).
\155\ Federal savings associations are also subject to the
FDIC's indemnification regulations.
---------------------------------------------------------------------------

One commenter suggested that the OCC confirm in the final rule that
the written agreement required under Sec. 7.2014(c) may provide for
the reimbursement of expenses, in addition to damages and other costs.
The commenter noted that proposed Sec. 7.2014(c) implies that expenses
may be covered by a written agreement, because it notes that the
written agreement may cover any portion of the indemnification payment
``except to the extent that the bank's or savings association's
expenses have been reimbursed by an insurance policy or fidelity
bond.'' The OCC does not believe that the final rule creates any
uncertainty regarding whether the written agreement may provide for the
reimbursement of expenses, in addition to damages and other costs. As
the commenter notes, and the OCC agrees, the written agreement may
cover any portion of the indemnification payment ``except to the extent
that the bank's or savings association's expenses have been reimbursed
by an insurance policy

[[Page 83719]]

or fidelity bond.'' The OCC therefore adopts Sec. 7.2014(c) as
proposed.
One commenter suggested that rather than amending Sec. 7.2014, the
OCC should repeal the entire regulation and the comparable regulation
for Federal savings associations, Sec. 145.121. The commenter noted
that 12 CFR part 359 and 12 U.S.C. 1828(k) already govern
indemnification to IAPs in administrative and court proceedings brought
by a Federal banking agency; and the proposed language in 12 CFR 7.2000
makes the separate indemnification provisions relating to non-part 359
proceedings unnecessary. The OCC disagrees with the commenter's
suggestion. The OCC believes that having OCC-specific regulations
provides clarity for OCC-supervised banks and savings associations. The
OCC therefore has not made any changes to the final rule in response to
this comment.
The commenter also suggested that, if the OCC does not repeal Sec.
7.2014, the OCC should delete language in Sec. 7.2014 that reserves
the power of the OCC to overturn any bank board decision on
indemnification and advancement of expenses. The OCC disagrees with
this comment. The OCC must retain supervisory authority to object to
indemnification payments if they threaten the safety and soundness of
the institution. The OCC notes that it would only exercise this
authority under those circumstances. The OCC therefore has not made any
changes to the final rule in response to this comment.
This commenter also suggested that, if the OCC does not repeal
Sec. 7.2014, the OCC should include the right to advance expenses in
both matters subject to 12 CFR part 359 and those that are not. The
commenter further suggested that the OCC should expand coverage for
indemnification unrelated to part 359-type matters to those who may not
fall under the definition of IAPs, noting that State statutes typically
cover potentially other individuals. The OCC also disagrees with these
comments. Section 7.2014 already includes the right to advance expenses
in both matters subject to 12 CFR part 359, which implements 12 U.S.C.
1828(k), and those that are not. As noted above, Sec. 7.2014 addresses
indemnification of IAPs by national banks in cases involving an
administrative proceeding or civil action initiated by a Federal
banking agency, as well as cases that do not involve a Federal banking
agency. Further, the OCC believes the scope of the coverage for
indemnification to IAPs is appropriate and sufficiently broad. ``IAP''
has the same meaning as set forth at 12 U.S.C. 1813(u), and thus Sec.
7.2014 applies not only to officers, directors, and employees of the
bank, but also to controlling shareholders, independent contractors,
consultants, and other persons identified in 12 U.S.C. 1813(u). The OCC
therefore has not made any changes to the final rule in response to
these comments.
The OCC believes that revised Sec. 7.2014 incorporates the
provisions of current Sec. 145.121 that should be applicable to both
national banks and Federal savings associations, while maintaining
appropriate flexibility for both types of institutions. As noted above,
revised Sec. 7.2014 will apply to actions brought by a Federal banking
agency and actions not brought by a Federal banking agency, as in Sec.
145.121, while retaining the statutory limits of section 1828(k).\156\
Revised Sec. 7.2014 also includes the reimbursement agreement
requirement, as in Sec. 145.121(e). However, the OCC did not propose
to include in Sec. 7.2014 the provision in Sec. 145.121 that requires
Federal savings associations to indemnify persons against whom an
action is brought under certain circumstances, such as if they are
successful on the merits of the action,\157\ nor the provision
requiring a board vote to authorize indemnification under certain
circumstances.\158\ In place of these requirements, revised Sec.
7.2014 permits Federal savings associations to incorporate State law on
indemnification. Because State law governing indemnification generally
incorporates these aspects of current Sec. 145.121, the OCC expects
that Federal savings associations will continue to be subject to
similar provisions governing indemnification as before. For example,
State law generally requires mandatory indemnification if an employee
is successful on the merits,\159\ as well as a board vote authorizing
indemnification in almost all circumstances.\160\ Because national
banks also may incorporate State indemnification law, they will be
subject to these State indemnification provisions as well. The OCC
specifically requested comment on whether, instead of relying on State
law, the final rule should include the requirement from Sec. 145.121
that, in the case of settlement, final judgment against the IAP, or
final judgment in the IAP's favor other than on the merits, a majority
of the disinterested directors determine that the IAP was acting in
good faith before the institution may indemnify the IAP. One commenter
replied to the OCC's request for comment, and did not support including
this requirement in the final rule. The commenter argued that this
requirement is generally more restrictive than typical State law and
may discourage qualified candidates from serving on the board of a
national bank or Federal savings association, and that there is no
compelling public interest served by subjecting national bank or
Federal savings association directors to greater risk of personal
liability than directors of other corporations. The OCC agrees with the
commenter, and therefore, the OCC is not including the requirement in
the final rule.
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\156\ Section 145.121(g) subjects and qualifies the
indemnification provided for by current Sec. 145.121 to 12 U.S.C.
1821(k). In contrast, current Sec. 7.2014 explicitly subjects
national bank indemnification to the restrictions of 12 U.S.C.
1828(k). Section 1828(k) directly addresses indemnification and is
applicable to any insured depository institution. See 12 U.S.C.
1828(k)(5)(A). Section 1821(k) addresses personal liability for
directors and officers and is also applicable to any insured
depository institution. Both of these statutes apply, and will
continue to apply to national banks and Federal savings associations
but proposed Sec. 7.2014 retains the citation to section 1828(k) as
the more relevant citation for indemnification purposes.
\157\ See Sec. 145.121(b).
\158\ See Sec. 145.121(c)(1)(ii)(C).
\159\ See, e.g., 8 Del. C. 145(c); New York BCL section 723(a);
805 ILCS 5/8.75(c); Model Bus. Corp. Act, section 8.52 (2016).
\160\ See, e.g., 8 Del. C. 145(d); New York BCL section 723(b);
805 ILCS 5/8.75(d); Model Bus. Corp. Act, sections 8.53(c), 8.55
(2016).
---------------------------------------------------------------------------

The OCC also did not propose to include in Sec. 7.2014 the
provision in Sec. 145.121 that requires a 60-day prior notice to the
OCC before making an indemnification because it believes this provision
is burdensome and unnecessary.\161\ However, the OCC requested comment
on whether the final rule should include this prior notice requirement
and, if so, what benefits prior approval would provide that would
outweigh any additional regulatory burden. One commenter replied to the
OCC's request for comment and did not support including this prior-
notice requirement. The commenter argued, and the OCC agrees, that the
regulatory burden of such a notice would outweigh any benefit.
Therefore, the OCC is not including this requirement in the final rule.
---------------------------------------------------------------------------

\161\ See Sec. 145.121(c)(2).
---------------------------------------------------------------------------

Restricting Transfer of National Bank Stock and Record Dates; Stock
Certificates (Sec. 7.2016)
Facsimile Signatures on Bank Stock Certificates (Sec. 7.2017)
Lost Stock Certificates (Sec. 7.2018)
Sections 12 CFR 7.2016, 7.2017, and 7.2018 contain specific
requirements related to national bank stock transfers and stock
certificates. Many of these requirements are mandated by 12 U.S.C. 52.
However, some of these

[[Page 83720]]

requirements are outdated because national banks today rarely issue
physical stock certificates.
Section 7.2016(a) states that, pursuant section 52, a national bank
may impose conditions on the transfer of its stock reasonably
calculated to simplify the work of the bank with respect to stock
transfers, voting at shareholders' meetings, and related matters and to
protect the bank against fraudulent transfers. Consistent with the
statute, Sec. 7.2016(b) allows a national bank to close its stock
records for a reasonable period to ascertain shareholders for voting
purposes. The board also may fix record dates, which should be
reasonable in proximity to the date notice is given to shareholders of
the meeting. Section 7.2017 states that the president and cashier of
the bank, or other officers authorized by the bank's bylaws, shall sign
each stock certificate. These signatures may be manual or facsimile and
may be electronic. Each certificate also must be sealed with the seal
of the bank.
To streamline OCC rules, the OCC proposed combining Sec. Sec.
7.2016 and 7.2017 into one section, Sec. 7.2016, that would apply to
both stock transfers and stock certificate requirements. The OCC also
proposed making OCC rules on stock certificates more flexible. As noted
above, section 12 U.S.C. 52 requires certain officers of the
association to sign every bank stock certificate and for it to be
sealed with the seal of the association. However, banks now generally
hold stock in ``book-entry'' form, which is not a format that supports
signatures or stamps. Although section 52 places requirements on
physical stock certificates, the OCC does not believe that the language
of that section requires banks to actually issue stock in certificated
form. Notably, section 52 also states that ``[t]he capital stock of
each association shall be . . . transferable on the books of the
association in such manner as may be prescribed in the by-laws or
articles of association.'' \162\ This language allows banks to provide
for book-entry transfer in their by-laws or articles of association,
even if this type of transfer is incompatible with the use of
signatures and seals. Therefore, the OCC proposed stating that a
national bank may prescribe the manner in which its stock must be
transferred in its by-laws or articles of association. The OCC also
proposed specifying that a national bank that does issue stock in
certificate form must comply with the requirements of section 52,
including: (1) The name and location of the bank; (2) name and holder
of record of the stock; (3) the number and class of shares which the
certificate represents; (4) if the bank issues more than one class of
stock, the respective rights, preferences, privileges, voting rights,
powers, restrictions, limitations, and qualifications of each class of
stock issued (unless incorporated by reference to the articles of
association); (5) signatures of the president and cashier of the bank,
or such other officers as the bylaws of the bank provide; and (6) the
seal of the bank. The OCC proposed to continue allowing banks to meet
the signature requirements of section 52 through the use of electronic
means or by facsimiles, as is permitted by current Sec. 7.2017.
---------------------------------------------------------------------------

\162\ See 12 U.S.C. 52, first paragraph.
---------------------------------------------------------------------------

Finally, the OCC proposed to remove Sec. 7.2018 as unnecessary.
Section 7.2018 states that if the bank's articles of association or
bylaws do not provide for replacing lost, stolen, or destroyed stock
certificates, the bank may adopt procedures under 12 CFR 7.2000.
Section 7.2000 generally permits national banks to adopt corporate
governance procedures \163\ in accordance with State law, to the extent
not inconsistent with applicable Federal laws and regulations or with
bank safety and soundness. Therefore, this provision is unnecessary.
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\163\ The proposed rule changed this terminology in Sec. 7.2000
to ``corporate governance provisions.''
---------------------------------------------------------------------------

The OCC received no comments on these changes to Sec. Sec. 7.2016
and the removal of Sec. Sec. 7.2017 and 7.2018. Therefore, the OCC
adopts these changes to Sec. 7.2016 and removes Sec. Sec. 7.2017 and
7.2018 as proposed. The OCC also is making a technical change to the
section heading not included in the proposed rule to reflect that fact
that Sec. 7.2016 applies only to national banks.
Acquisition and Holding of Shares as Treasury Stock (Sec. 7.2020)
The OCC proposed to remove 12 CFR 7.2020. Section 7.2020 provides
that a national bank may repurchase its outstanding shares and hold
them as treasury stock as a capital reduction under 12 U.S.C. 59 if the
repurchase and retention is for a ``legitimate corporate purpose'' and
not for speculative purposes. The OCC issued Sec. 7.2020 in 1996 as an
exception to the provision in 12 U.S.C. 83 that prohibited a national
bank from being the ``purchaser or holder'' of its own shares. However,
in 2000, Congress amended section 83 to remove this prohibition.\164\
Therefore, Sec. 7.2020 is unnecessary. The OCC received no comments on
this change and the final rule removes Sec. 7.2020 as proposed. The
OCC notes that removing Sec. 7.2020 would not limit the OCC's
authority over share repurchases. Share repurchases are considered
reductions in capital and would continue to be subject to OCC and
shareholder approval under 12 U.S.C. 59 and 12 CFR 5.46.
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\164\ Public Law 106-569, Title XII, section 1207(a), 114 Stat.
3034 (American Homeownership and Economic Opportunity Act of 2000).
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Capital Stock-Related Activities of a National Bank (new Sec. 7.2025)
The OCC proposed new Sec. 7.2025 to codify various OCC
interpretations of the National Bank Act involving capital stock
issuances and repurchases. The OCC received no comment on this new
section and adopts it as proposed.
Section 7.2025 explains the shareholder approval requirements for
the issuance of authorized common stock; the issuance, repurchase, and
redemption of preferred stock pursuant to blank check procedures; and
share repurchase programs. Generally, an increase or decrease in the
amount of a national bank's common or preferred stock is a change in
permanent capital subject to the notice and approval requirements of 12
CFR 5.46 and applicable law.\165\ Section 7.2025(a) sets forth the
general requirements for changes in permanent capital. Paragraphs (b)
through (d) of Sec. 7.2025 provide more specific requirements for
shareholder approval of various types of issuances and repurchases.
Section 7.2025(e) identifies certain permissible features for preferred
stock.
---------------------------------------------------------------------------

\165\ See generally 12 U.S.C. 51a, (preferred stock issuance),
57 (increase in capital), and 59 (reduction of capital).
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Issuance of previously approved and authorized common stock. The
issuance of common stock is governed by 12 U.S.C. 57, which provides
that a national bank may, with the approval of the OCC, and by a vote
of shareholders owning two-thirds of the stock of the bank, increase
its capital stock to any sum. The OCC has interpreted 12 U.S.C. 57 to
require a two-thirds shareholder vote to amend the articles of
association to increase the number of authorized shares.\166\ The OCC
also has long interpreted section 57 to permit a national bank's board
of directors to issue common stock without obtaining additional
shareholder approval at the time of the issuance so long as the
issuance does not exceed the amount of common stock previously approved
and

[[Page 83721]]

authorized by shareholders.\167\ Section 7.2025(b) codifies this
interpretation. Specifically, paragraph (b) provides that, in
compliance with 12 U.S.C. 57, a national bank may issue common stock up
to an amount previously approved and authorized in the national bank's
articles of association by holders of two-thirds of the national bank's
shares without obtaining additional shareholder approval for each
subsequent issuance within the authorized amount.
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\166\ See, e.g., Articles of Association, Charter, and Bylaw
Amendments, Comptroller's Licensing Manual (June 2017), p. 3
(indicating that two-thirds of a national bank's shareholders must
vote to increase or decrease the authorized number of common shares
in the articles of association).
\167\ A previous version of Sec. 5.46 (1981) provided that
shareholder approval would not be required to increase common stock
through the issuance of a class of common up to an amount previously
approved by shareholders. Subsequent amendments to Sec. 5.46, which
the OCC intended to simplify 12 CFR part 5, omitted this language
but did not change this interpretation.
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Issuance, repurchase, and redemption of preferred stock pursuant to
certain procedures. Twelve U.S.C. 51a requires a majority of
shareholders vote to approve a national bank's issuance of preferred
stock. However, the statute does not specify when in the process the
bank must obtain shareholder approval. In OCC Interpretive Letter 921,
the OCC determined that a national bank could adopt, subject to
required shareholder approval, a provision in its articles of
association or an amendment to its articles authorizing the bank's
board of directors to issue preferred stock using blank check
procedures (``blank check preferred stock'').\168\ Blank check
preferred stock refers to preferred stock for which the board is
empowered to issue and determine the terms of authorized and unissued
preferred stock. To be permissible, blank check preferred stock must be
permitted by the corporate governance procedures adopted by the bank
under Sec. 7.2000.\169\
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\168\ OCC Interpretive Letter No. 921 (Dec. 13, 2001).
\169\ The final rule changes this terminology in Sec. 7.2000 to
``corporate governance provisions.''
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The OCC also determined that shareholders' adoption or approval of
a blank check preferred stock article constitutes the shareholder
action required by 12 U.S.C. 51a and 51b to issue and establish the
terms of preferred stock. The subsequent issuance of the preferred
stock within the authorized limits would not require additional
shareholder approval. Interpretive Letter 921 did not specifically
address blank check preferred procedures that include the authority,
and the shareholder action required, to repurchase and redeem blank
check preferred stock.
The redemption or repurchase of preferred stock is a reduction in
capital. Twelve U.S.C. 59 requires the approval of two-thirds of
shareholders for a national bank to reduce capital, but it does not
specify when in the process the bank must obtain shareholder approval.
In Interpretive Letter 1162, the OCC determined that the holders of
two-thirds of a national bank's shares may approve in advance
redemptions of blank check preferred stock by voting to amend the
articles of association to authorize the issuance and redemption of
blank check preferred shares.\170\
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\170\ OCC Interpretive Letter No. 1162 (July 6, 2018).
---------------------------------------------------------------------------

Section 7.2025(c) codifies these interpretations and permits blank
check procedures, if approved in advance by the bank's shareholders,
that authorize the issuance, repurchase, and redemption of preferred
stock without additional shareholder approval at the time of issuance,
repurchase, or redemption, if certain conditions are met. Paragraph (c)
provides that, subject to the requirements of 12 U.S.C. 51a, 51b, and
59, a national bank may adopt procedures to authorize the board of
directors to issue, determine the terms of, repurchase, or redeem one
or more series of preferred stock, if permitted by the corporate
governance provisions adopted by the bank under 12 CFR 7.2000. This
provision further provides that, to satisfy the shareholder approval
requirements of 12 U.S.C. 51a and 59, shareholders must approve the
adoption of these procedures in advance through an amendment to the
national bank's articles of association, and that any amendment that
authorizes both the issuance and the repurchase and redemption of
shares must be approved by holders of two-thirds of the national bank's
shares.
Share repurchase programs. In Interpretive Letter 1162, the OCC
determined that the shareholder approval requirement in 12 U.S.C. 59
may be satisfied by a two-thirds shareholder vote approving an
amendment to the bank's articles of association authorizing the board
of directors to implement share repurchase programs. A share repurchase
program authorizes the board of directors to repurchase the national
bank's common or preferred stock from time to time under board-
determined parameters that can limit the frequency, type, aggregate
limit, or purchase price of repurchases, without obtaining additional
shareholder approval at the time the shares are repurchased. Section
7.2025(d) codified this interpretation by providing that, subject to
the requirements of 12 U.S.C. 59, a national bank may establish a
program for the repurchase, from time to time, of the national bank's
common or preferred stock, if permitted by the corporate governance
provisions adopted by the bank under 12 CFR 7.2000. Paragraph (d) also
provides that, to satisfy the shareholder approval requirement of 12
U.S.C. 59, the repurchase program must be approved in advance by the
holders of two-thirds of the national bank's shares, including through
an amendment to the national bank's articles of association that
authorizes the board of directors to implement share repurchase
programs from time to time under board-determined parameters that can
limit the frequency, type, aggregate limit, or purchase price of
repurchases.
Preferred stock features. Section 7.2025(e) clarifies that a
national bank may issue and maintain noncumulative preferred stock.
This provision codifies a longstanding OCC interpretation that 12
U.S.C. 51b, by its terms, describes limitations on the portion of the
preferred stock dividend which may be cumulative. It does not require
that preferred stock dividends must always be cumulative.\171\
Specifically, Sec. 7.2025(e) provides that a national bank's preferred
stock may be cumulative or non-cumulative and may or may not have
voting rights on one or more series.
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\171\ In part, section 51b provides that preferred shareholders
``shall be entitled to receive such cumulative dividends . . . as
may be provided in the articles of association . . . and no
dividends shall be declared or paid on common stock until cumulative
dividends on preferred stock have been paid in full . . . .'' The
OCC has previously interpreted section 51a as providing national
banks with broad authority to issue preferred stock, including
preferred stock bearing noncumulative dividends, notwithstanding the
language of section 51b. See OCC Letter from Martin Goodman, OCC
Assoc. Ch. Couns. (Oct. 3, 1977).
---------------------------------------------------------------------------

Subpart C--National Bank and Federal Savings Association Operations

National Bank and Federal Savings Association Operating Hours and
Closings (Sec. 7.3000)
The OCC proposed to amend Sec. 7.3000, National bank hours and
closings, to include Federal savings associations, to update it, and to
make technical and clarifying changes. The OCC received one comment on
Sec. 7.3000, in support of the proposed updates to the types of
emergency conditions that may result in the declaration of a legal
holiday. Therefore, the OCC adopts the amendments to Sec. 7.3000 as
proposed, with technical changes to the section and paragraph (a)
headings.
Twelve U.S.C. 95(b)(1) specifically authorizes the Comptroller to
designate a legal holiday because of emergency conditions occurring in
any State or part of a State for national banks located in

[[Page 83722]]

that State or affected area. Section 95(b)(1) also provides that when a
State or State official authorized by law designates any day as a legal
holiday for ceremonial or emergency reasons, that day is a legal
holiday and a national bank located in that State or affected part of
the State may close or remain open unless the Comptroller directs
otherwise by written order. Section 7.3000 implements this statutory
provision. Specifically, current Sec. 7.3000(b) provides that when the
Comptroller, a State, or a legally authorized State official declares a
day a legal holiday due to emergency conditions, a national bank may
temporarily limit or suspend its operations at its affected offices.
Alternatively, the bank may continue its operations, unless the
Comptroller directs otherwise by written order. This rule provides that
emergency conditions include natural disasters and civil and municipal
emergencies, such as severe flooding or a power emergency declared by a
local power company or government requesting that businesses in the
affected area close. Section 7.3000(c) states that a State or a legally
authorized State official may declare a day a legal holiday for
ceremonial reasons and provides that when a State legal holiday is
declared for ceremonial reasons, a national bank may choose to remain
open or to close. Section 7.3000(d) provides that a national bank
should assure that all liabilities or other obligations under the
applicable law due to the bank's closing are satisfied, e.g., notice to
depositors about funds availability pursuant to 12 CFR 229.13(g)(4).
There is no equivalent statute or corresponding regulation for
Federal savings associations. However, a former OTS regulation at 12
CFR 510.2(b) permitted the OTS to waive or relax any limitations
pertaining to the operations of a Federal savings associations in any
area affected by a determination by the President of the United States
that a major disaster or emergency had occurred. Amending Sec. 7.300
to include Federal savings associations clarifies for these
institutions how a legal holiday is declared and the implications of a
legal holiday declaration, as well as provide consistency between
national bank and Federal savings association operations on legal
holidays.\172\
---------------------------------------------------------------------------

\172\ We note that the Comptroller is directed under section 4
of the HOLA (12 U.S.C. 1463(a)(1)(A)) to provide for the ``safe and
sound operation'' of Federal savings associations. The OTS relied on
this HOLA authority when it issued Sec. 510.2(b) (see 54 FR 49411,
at 49456 (Nov. 30, 1989) and this final rule furthers that
objective. See also 12 U.S.C. 1(a) (charging the OCC with assuring
the safety and soundness of institutions subject to its
jurisdiction).
---------------------------------------------------------------------------

As proposed, in addition to adding Federal savings associations,
the final rule clarifies and updates the emergency closing provisions
of Sec. 7.3000. First, the final rule clarifies that Sec. 7.3000 also
applies to Federal branches and agencies of foreign banks. Although
current Sec. 7.3000 applies to Federal branches and agencies pursuant
to section 4(b) of the International Banking Act, 12 U.S.C. 3102(b),
the OCC believes it is appropriate to specify this application in the
rule.\173\
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\173\ As indicated previously in this preamble, section 4(b) of
the International Banking Act, 12 U.S.C. 3102(b), provides that the
operations of a foreign bank at a Federal branch or agency shall be
conducted with the same rights and privileges as a national bank at
the same location and shall be subject to all the same duties,
restrictions, penalties, liabilities, conditions, and limitations
that would apply under the National Bank Act to a national bank
doing business at the same location. See also 12 CFR 28.13.
---------------------------------------------------------------------------

Second, the final rule clarifies that the Comptroller may declare
``any day'' a legal holiday, instead of ``a day,'' to more accurately
reflect the statutory language and to clarify that the Comptroller may
declare more than one day due to the emergency condition as a legal
holiday.
Third, the final rule amends Sec. 7.3000(b) to state that
emergency conditions may be ``caused by acts of nature or of man.''
This amendment mirrors the language in 12 U.S.C. 95(b)(1) and clarifies
the broad scope of possible emergency conditions that could justify a
legal holiday.
Fourth, the final rule updates the types of emergency conditions
listed in the rule to include disasters other than natural disasters,
public health or safety emergencies, and cyber threats or other
unauthorized intrusions, and updates the list of examples to include
pandemics, terrorist attacks, and cyber-attacks on bank systems.
Fifth, the final rule provides that the Comptroller may issue a
declaration of a legal holiday in anticipation of the emergency
condition, in addition to at the time of the emergency or soon
thereafter. This codifies the current practice of the Comptroller in
most cases, which permits national banks, Federal savings associations,
and Federal branches and agencies to better plan for the possible
closing.
Sixth, the final rule provides that in the absence of a Comptroller
declaration of a bank holiday, a national bank, Federal savings
associations, or Federal branch or agency may choose to temporarily
close offices in response to an emergency condition. If a bank, savings
association, or branch or agency temporarily closes pursuant to this
provision, it should notify the OCC of such temporary closure as soon
as feasible. This provision provides additional flexibility to OCC-
regulated institutions during emergency conditions and codifies similar
language currently included in the OCC's Licensing Manual.\174\
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\174\ See Comptroller's Licensing Manual, Branch Closings (June
2017).
---------------------------------------------------------------------------

Seventh, the final rule clarifies in Sec. 7.3000(c) that a State
legal holiday may be for the entire State or part of the State, as
indicated in 12 U.S.C. 95(b)(1).
Eighth, as provided in the statute, the final rule provides in
Sec. 7.3000(c) that the Comptroller may by written order direct the
affected institution to close or remain open during a State legal
holiday declared for ceremonial reasons, as with a State legal holiday
declared due to an emergency.
Finally, the final rule adds a new paragraph, Sec. 7.3000(e), to
provide a definition of ``State'' that is consistent with the
definition in 12 U.S.C. 95(b)(2).
Also as proposed, the final rule also makes a number of technical
changes to Sec. 7.3000. The final rule replaces the word ``country''
with ``United States'' in the phrase describing affected geographic
area to make this phrase more precise; deletes the superfluous citation
to 12 U.S.C. 95 in Sec. 7.3000(b); and deletes the superfluous first
sentence of current Sec. 7.3000(c), which states that a State or a
legally authorized State official may declare a day a legal holiday for
ceremonial reasons.
In making these changes, the OCC is reorganizing Sec. 7.3000(b)
and (c) so that all provisions relating to Comptroller declared legal
holidays for emergency conditions are in Sec. 7.3000(b) and all
provisions related to State declared legal holidays for emergency and
ceremonial reasons are in Sec. 7.3000(c). This reorganization more
clearly sets forth the standards for Comptroller and State declared
legal holidays and corresponds better with the statutory text.
Section 7.3000 also provides, in paragraph (a), that a national
bank's board of directors should review its banking hours and,
independently of any other bank, take appropriate actions to
establishing a schedule of its banking hours. As proposed, the final
rule updates this provision by replacing ``banking hours'' with ``hours
of operations for customers.'' The final rule also makes technical
corrections to the section and paragraph heading to reflect this change
in terminology. Furthermore, the final rule includes Federal savings
associations and Federal branches and agencies in this provision.

[[Page 83723]]

Because Federal branches and agencies typically do not have a board of
directors, Sec. 7.3000(a) provides that an equivalent person or
committee for a Federal branch or agency should review that entity's
operating hours and take appropriate action to establish a schedule of
operating hours for customers.
Sharing National Bank or Federal Savings Association Space and
Employees (Sec. 7.3001)
Section 7.3001 permits national banks and Federal savings
associations to lease excess space on bank or savings association
premises to other businesses, share space jointly held with other
businesses, offer its services in space owned by or leased to other
businesses, and share employees when sharing space. The OCC proposed to
add a cross-reference to redesignated Sec. 7.1024, National bank or
Federal savings association ownership of property, in Sec.
7.3001(a)(1) to clarify that the requirements of Sec. 7.1024 apply to
the sharing of office space and employees pursuant to Sec. 7.3001. The
OCC did not receive any comments on this change and adopts it as
proposed.
Additional Issues and General Comments
Application to Federal savings associations generally. The OCC
received several comments on the applicability of the proposed
revisions in the proposed rule to Federal savings associations and, in
particular, mutual savings associations. One commenter stated that
national banks and Federal savings associations have different enabling
acts, and it is not clear that applying national bank rules to Federal
savings associations is a good fit. The OCC is cognizant of the fact
that national banks and Federal savings associations have different
enabling statutes and takes those differences into account when
determining whether, and when, to integrate the rules applicable to
national banks and Federal savings associations. In other areas, the
OCC has retained different regulations for national banks and Federal
savings associations, as dictated by provisions of the National Bank
Act and the HOLA, respectively.
The same commenter noted that mutual associations are a distinct
and very different entity from a governance perspective and requested
that mutual savings associations have the same leeway in making a
choice of law as national banks. This commenter also stated that mutual
savings associations should not be denied the benefit of State law
simply because national banks are denied those provisions by their
enabling act. The OCC notes that the proposal as well as the final rule
do not deny Federal mutual savings associations the benefit of State
law. In fact, as noted above in the preamble discussion of Sec.
7.2000, the final rule permits additional flexibility for Federal
savings associations with respect to a choice of corporate governance
law to allow parity with national banks. In suggesting and adopting
these changes, the OCC recognized the distinction between Federal
savings associations and national banks by considering choice of law
issues for these different charters separately.
Another commenter suggested the OCC should explore further ways to
harmonize national bank and Federal savings association regulations,
including potential Federal savings association use of 12 U.S.C. 24 and
12 CFR part 24, to invest directly in public welfare investments. The
OCC regularly reviews its regulations to determine opportunities to
harmonize Federal savings associations and national bank regulations,
where appropriate. The OCC staff notes that 12 CFR 160.36 already
permits Federal savings associations to make de minimis investments in
community development investments of the type permitted by 12 CFR part
24 for a national bank, and 12 U.S.C. 1464(c)(3)(A) and 12 CFR 160.30
authorize community development investments by Federal savings
associations.
A commenter suggested that any attempt to revise the corporate
governance documents of a subsidiary Federal stock savings association
of a mutual holding company (MHC) should be harmonized with the Federal
Reserve Board's regulation on mutual holding companies, Regulation
MM.\175\ The same commenter suggested that one of the principal
problems with governance for mutual savings associations is a faulty
assumption that depositor members have an active interest in
participating in the association's corporate affairs.\176\ While the
OCC considered and is amending for Federal savings associations only
the choice of State law for the corporate governance provisions, the
OCC is not considering a general overhaul of all the Federal mutual
savings association governance regulations in this rulemaking. The OCC
may consider revising other governance provisions relating to Federal
mutual savings associations in a separate rulemaking and, if practical,
in conjunction with a Federal Reserve Board review of Regulation MM.
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\175\ 12 CFR part 239.
\176\ Federal savings association mutual members have certain
statutory and regulatory voting rights. See 12 U.S.C. 1464; 12 CFR
5.21.
---------------------------------------------------------------------------

The same commenter indicated that, while the right to vote shares
above a certain percentage limit and supermajority voting provisions
may be prohibited for national banks, these provisions normally are
permitted for Federal savings associations. The commenter suggested
that the OCC explicitly state these provisions are permissible for
Federal savings associations. In response, the OCC notes that it has
permitted certain anti-takeover and supermajority vote provisions for
Federal savings associations, either specifically provided by
regulation or authorized by the applicable State law, provided that any
supermajority vote provisions are adopted by a percentage of the
shareholder vote at least equal to the highest percentage that would be
required to take any action under such provision.\177\ Also, the OCC
generally does not approve supermajority provisions that require
approval of more than 80 percent of the voting shares.\178\
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\177\ 12 CFR 5.22(h).
\178\ See Articles of Association, Charters, and Bylaw
Amendments (Forms), Comptroller's Licensing Manual (June 19, 2017),
Anti-Takeover Provisions, p. 11.
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Electronic filings and procedures. One commenter encouraged the OCC
to permit digital and remote filing procedures, such as electronic
fingerprinting, digital signatures, and virtual notarization.
Specifically, the commenter suggested that the requirements for filing
oaths of directors should be modernized by permitting submissions in
electronic form instead of the original hard copy; allowing the notary
to be a bank officer; and as an alternative to notarization, allowing
certification of oaths by the Secretary or an Assistant Secretary of
the financial institution. The OCC notes that has already updated its
licensing regulation to encourage the use of electronic filings,
including permitting digital signatures in the OCC's Central
Application Tracking System (CATS). Further, the OCC is unable to
update to virtual notarization because notarization is governed by
State law.
Technical Changes
In addition to the technical changes discussed above, the OCC
proposed numerous technical changes throughout 12 CFR part 7. The OCC
received no comments on these changes and adopts them as proposed.
Specifically, the final rule:
Replaces the word ``shall'' with ``must,'' ``will,'' or
other appropriate

[[Page 83724]]

language, which is the more current rule writing convention for
imposing an obligation and is the recommended drafting style of the
Federal Register;
Uniformly capitalizes the words ``State'' and ``Federal''
in conformance with Federal Register drafting style;
Replaces the term ``bank'' and ``savings association''
with ``national bank'' or ``Federal savings association,''
respectively, where appropriate;
Clarifies punctuation and update or conform spelling of
various terms; and
Conforms paragraph heading style.
The OCC also is making technical changes to 12 CFR 5.30 to reflect
changes made by the final rule. Specifically, the final rule removes
drop boxes from the definition of branch in Sec. 5.30(d)(1)(i),
pursuant to the change made by Sec. 7.1027, and replaces the cross-
reference to Sec. 7.4003 in Sec. 5.30(d)(i)(iii) with Sec. 7.1027,
as redesignated by this final rule.
In addition, the OCC is making a conforming change to the heading
of subpart B and technical changes to various section headings in
subpart B to better identify their application only to national banks.
Finally, the OCC is making technical changes to 12 CFR 4.5 to
replace outdated information on office locations and responsibilities.
The OCC cross-references 12 CFR part 4, subpart A, when using the term
``appropriate OCC supervisory office'' in 12 CFR 7.1025 and 7.1026.
Twelve CFR part 4, subpart A, sets forth the physical addresses of OCC
offices, including supervisory offices. The OCC is updating one address
in 12 CFR 4.5, Other OCC Supervisory Offices, to provide the correct
location of Midsize Bank Supervision (MBS) headquarters in 12 CFR
4.5(a). The OCC also is amending the description of MBS duties in 12
CFR 4.5(a) to better reflect its current responsibilities.

IV. Regulatory Analyses

A. Paperwork Reduction Act

Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the OCC may not conduct or sponsor, and a
respondent is not required to respond to, an information collection
unless it displays a currently valid Office of Management and Budget
(OMB) control number.
The OCC reviewed the final rule and determined that it revises
certain information collection requirements previously cleared by OMB
under OMB Control No. 1557-0204. The OCC has submitted the revised
information collection to OMB for review under section 3507(d) of the
PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB's implementing
regulations (5 CFR part 1320).
Current Actions
The information collection requirements are as follows:
Tax Equity Finance Transactions--Written requests are
required to increase the aggregate limit on tax equity finance
transactions. Prior written notification to OCC is required for each
tax equity finance transaction. Sec. 7.1025.
Payment Systems--Thirty (30) days advance written notice
is required before joining a payment system that would expose the
institution to open-end liability. An after-the-fact written notice
must be filed within 30 days of becoming a member of a payment system
that does not expose the institution to open-end liabilities with
certain representations. Both notices must include safety and soundness
representations. Sec. 7.1026.
Derivatives Activities--Thirty (30) days prior written
notice is required before engaging in certain derivatives hedging
activities, expanding derivatives hedging activities to include a new
category of underlying, engaging in certain customer-driven financial
intermediation derivatives activities, and expanding customer-driven
financial intermediation derivatives activities to include a new
category of underlying. Sec. 7.1030.
State Corporate Governance--Requests for OCC's staff
position on the ability of national bank to engage in particular State
corporate governance provision must include name, citations, discussion
of similarly suited State banks, identification of Federal banking
statutes and regulations, and analysis of consistency with statutes,
regulations, and safety and soundness. Sec. 7.2000.
Indemnification of institution-affiliated parties--
Administrative proceeding or civil actions not initiated by a Federal
banking agency--A written agreement that an IAP will reimburse the
institution for any portion of non-reimbursed indemnification that the
IAP is found not entitled to is required before advancing funds to an
IAP. Federal savings associations no longer required to provide OCC
prior notice of indemnification. Sec. 7.2014.
Issuing Stock in Certificate Form--National banks must
include certain information, signatures and seal when issuing stock in
certificate form. Sec. 7.2016.
Title of Information Collection: Bank Activities and Operations.
Frequency: Event generated.
Affected Public: Businesses or other for-profit.
Estimated number of respondents: 213.
Total estimated annual burden: 586 hours.

B. Regulatory Flexibility Act

In general, the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et
seq.) requires an agency, in connection with a final rule, to prepare a
Final Regulatory Flexibility Analysis describing the impact of the rule
on small entities (defined by the Small Business Administration for
purposes of the RFA to include commercial banks and savings
institutions with total assets of $600 million or less and trust
companies with total assets of $41.5 million or less). However, under
section 605(b) of the RFA, this analysis is not required if an agency
certifies that the rule would not have a significant economic impact on
a substantial number of small entities and publishes its certification
and a short explanatory statement in the Federal Register along with
its rule.
The OCC currently supervises approximately 1,156 institutions
(commercial banks, trust companies, Federal savings associations, and
branches or agencies of foreign banks, collectively banks), of which
745 are small entities.\179\ Because the rule applies to all OCC-
supervised depository institutions, the rule will affect all small OCC-
supervised entities and thus, a substantial number of them. However,
almost all of the provisions in the final rule clarify or codify
existing requirements, provide relief from existing requirements,
increase flexibility, or reduce burden. One provision in the final
rule, Sec. 7.2012, which will require a person serving as, or in the
function of, bank president, regardless of title, to be a member of the
bank's board of directors, could impose a new requirement on banks
subject to the prior notice requirement for any change in directors
pursuant to 12 CFR 5.51. However, the number of banks that are subject
to this prior notice requirement that do not currently have

[[Page 83725]]

a president serving on the board of directors is limited. As a result,
the final rule will not impose new mandates on more than a limited
number of banks. Therefore, the OCC believes the costs associated with
the final rule, if any, would be minimal and thus the final rule would
not have a significant economic impact on any small OCC-supervised
entities. For these reasons, the OCC certifies that the final rule will
not have a significant economic impact on a substantial number of small
entities supervised by the OCC. Accordingly, a Final Regulatory
Flexibility Analysis is not required.
---------------------------------------------------------------------------

\179\ Consistent with the General Principles of Affiliation 13
CFR 121.103(a), the OCC counts the assets of affiliated financial
institutions when determining if it should classify an institution
as a small entity. The OCC used December 31, 2019, to determine size
because a ``financial institution's assets are determined by
averaging the assets reported on its four quarterly financial
statements for the preceding year.'' See footnote 8 of the U.S.
Small Business Administration's Table of Size Standards.
---------------------------------------------------------------------------

C. Unfunded Mandates Reform Act of 1995

The OCC has analyzed the final rule under the factors in the
Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1501 et seq.
Under this analysis the OCC considered whether the final rule includes
a Federal mandate that may result in the expenditure by State, local,
and tribal governments, in the aggregate, or by the private sector, of
$100 million or more in any one year ($157 million as adjusted annually
for inflation). The UMRA does not apply to regulations that incorporate
requirements specifically set forth in law.
As discussed above, the final rule would not impose new mandates on
more than a limited number of banks. Therefore, the OCC concludes that
the final rule would not result in an expenditure of $157 million or
more annually by State, local, and tribal governments, or by the
private sector. As a result, the OCC finds that the final rule does not
trigger the UMRA cost threshold. Accordingly, the OCC has not prepared
the written statement described in section 202 of the UMRA.

D. Riegle Community Development and Regulatory Improvement Act of 1994

Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4802(a), in
determining the effective date and administrative compliance
requirements for new regulations that impose additional reporting,
disclosure, or other requirements on insured depository institutions,
the OCC must consider, consistent with principles of safety and
soundness and the public interest (1) any administrative burdens that
the final rule would place on depository institutions, including small
depository institutions and customers of depository institutions and
(2) the benefits of the final rule. The has considered the changes made
by this final rule and believes that the overall effective date of
April 1, 2021 will provide OCC-regulated institutions with adequate
time to comply with the rule. With respect to administrative compliance
requirements, the OCC has considered the administrative burdens and the
benefits of this final rule and believes that any burdens are necessary
for safety and soundness and proper OCC supervision. As examples, the
final rule, requires a person serving as, or in the function of, a bank
president, regardless of title to be a member of the bank's board of
directors (Sec. 7.2012) and contains notice requirements with respect
to payment system membership and derivatives activities. The final
rule's benefits include clarifying existing requirements, codifying
existing OCC interpretations and guidance, removing unnecessary
provisions, and updating and modernizing certain provisions. Further
discussion of the consideration by the OCC of these administrative
compliance requirements is found in other sections of the final rule's
SUPPLEMENTARY INFORMATION section.

E. The Congressional Review Act

For purposes of Congressional Review Act, the Office of Management
and Budget (OMB) makes a determination as to whether a final rule
constitutes a ``major'' rule.\180\ If a rule is deemed a ``major rule''
by OMB, the Congressional Review Act generally provides that the rule
may not take effect until at least 60 days following its
publication.\181\ The Congressional Review Act defines a ``major rule''
as any rule that the Administrator of the Office of Information and
Regulatory Affairs of the OMB finds has resulted in or is likely to
result in (1) an annual effect on the economy of $100,000,000 or more;
(2) a major increase in costs or prices for consumers, individual
industries, Federal, State, or local government agencies or geographic
regions, or (3) a significant adverse effects on competition,
employment, investment, productivity, innovation, or on the ability of
United States-based enterprises to compete with foreign-based
enterprises in domestic and export markets.\182\
---------------------------------------------------------------------------

\180\ 5 U.S.C. 801 et seq.
\181\ 5 U.S.C. 801(a)(3).
\182\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------

OMB has determined that this final rule is not a major rule. As
required by the Congressional Review Act, the OCC will submit the final
rule and other appropriate reports to Congress and the Government
Accountability Office for review.

F. Effective Date

The APA \183\ requires that a substantive rule must be published
not less than 30 days before its effective date, except for: (1)
Substantive rules which grant or recognize an exemption or relieve a
restriction; (2) interpretative rules and statements of policy; or (3)
as otherwise provided by the agency for good cause.\184\ Section 302(b)
of the Riegle Community Development and Regulatory Improvement Act of
1994 (RCDRIA) requires that regulations issued by a Federal banking
agency \185\ imposing additional reporting, disclosure, or other
requirements on insured depository institutions take effect on the
first day of a calendar quarter that begins on or after the date of
publication of the final rule, unless, among other things, the agency
determines for good cause that the regulations should become effective
before such time.\186\ The April 1, 2021, effective date of this final
rule meets both the APA and RCDRIA effective date requirements as it
will take effect at least 30 days after its publication date of
December 22, 2020 and on the first day of a calendar quarter following
publication, April 1, 2021. However, the OCC notes that RCDRIA provides
that insured depository institutions may comply with regulations that
impose additional reporting, disclosure, or other requirements before
the regulation's effective date.\187\
---------------------------------------------------------------------------

\183\ Codified at 5 U.S.C. 551 et seq.
\184\ 5 U.S.C. 553(d).
\185\ For purposes of RCDRIA, ``Federal banking agency'' means
the OCC, FDIC, and Board. See 12 U.S.C. 4801.
\186\ 12 U.S.C. 4802(b).
\187\ 12 U.S.C. 4802(b)(2).
---------------------------------------------------------------------------

Pursuant to section 553(b)(B) of the APA, general notice and the
opportunity for public comment are not required with respect to a
rulemaking when an ``agency for good cause finds (and incorporates the
finding and a brief statement of reasons therefor in the rules issued)
that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.'' \188\ As described
in the final rule's SUPPLEMENTARY INFORMATION section, the final rule
includes a number of technical, clarifying, or conforming amendments
that the OCC did not include in its proposed rule. Because these
amendments are not substantive and merely correct or clarify the rule,
update the rule to reflect current law, or fix citation and regulatory
text format, the OCC believes that public notice of these changes is
unnecessary and therefore that it has good cause to adopt

[[Page 83726]]

these changes without notice and comment. Furthermore, the final rule's
amendment to 12 CFR part 4, subpart A, relates to the organization of
the OCC. Rules related to agency organization are not subject to APA
notice and comment.\189\
---------------------------------------------------------------------------

\188\ 5 U.S.C. 553(b).
\189\ Id.
---------------------------------------------------------------------------

List of Subjects

12 CFR Part 4

Administrative practice and procedure, Freedom of Information,
Individuals with disabilities, Minority businesses, Organization and
functions (Government agencies), Reporting and recordkeeping
requirements, Women.

12 CFR Part 5

Administrative practice and procedure, Federal savings
associations, National banks, Reporting and recordkeeping requirements,
Securities.

12 CFR Part 7

Computer technology, Credit, Derivatives, Federal savings
associations, Insurance, Investments, Metals, National banks, Reporting
and recordkeeping requirements, Securities, Security bonds.

12 CFR Part 145

Electronic funds transfers, Public deposits, Federal savings
associations.

12 CFR Part 160

Consumer protection, Investments, Manufactured homes, Mortgages,
Reporting and recordkeeping requirements, Savings associations,
Securities.

For the reasons set out in the preamble, the OCC amends 12 CFR
chapter I as follows:

PART 4--ORGANIZATION AND FUNCTIONS, AVAILABILITY AND RELEASE OF
INFORMATION, CONTRACTING OUTREACH PROGRAM, POST-EMPLOYMENT
RESTRICTIONS FOR SENIOR EXAMINERS

0
1. The authority citation for part 4 continues to read as follows:

Authority: 5 U.S.C. 301, 552; 12 U.S.C. 1, 93a, 161, 481, 482,
484(a), 1442, 1462a, 1463, 1464 1817(a), 1818, 1820, 1821, 1831m,
1831p-1, 1831o, 1833e, 1867, 1951 et seq., 2601 et seq., 2801 et
seq., 2901 et seq., 3101 et seq., 3401 et seq., 5321, 5412, 5414; 15
U.S.C. 77uu(b), 78q(c)(3); 18 U.S.C. 641, 1905, 1906; 29 U.S.C.
1204; 31 U.S.C. 5318(g)(2), 9701; 42 U.S.C. 3601; 44 U.S.C. 3506,
3510; E.O. 12600 (3 CFR, 1987 Comp., p. 235).

Sec. 4.5 [Amended]

0
2. Amend Sec. 4.5(a) by:
0
a. Removing the second sentence; and
0
b. Removing the phrase ``1 South Wacker Drive, Suite 2000, Chicago, IL
60606'' and adding in its place the phrase ``425 South Financial Place,
Suite 1700, Chicago, IL 60605''.

PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES

0
3. The authority citation for part 5 continues to read as follows:

Authority: 12 U.S.C. 1 et seq., 24a, 35, 93a, 214a, 215, 215a,
215a-1, 215a-2, 215a-3, 215c, 371d, 481, 1462a, 1463, 1464, 1817(j),
1831i, 1831u, 2901 et seq., 3101 et seq., 3907, and 5412(b)(2)(B).

Sec. 5.21 [Amended]

0
4. Amend Sec. 5.21 by:
0
a. In paragraphs (j)(2)(i)(C) and (j)(3)(ii), removing the phrase
``corporate governance procedures'' wherever it appears and adding in
its place the phrase ``corporate governance provisions'';
0
b. In paragraph (j)(3)(ii):
0
i. Removing the phrase ``the State where the home office of the
institution'' and adding in its place ``any State in which the home
office or any branch of the association''; and
0
ii. Removing the phrase ``such procedures'' wherever it appears and
adding in its place the phrase ``such provisions''.

0
5. Amend Sec. 5.22 by:
0
a. Revising paragraph (j)(2)(ii); and
0
b. In paragraph (k)(1)(ii)(B), removing the phrase ``corporate
governance procedures'' and adding in its place the phrase ``corporate
governance provisions''.
The revision reads as follows:

Sec. 5.22 Federal stock savings association charter and bylaws.

* * * * *
(j) * * *
(2) * * *
(ii) Corporate governance election and notice requirement. A
Federal stock association may elect to follow the corporate governance
provisions of: The laws of any State in which the home office or any
branch of the association is located; the laws of any State in which a
holding company of the association is incorporated or chartered;
Delaware General Corporation law; or the Model Business Corporation
Act, provided that such provisions may be elected to the extent not
inconsistent with applicable Federal statutes and regulations and
safety and soundness, and such provisions are not of the type described
in paragraph (j)(2)(i)(B) of this section. If this election is
selected, a Federal stock association must designate in its bylaws the
provision or provisions from the body or bodies of law selected for its
corporate governance provisions, and must file a notice containing a
copy of such bylaws, within 30 days after adoption. The notice must
indicate, where not obvious, why the bylaw provisions meet the
requirements stated in paragraph (j)(2)(i)(B) of this section. A
Federal stock savings association that has elected to follow the
corporate governance provisions of the law of the State in which its
holding company is incorporated may continue to use those provisions
even if the association is no longer controlled by that holding
company.
* * * * *

Sec. 5.30 [Amended]

0
6. Amend Sec. 5.30 by:
0
a. In paragraph (d)(1)(i), adding the word ``or'' after the phrase
``temporary facility,'' and removing the phrase ``, or a drop box'';
and
0
b. In paragraph (d)(1)(iii), removing the citation ``12 CFR 7.4003''
and adding in its place the citation ``12 CFR 7.1027''.

PART 7--ACTIVITIES AND OPERATIONS

0
7. The authority citation for part 7 is revised to read as follows:

Authority: 12 U.S.C. 1 et seq., 25b, 29, 71, 71a, 92, 92a, 93,
93a, 95(b)(1), 371, 371d, 481, 484, 1462a, 1463, 1464, 1465, 1818,
1828, 3102(b), and 5412(b)(2)(B).

Sec. 7.1000 [Redesignated]

0
8. Redesignate Sec. 7.1000 as Sec. 7.1024.

0
9. Add a new Sec. 7.1000 to read as follows:

Sec. 7.1000 Activities that are part of, or incidental to, the
business of banking.

(a) Purpose. This section identifies the criteria that the Office
of the Comptroller of the Currency (OCC) uses to determine whether an
activity is authorized as part of, or incidental to, the business of
banking under 12 U.S.C. 24(Seventh) or other statutory authority.
(b) Restrictions and conditions on activities. The OCC may
determine that activities are permissible under 12 U.S.C. 24(Seventh)
or other statutory authority only if they are subject to standards or
conditions designed to provide that the activities function as intended
and are conducted safely and soundly, in accordance with other
applicable statutes, regulations, or supervisory policies.

[[Page 83727]]

(c) Activities that are part of the business of banking. (1) An
activity is permissible for national banks as part of the business of
banking if the activity is authorized under 12 U.S.C. 24(Seventh) or
other statutory authority. In determining whether an activity that is
not specifically included in 12 U.S.C. 24(Seventh) or other statutory
authority is part of the business of banking, the OCC considers the
following factors:
(i) Whether the activity is the functional equivalent to, or a
logical outgrowth of, a recognized banking activity;
(ii) Whether the activity strengthens the bank by benefiting its
customers or its business;
(iii) Whether the activity involves risks similar in nature to
those already assumed by banks; and
(iv) Whether the activity is authorized for State-chartered banks.
(2) The weight accorded each factor set out in paragraph (c)(1) of
this section depends on the facts and circumstances of each case.
(d) Activities that are incidental to the business of banking. (1)
An activity is authorized for a national bank as incidental to the
business of banking if it is convenient or useful to an activity that
is specifically authorized for national banks or to an activity that is
otherwise part of the business of banking. In determining whether an
activity is convenient or useful to such activities, the OCC considers
the following factors:
(i) Whether the activity facilitates the production or delivery of
a bank's products or services, enhances the bank's ability to sell or
market its products or services, or improves the effectiveness or
efficiency of the bank's operations, in light of risks presented,
innovations, strategies, techniques and new technologies for producing
and delivering financial products and services; and
(ii) Whether the activity enables the bank to use capacity acquired
for its banking operations or otherwise avoid economic loss or waste.
(2) The weight accorded each factor set out in paragraph (d)(1) of
this section depends on the facts and circumstances of each case.

0
10. Revise Sec. 7.1002 to read as follows:

Sec. 7.1002 National bank and Federal savings association acting as
finder.

(a) In general. A finder may identify potential parties, make
inquiries as to interest, introduce or arrange contacts or meetings of
interested parties, act as an intermediary between interested parties,
and otherwise bring parties together for a transaction that the parties
themselves negotiate and consummate. It is part of the business of
banking under 12 U.S.C. 24(Seventh) for a national bank to act as a
finder. A Federal savings association may act as a finder to the extent
those activities are incidental to the powers expressly authorized by
the Home Owners' Loan Act (HOLA) (12 U.S.C. 1461 et seq).
(b) Permissible finder activities--(1) National banks. The
following list provides examples of permissible finder activities for
national banks. This list is illustrative and not exclusive; the OCC
may determine that other activities are permissible pursuant to a
national bank's authority to act as a finder:
(i) Communicating information about providers of products and
services, and proposed offering prices and terms to potential markets
for these products and services;
(ii) Communicating to the seller an offer to purchase or a request
for information, including forwarding completed applications,
application fees, and requests for information to third-party
providers;
(iii) Arranging for third-party providers to offer reduced rates to
those customers referred by the national bank;
(iv) Providing administrative, clerical, and record keeping
functions related to the national bank's finder activity, including
retaining copies of documents, instructing and assisting individuals in
the completion of documents, scheduling sales calls on behalf of
sellers, and conducting market research to identify potential new
customers for retailers;
(v) Conveying between interested parties expressions of interest,
bids, offers, orders, and confirmations relating to a transaction;
(vi) Conveying other types of information between potential buyers,
sellers, and other interested parties;
(vii) Establishing rules of general applicability governing the use
and operation of the finder service, including rules that:
(A) Govern the submission of bids and offers by buyers, sellers,
and other interested parties that use the finder service and the
circumstances under which the finder service will pair bids and offers
submitted by buyers, sellers, and other interested parties; and
(B) Govern the manner in which buyers, sellers, and other
interested parties may bind themselves to the terms of a specific
transaction; and
(viii) Acting as an electronic finder pursuant to Sec.
7.5002(a)(1).
(2) Federal savings associations. The following list provides
examples of finder activities that are permissible for Federal savings
associations. This list is illustrative and not exclusive; the OCC may
determine that other activities are permissible pursuant to a Federal
savings association's incidental powers:
(i) Referring customers to a third party; and
(ii) Providing services and products to customers indirectly
through a third-party discount program.
(c) Limitation. The authority to act as a finder does not enable a
national bank or a Federal savings association to engage in brokerage
activities that have not been found to be permissible for national
banks or Federal savings associations, respectively.
(d) Advertisement and fee. Unless otherwise prohibited by Federal
law, a national bank or Federal savings association may advertise the
availability of, and accept a fee for, the services provided pursuant
to this section.

0
11. Amend Sec. 7.1003 by:
0
a. In paragraph (a):
0
i. Revising the paragraph heading;
0
ii. Adding the word ``national'' before the word ``bank'' wherever it
appears;
0
b. In paragraph (b):
0
i. Adding the word ``national'' before the word ``bank'' in the
paragraph heading;
0
ii. Adding the word ``national'' before the word ``bank'' wherever it
appears; and
0
iii. Adding the word ``national'' before the word ``bank's''; and
0
c. Adding paragraph (c).
The revisions and addition read as follows:

Sec. 7.1003 Money lent by a national bank at banking offices or at
facilities other than banking offices.

(a) In general. * * *
(c) Services on equivalent terms to those offered customers of
unrelated banks. An operating subsidiary owned by a national bank may
distribute loan proceeds from its own funds or bank funds directly to
the borrower in person at offices the operating subsidiary has
established without violating 12 U.S.C. 36, 12 U.S.C. 81 and 12 CFR
5.30 provided that the operating subsidiary provides similar services
on substantially similar terms and conditions to customers of
unaffiliated entities including unaffiliated banks.

0
12. Revise Sec. 7.1004 to read as follows:

Sec. 7.1004 Establishment of a loan production office by a national
bank.

(a) In general. A national bank or its operating subsidiary may
engage in loan production activities at a site other than the main
office or a branch of the bank. A national bank or its operating
subsidiary may solicit loan customers,

[[Page 83728]]

market loan products, assist persons in completing application forms
and related documents to obtain a loan, originate and approve loans,
make credit decisions regarding a loan application, and offer other
lending-related services such as loan information and applications at a
loan production office without violating 12 U.S.C. 36 and 12 U.S.C. 81,
provided that ``money'' is not deemed to be ``lent'' at that site
within the meaning of Sec. 7.1003 and the site does not accept
deposits or pay withdrawals.
(b) Services of other persons. A national bank may use the services
of, and compensate, persons not employed by the bank in its loan
production activities.

Sec. 7.1005 [Removed and Reserved]

0
13. Remove and reserve Sec. 7.1005.

Sec. 7.1006 [Amended]

0
14. Amend Sec. 7.1006 by:
0
a. In the section heading, adding the phrase ``or Federal savings
association'' after the phrase ``national bank'';
0
b. Adding the phrase ``or Federal savings association'' after the
phrase ``national bank'' wherever it appears in the first and second
sentences; and
0
c. Adding the phrase ``or savings association'' after the phrase
``provided that the bank'' in the second sentence.

Sec. 7.1009 [Removed and Reserved]

0
15. Remove and reserve Sec. 7.1009.

0
16. Revise Sec. 7.1010 to read as follows:

Sec. 7.1010 Postal services by national banks and Federal savings
associations.

(a) In general. A national bank or Federal savings association may
provide postal services and receive income from those services. The
services performed are those permitted under applicable rules of the
United States Postal Service and may include meter stamping of letters
and packages and the sale of related insurance. The national bank or
Federal savings association may advertise, develop, and extend the
services to attract customers to the institution.
(b) Postal regulations. A national bank or Federal savings
association providing postal services must do so in accordance with the
rules and regulations of the United States Postal Service. The national
bank or Federal savings association must keep the books and records of
the postal services separate from those of other banking operations.
Under 39 U.S.C. 404 and regulations issued under that statute (see 39
CFR chapter I), the United States Postal Service may inspect the books
and records pertaining to the postal services.

Sec. 7.1012 [Amended]

0
17. Amend Sec. 7.1012 by:
0
a. In paragraph (c)(1), removing the phrase ``pick up from, and
deliver'' and adding in its place the phrase ``pick up from and
deliver''; and
0
b. In paragraph (c)(2)(vi), removing the words ``back office'' and
adding in its place the word ``back-office''.

0
18. Revise Sec. 7.1015 to read as follows:

Sec. 7.1015 National bank and Federal savings association investments
in small business investment companies.

(a) National banks. A national bank may invest in a small business
investment company (SBIC) or in any entity established solely to invest
in SBICs, including purchasing the stock of a SBIC, subject to
appropriate capital limitations (see e.g., 15 U.S.C. 682(b)), and may
receive the benefits of such stock ownership (e.g., stock dividends).
The receipt and retention of a dividend by a national bank from a SBIC
in the form of stock of a corporate borrower of the SBIC is not a
purchase of stock within the meaning of 12 U.S.C. 24(Seventh).
(b) Federal savings associations. Federal savings associations may
invest in a SBIC or in any entity established solely to invest in SBICs
as provided in 12 CFR 160.30.
(c) Qualifying SBIC. A national bank or Federal savings association
may invest in a SBIC that is either:
(1) Already organized and has obtained a license from the Small
Business Administration; or
(2) In the process of being organized.
(d) SBIC wind-down. A national bank or Federal savings association
may retain an interest in a SBIC that has voluntarily surrendered its
license to operate as a SBIC in accordance with 13 CFR 107.1900 and
does not make any new investments (other than investments in cash
equivalents, which, for the purposes of this paragraph (d), means high
quality, highly liquid investments whose maturity corresponds to the
issuer's expected or potential need for funds and whose currency
corresponds to the issuer's assets) after such voluntary surrender.

0
19. Amend Sec. 7.1016 by:
0
a. Revising the section heading and paragraphs (a) and (b)(1)
introductory text;
0
b. In paragraphs (b)(1)(iii)(B) and (C), (b)(2)(iii), and (b)(3) and
(4), removing the word ``bank'' and adding in its place the phrase
``national bank or Federal savings association'';
0
c. In paragraphs (b)(1)(iii)(B), (b)(2)(iii), and (b)(4), adding the
phrase ``or savings association's'' after the word ``bank's'';
0
d. Revising paragraphs (b)(1)(iv) and (b)(2)(i); and
0
e. In paragraph (b)(2)(ii), removing the word ``bank's'' and adding in
its place the phrase ``national bank's or Federal savings
association's''.
The revisions read as follows:

Sec. 7.1016 Independent undertakings issued by a national bank or
Federal savings association to pay against documents.

(a) In general. A national bank or Federal savings association may
issue and commit to issue letters of credit and other independent
undertakings within the scope of applicable laws or rules of practice
recognized by law.\1\ Under such independent undertakings, the national
bank's or Federal savings association's obligation to honor depends
upon the presentation of specified documents and not upon
nondocumentary conditions or resolution of questions of fact or law at
issue between the applicant and the beneficiary. A national bank or
Federal savings association also may confirm or otherwise undertake to
honor or purchase specified documents upon their presentation under
another person's independent undertaking within the scope of such laws
or rules.
---------------------------------------------------------------------------

\1\ Examples of such laws or rules of practice include: The
applicable version of Article 5 of the Uniform Commercial Code (UCC)
(1962, as amended 1990) or revised Article 5 of the UCC (as amended
1995); the Uniform Customs and Practice for Documentary Credits
(International Chamber of Commerce (ICC) Publication No. 600 or any
applicable prior version); the Supplements to UCP 500 & 600 for
Electronic Presentation (eUCP v. 1.0, 1.1, & 2.0) (Supplements to
the Uniform Customs and Practices for Documentary Credits for
Electronic Presentation); International Standby Practices (ISP98)
(ICC Publication No. 590); the United Nations Convention on
Independent Guarantees and Stand-by Letters of Credit (adopted by
the U.N. General Assembly in 1995 and signed by the U.S. in 1997);
and the Uniform Rules for Bank-to-Bank Reimbursements Under
Documentary Credits (ICC Publication No. 725).
---------------------------------------------------------------------------

(b) * * * (1) Terms. As a matter of safe and sound banking
practice, national banks and Federal savings associations that issue
independent undertakings should not be exposed to undue risk. At a
minimum, national banks and Federal savings associations should
consider the following:
* * * * *
(iv) The national bank or Federal savings association either should
be fully collateralized or have a post-honor right of reimbursement
from the applicant or from another issuer of an independent
undertaking. Alternatively, if the national bank's or Federal savings
association's undertaking is to purchase documents of title,
securities, or other valuable documents, the bank or savings
association should obtain a first priority right to realize on the
documents if the

[[Page 83729]]

bank or savings association is not otherwise to be reimbursed.
(2) * * *
(i) In the event that the undertaking is to honor by delivery of an
item of value other than money, the national bank or Federal savings
association should ensure that market fluctuations that affect the
value of the item will not cause the bank or savings association to
assume undue market risk;
* * * * *

0
20. Revise Sec. 7.1021 to read as follows:

Sec. 7.1021 Financial literacy programs not branches of national
banks.

A financial literacy program is a program the principal purpose of
which is to be educational for members of the community. The premises
of, or a facility used by, a school or other organization at which a
national bank participates in a financial literacy program is not a
branch for purposes of 12 U.S.C. 36 provided the bank does not
establish and operate the premises or facility. The OCC considers
establishment and operation in this context on a case by case basis,
considering the facts and circumstances. However, the premises or
facility is not a branch of the national bank if the safe harbor test
in Sec. 7.1012(c)(2) applicable to messenger services established by
third parties is satisfied. The factor discussed in Sec.
7.1012(c)(2)(i) can be met if bank employee participation in the
financial literacy program consists of managing the program or
conducting or engaging in financial education activities provided the
school or other organization retains control over the program and over
the premises or facilities at which the program is held.

Sec. 7.1022 [Amended]

0
21. Amend Sec. 7.1022 by:
0
a. In paragraph (d), removing the word ``shall'' and adding in its
place the word ``may'' wherever it appears; and
0
b. In paragraph (e), in the first sentence, removing the word ``shall''
and adding in its place the word ``must'' and removing the phrase ``the
effective date of this regulation'' and adding in its place the phrase
``April 1, 2018''.

Sec. 7.1023 [Amended]

0
22. Amend Sec. 7.1023 by:
0
a. In paragraph (c), removing the word ``shall'' and adding in its
place the word ``may'' and removing the words ``federal savings
association'' and adding in its place the words ``Federal savings
association''; and
0
b. In paragraph (d):
0
i. In the first sentence:
0
A. Removing the word ``shall'' and adding in its place the word
``must'';
0
B. Removing the phrase ``the effective date of this regulation'' and
adding in its place the phrase ``April 1, 2018''; and
0
ii. Removing, in the second sentence, the phrase ``federal savings
association'' and adding in its place the phrase ``Federal savings
association''.

Sec. 7.1024 [Amended]

0
23. Amend newly redesignated Sec. 7.1024 by:
0
a. In paragraphs (c)(2)(i) and (ii) and (d), removing the word
``shall'' and adding in its place the word ``must''; and
0
b. In paragraph (e), removing the word ``shall'' and adding in its
place the word ``may''.

0
24. Add Sec. 7.1025 to read as follows:

Sec. 7.1025 Tax equity finance transactions by national banks and
Federal savings associations.

(a) Tax equity finance transactions. A national bank or Federal
savings association may engage in a tax equity finance transaction
pursuant to 12 U.S.C. 24(Seventh) and 1464 only if the transaction is
the functional equivalent of a loan, as provided in paragraph (c) of
this section, and the transaction satisfies applicable conditions in
paragraph (d) of this section. The authority to engage in tax equity
finance transactions under this section is pursuant to 12 U.S.C.
24(Seventh) and 1464 lending authority and is separate from, and does
not limit, other investment authorities available to national banks and
Federal savings associations.
(b) Definitions. For purposes of this section:
(1) Appropriate OCC supervisory office means the OCC office that is
responsible for the supervision of a national bank or Federal savings
association, as described in subpart A of 12 CFR part 4;
(2) Capital and surplus has the same meaning that this term has in
12 CFR 32.2.
(3) Tax equity finance transaction means a transaction in which a
national bank or Federal savings association provides equity financing
to fund a project or projects that generate tax credits or other tax
benefits and the use of an equity-based structure allows the transfer
of those credits and other tax benefits to the national bank or Federal
savings association.
(c) Functional equivalent of a loan. A tax equity finance
transaction is the functional equivalent of a loan if:
(1) The structure of the transaction is necessary for making the
tax credits or other tax benefits available to the national bank or
Federal savings association;
(2) The transaction is of limited tenure and is not indefinite,
including retaining a limited investment interest that is required by
law to obtain continuing tax benefits or needed to obtain the expected
rate of return;
(3) The tax benefits and other payments received by the national
bank or Federal savings association from the transaction repay the
investment and provide the expected rate of return at the time of
underwriting;
(4) Consistent with paragraph (c)(3) of this section, the national
bank or Federal savings association does not rely on appreciation of
value in the project or property rights underlying the project for
repayment;
(5) The national bank or Federal savings association uses
underwriting and credit approval criteria and standards that are
substantially equivalent to the underwriting and credit approval
criteria and standards used for a traditional commercial loan;
(6) The national bank or Federal savings association is a passive
investor in the transaction and is unable to direct the affairs of the
project company; and
(7) The national bank or Federal savings association appropriately
accounts for the transaction initially and on an ongoing basis and has
documented contemporaneously its accounting assessment and conclusion.
(d) Conditions on tax equity finance transactions. A national bank
or Federal savings association may engage in tax equity finance
transactions only if:
(1) The national bank or Federal savings association cannot control
the sale of energy, if any, from the project;
(2) The national bank or Federal savings association limits the
total dollar amount of tax equity finance transactions undertaken
pursuant to this section to no more than five percent of its capital
and surplus, unless the OCC determines, by written approval of a
written request by the national bank or Federal savings association to
exceed the five percent limit, that a higher aggregate limit will not
pose an unreasonable risk to the national bank or Federal savings
association and that the tax equity finance transactions in the
national bank's or Federal savings association's portfolio will not be
conducted in an unsafe or unsound manner; provided, however, that in no
case may a national bank or Federal savings association's total dollar
amount of tax equity finance transactions undertaken pursuant to this
section exceed 15 percent of its capital and surplus;

[[Page 83730]]

(3) The national bank or Federal savings association has provided
written notification to the appropriate OCC supervisory office, prior
to engaging in each tax equity finance transaction that includes its
evaluation of the risks posed by the transaction;
(4) The national bank or Federal savings association can identify,
measure, monitor, and control the associated risks of its tax equity
finance transaction activities individually and as a whole on an
ongoing basis to ensure that such activities are conducted in a safe
and sound manner; and
(5) The national bank or Federal savings association obtains a
legal opinion or has other good faith, reasoned bases for making a
determination that tax credits or other tax benefits are available
before engaging in a tax equity finance transaction.
(e) Applicable legal requirements. The transaction is subject to
the substantive legal requirements of a loan, including the lending
limits prescribed by 12 U.S.C. 84 and 12 U.S.C. 1464(u), as
appropriate, as implemented by 12 CFR part 32, and if the active
investor or project sponsor of the transaction is an affiliate of the
bank, to the restrictions on transactions with affiliates prescribed by
12 U.S.C. 371c and 371c-1, as implemented by 12 CFR part 223.

0
25. Add Sec. 7.1026 to read as follows:

Sec. 7.1026 National bank and Federal savings association payment
system memberships.

(a) In general. National banks and Federal savings associations may
become members of payment systems, subject to the requirements of this
section.
(b) Definitions. As used in this section:
(1) Appropriate OCC supervisory office means the OCC office that is
responsible for the supervision of a national bank or Federal savings
association, as described in subpart A of 12 CFR part 4;
(2) Member includes a national bank or Federal savings association
designated as a ``member,'' or ``participant,'' or other similar role
by a payment system, including by a payment system that requires the
national bank or Federal savings association to share in operational
losses or maintain a reserve with the payment system to offset
potential liability for operational losses. This definition includes
indirect members only if they agree to be bound by the rules of the
payment system and the rules of the payment system indicate indirect
members are covered;
(3) Open-ended liability refers to liability for operational losses
that is not capped under the rules of the payment system and includes
indemnifications of third parties provided as a condition of membership
in the payment system;
(4) Operational loss means a charge resulting from sources other
than defaults by other members of the payment system. Examples of
operational losses include losses that are due to: Employee misconduct,
fraud, misjudgment, or human error; management failure; information
systems failures; disruptions from internal or external events that
result in the degradation or failure of services provided by the
payment system; security breaches or cybersecurity events; or payment
or settlement delays, constrained liquidity, contagious disruptions,
and resulting litigation; and
(5) Payment system means ``financial market utility'' as defined in
12 U.S.C. 5462(6), wherever operating, and includes both retail and
wholesale payment systems. Payment system does not include a
derivatives clearing organization registered under the Commodity
Exchange Act, a clearing agency registered under the Securities
Exchange Act of 1934, or foreign organization that would be considered
a derivatives clearing organization or clearing agency were it
operating in the United States.
(c) Notice requirements--(1) Prior notice required. A national bank
or Federal savings association must provide written notice to its
appropriate OCC supervisory office at least 30 days prior to joining a
payment system that exposes it to open-ended liability.
(2) After-the-fact notice. A national bank or Federal savings
association must provide written notice to its appropriate OCC
supervisory office within 30 days of joining a payment system that does
not expose it to open-ended liability.
(d) Content of notice--(1) In general. A notice required by
paragraph (c) of this section must include representations that the
national bank or Federal savings association:
(i) Has complied with the safety and soundness review requirements
in paragraph (e)(1) of this section; and
(ii) Will comply with the safety and soundness review and
notification requirements in paragraphs (e)(2) and (3) of this section.
(2) Payment system with limits on liability or no liability. A
notice filed under paragraph (c)(2) of this section also must include a
representation that either:
(i) The rules of the payment system do not impose liability for
operational losses on members; or
(ii) The national bank's or Federal savings association's liability
for operational losses is limited by the rules of the payment system to
specific and appropriate limits that do not exceed the lower of:
(A) The legal lending limit under 12 CFR part 32; or
(B) The limit set for the bank or savings association by the OCC.
(e) Safety and soundness procedures. (1) Prior to joining a payment
system, a national bank or Federal savings association must:
(i) Identify and evaluate the risks posed by membership in the
payment system, taking into account whether the liability of the bank
or savings association is limited; and
(ii) Ensure that it can measure, monitor, and control the risks
identified pursuant to paragraph (e)(1)(i) of this section.
(2) After joining a payment system, a national bank or Federal
savings association must manage the risks of the payment system on an
ongoing basis. This ongoing risk management must:
(i) Identify and evaluate the risks posed by membership in the
payment system, taking into account whether the liability of the bank
or savings association is limited; and
(ii) Measure, monitor, and control the risks identified pursuant to
paragraph (e)(2)(i) of this section.
(3) If the national bank or Federal savings association identifies
risks during the ongoing risk management required by paragraph (e)(2)
of this section that raise safety and soundness concerns, such as a
material change to the bank's or savings association's liability or
indemnification responsibilities, the national bank or Federal savings
association must:
(i) Notify the appropriate OCC supervisory office as soon as the
safety and soundness concern is identified; and
(ii) Take appropriate actions to remediate the risk.
(4) A national bank or Federal savings association that believes
its open-ended liability is otherwise limited (e.g., by negotiated
agreements or laws of an appropriate jurisdiction) may consider its
liability to be limited for purposes of the reviews required by
paragraphs (e)(1) and (2) of this section so long as:
(i) Prior to joining the payment system, the bank or savings
association obtains a written legal opinion that:
(A) Describes how the payment system allocates liability for
operational losses; and

[[Page 83731]]

(B) Concludes the potential liability for operational losses for
the national bank or Federal savings association is in fact limited to
specific and appropriate limits that do not exceed the lower of:
(1) The legal lending limit under 12 CFR part 32; or
(2) The limit set for the bank or savings association by the OCC;
and
(ii) There are no material changes to the liability or
indemnification requirements applicable to the bank or savings
association since the issuance of the written legal opinion.
(f) Safety and soundness considerations. (1) A national bank or
Federal savings association should evaluate, at a minimum, the
following payment system characteristics when conducting an analysis
required by paragraph (e) of this section:
(i) Does the processing occur on a real-time gross settlement basis
or provide reasonable assurance (e.g., prefunding, etc.) that members
will meet settlement obligations?
(ii) How does the payment system's rules limit its liability to
members?
(iii) Does the payment system have insurance coverage and/or self-
insurance arrangements to cover operational losses?
(iv) Do the payment system's rules provide an unambiguous pro-rata
loss allocation methodology under its indemnity provisions and does the
methodology provide members the opportunity to reduce or eliminate
liability exposure by decreasing or ceasing use of the payment system?
(v) Do the payment system's rules provide for unambiguous
membership withdrawal procedures that do not require the prior approval
of the system?
(vi) Does the payment system have appropriate admission and
continuing participation requirements for system participants? Such
requirements should address, among other things:
(A) The participants' access to sufficient financial resources to
meet obligations arising from participation;
(B) The adequacy of participants' operational capacities to meet
obligations arising from participation; and
(C) The adequacy of the participants' own risk management
processes.
(vii) Does the payment system have processes and controls in place
to verify and monitor on an ongoing basis the compliance of each
participant with admission and participation requirements?
(viii) Does the payment system have written policies and procedures
for addressing participant failures to meet ongoing participation
requirements?
(ix) Are the payment system's rules relating to the system's
emergency authorities unambiguous and may they be amended or otherwise
altered without prior notification to all members and an opportunity to
withdraw?
(x) Is the payment system governed by uniform, comprehensive and
clear legal standards in its operating jurisdiction that address
payment and/or settlement activities?
(xi) Is the payment system subject to and in compliance (or
observance) with the Committee on Payment and Settlement Systems and
the Technical Committee of the International Organization of Securities
Commissions (CPSS--IOSCO) Principles for Financial Market
Infrastructures?
(xii) Is the payment system designated as a systemically important
financial market utility (SIFMU) by the Financial Stability Oversight
Counsel (FSOC) or is it the international or foreign equivalent?
(xiii) Does the payment system provide members with information
relevant to governance, risk management practices, and operations in a
timely manner and with sufficient transparency and particularity for
the bank to ascertain with reasonable certainty the bank's level of
risk exposure to the system?
(xiv) Is the payment system operated by or subject to oversight of
a central bank or regulatory authority?
(xv) Is the payment system legally organized as a not-for-profit
enterprise or is it owned and operated by a government entity?
(xvi) Does the payment system have appropriate systems and controls
for communicating to members in a timely manner about material events
that relate to or could result in potential operational losses, e.g.
fraud, system failures, natural disasters, etc.?
(xvii) Has the payment system ever exercised its authority under
indemnification provisions?
(2) A national bank or Federal savings association should consider,
at a minimum, the following characteristics of its risk management
program when conducting an analysis required by paragraph (e) of this
section:
(i) Does the bank or savings association have appropriate board
supervision and managerial and staff expertise?
(ii) Does the bank or savings association have comprehensive
policies and operating procedures with respect to its risk
identification, measurement and management information systems that are
routinely reviewed?
(iii) Does the bank or savings association have effective risk
controls and processes to oversee and ensure the continuing
effectiveness of the risk management process? The program should
include a formal process for approval of payment system memberships as
well as ongoing monitoring and measurement of activity against
predetermined risk limits.
(iv) Does the bank or savings association's membership evaluation
process include assessments and analyses of:
(A) The credit quality of the entity;
(B) The entity's risk management practices;
(C) Settlement and default procedures of the entity;
(D) Any default or loss-sharing precedents and any other applicable
limits or restrictions of the entity;
(E) Key risks associated with joining the entity; and
(F) The incremental effect of additional memberships in aggregate
exposure to payment system risk?
(v) Does the bank or savings association's risk management program
include policies and procedures that identify and estimate the level of
potential operational risks, at both inception of membership and on an
on-going basis?
(vi) Does the bank or savings association have auditing procedures
to ensure the integrity of risk measurement, control and reporting
systems?
(vii) Does the program include mechanisms to monitor, estimate, and
maintain control over the bank or savings association's potential
liabilities for operational losses on an ongoing basis. This should
include:
(A) Limits and other controls with respect to each identified risk
factor;
(B) Reports generated throughout the processes that accurately
present the nature and level(s) of risk taken and demonstrate
compliance with approved polices and limits; and
(C) Identification of the business unit and/or individuals
responsible for measuring and monitoring risk exposures, as well as
those individuals responsible for monitoring compliance with policies
and risk exposure limits.
(viii) Does a bank or savings association with memberships in
multiple payment systems have the ability to monitor and report
aggregate risk exposures and measurement against risk limits both at
the sponsoring business line level and the total exposure
organizationally?

0
26. Add Sec. 7.1027 to read as follows:

Sec. 7.1027 Establishment and operation of a remote service unit by a
national bank.

A remote service unit (RSU) is an automated or unstaffed facility,
operated

[[Page 83732]]

by a customer of a bank with at most delimited assistance from bank
personnel, that conducts banking functions such as receiving deposits,
paying withdrawals, or lending money. A national bank may establish and
operate an RSU pursuant to 12 U.S.C. 24(Seventh). An RSU includes an
automated teller machine, automated loan machine, automated device for
receiving deposits, personal computer, telephone, other similar
electronic devices, and drop boxes. An RSU may be equipped with a
telephone or tele-video device that allows contact with bank personnel.
An RSU is not a ``branch'' within the meaning of 12 U.S.C. 36(j), and
is not subject to State geographic or operational restrictions or
licensing laws.

0
27. Add Sec. 7.1028 to read as follows:

Sec. 7.1028 Establishment and operation of a deposit production
office by a national bank.

(a) In general. A national bank or its operating subsidiary may
engage in deposit production activities at a site other than the main
office or a branch of the bank. A national bank or its operating
subsidiary may solicit deposits, provide information about deposit
products, and assist persons in completing application forms and
related documents to open a deposit account at a deposit production
office (DPO). A DPO is not a branch within the meaning of 12 U.S.C.
36(j) and 12 CFR 5.30(d)(1) so long as it does not receive deposits,
pay withdrawals, or make loans. All deposit and withdrawal transactions
of a bank customer using a DPO must be performed by the customer,
either in person at the main office or a branch office of the bank, or
by mail, electronic transfer, or a similar method of transfer.
(b) Services of other persons. A national bank may use the services
of, and compensate, persons not employed by the bank in its deposit
production activities.

0
28. Add Sec. 7.1029 to read as follows:

Sec. 7.1029 Combination of national bank loan production office,
deposit production office, and remote service unit.

A location at which a national bank operates a loan production
office (LPO), a deposit production office (DPO), and a remote service
unit (RSU) is not a ``branch'' within the meaning of 12 U.S.C. 36(j) by
virtue of that combination. Since an LPO, DPO, or RSU is not,
individually, a branch under 12 U.S.C. 36(j), any combination of these
facilities at one location does not create a branch. The RSU at such a
combined location must be primarily operated by the customer with at
most delimited assistance from bank personnel.

0
29. Add Sec. 7.1030 to read as follows:

Sec. 7.1030 Permissible derivatives activities for national banks.

(a) Authority. This section is issued pursuant to 12 U.S.C.
24(Seventh). A national bank may only engage in derivatives
transactions in accordance with the requirements of this section.
(b) Definitions. For purposes of this section:
(1) Customer-driven means a transaction is entered into for a
customer's valid and independent business purpose (and a customer-
driven transaction does not include a transaction the principal purpose
of which is to deliver to a national bank assets that the national bank
could not invest in directly);
(2) Perfectly-matched means two back-to-back derivatives
transactions that offset risk with respect to all economic terms (e.g.,
amount, maturity, duration, and underlying);
(3) Portfolio-hedged means a portfolio of derivatives transactions
that are hedged based on net unmatched positions or exposures in the
portfolio;
(4) Physical hedging or physically-hedged means holding title to or
acquiring ownership of an asset (for example, by warehouse receipt or
book-entry) solely to manage the risks arising out of permissible
customer-driven derivatives transactions;
(5) Physical settlement or physically-settled means accepting title
to or acquiring ownership of an asset;
(6) Transitory title transfer means accepting and immediately
relinquishing title to an asset; and
(7) Underlying means the reference asset, rate, obligation, or
index on which the payment obligation(s) between counterparties to a
derivative transaction is based.
(c) In general. A national bank may engage in the following
derivatives transactions after notice in accordance with paragraph (d)
of this section, as applicable:
(1) Derivatives transactions with payments based on underlyings a
national bank is permitted to purchase directly as an investment;
(2) Derivatives transactions with any underlying to hedge the risks
arising from bank-permissible activities;
(3) Derivatives transactions as a financial intermediary with any
underlying that are customer-driven, cash-settled, and either
perfectly-matched or portfolio-hedged;
(4) Derivatives transactions as a financial intermediary with any
underlying that are customer-driven, physically-settled by transitory
title transfer, and either perfectly-matched or portfolio-hedged; and
(5) Derivatives transactions as a financial intermediary with any
underlying that are customer-driven, physically-hedged, and either
portfolio-hedged or hedged on a transaction-by-transaction basis, and
provided that:
(i) The national bank does not take physical delivery of any
commodity by receipt of physical quantities of the commodity on bank
premises; and
(ii) Physical hedging activities meet the requirements of paragraph
(e) of this section.
(d) Notice procedure. (1) A national bank must provide notice to
its Examiner-in-Charge prior to engaging in any of the following with
respect to derivatives transactions with payments based on underlyings
that a national bank is not permitted to purchase directly as an
investment:
(i) Engaging in derivatives hedging activities pursuant to
paragraph (c)(2) of this section;
(ii) Expanding the bank's derivatives hedging activities pursuant
to paragraph (c)(2) of this section to include a new category of
underlying for derivatives transactions;
(iii) Engaging in customer-driven financial intermediation
derivatives activities pursuant to paragraph (c)(3), (4), or (5) of
this section; and
(iv) Expanding the bank's customer-driven financial intermediation
derivatives activities pursuant to paragraph (c)(3), (4), or (5) of
this section to include any new category of underlyings.
(2) The notice pursuant to paragraph (d)(1) of this section must be
submitted in writing at least 30 days before the national bank
commences the activity and include the following information:
(i) A detailed description of the proposed activity, including the
relevant underlyings;
(ii) The anticipated start date of the activity; and
(iii) A detailed description of the bank's risk management system
(policies, processes, personnel, and control systems) for identifying,
measuring, monitoring, and controlling the risks of the activity.
(e) Additional requirements for physical hedging activities. (1) A
national bank engaging in physical hedging activities pursuant to
paragraph (c)(5) of this section must hold the underlying solely to
hedge risks arising from derivatives transactions originated by
customers for the customers' valid and independent business purposes.

[[Page 83733]]

(2) The physical hedging activities must offer a cost-effective
means to hedge risks arising from permissible banking activities.
(3) The national bank must not take anticipatory or maintain
residual positions in the underlying except as necessary for the
orderly establishment or unwinding of a hedging position.
(4) The national bank must not acquire equity securities for
hedging purposes that constitute more than 5 percent of a class of
voting securities of any issuer.
(5) With respect to physical hedging involving commodities:
(i) A national bank's physical position in a particular physical
commodity (including, as applicable, delivery point, purity, grade,
chemical composition, weight, and size) must not be more than 5 percent
of the gross notional value of the bank's derivatives that are in that
particular physical commodity and allow for physical settlement within
30 days. Title to commodities acquired and immediately sold by a
transitory title transfer does not count against the 5 percent limit;
(ii) The physical position must more effectively reduce risk than a
cash-settled hedge referencing the same commodity; and
(iii) The physical position hedges a physically-settled customer-
driven commodity derivative transaction(s).
(f) Safe and sound banking practices. A national bank must adhere
to safe and sound banking practices in conducting the activities
described in this section. The bank must have a risk management system
(policies, processes, personnel, and control system) that effectively
manages (identifies, measures, monitors, and controls) these
activities' interest rate, credit, liquidity, price, operational,
compliance, and strategic risks.

0
30. Revise the heading for subpart B to read as follows:

Subpart B--Corporate Practices

0
31. Amend Sec. 7.2000 by:
0
a. Revising the section heading and paragraph (a);
0
b. In paragraph (b):
0
i. Removing the word ``procedures'' wherever it appears and adding in
its place the word ``provisions'';
0
ii. Removing the phrase ``the state in which the main office of the
bank'' and adding in its place the phrase ``any State in which the main
office or any branch of the bank'';
0
iii. Removing the phrase ``the state in which the holding company of
the bank'' and adding in its place the phrase ``any State in which a
holding company of the bank''; and
0
iv. Removing the word ``shall'' and adding in its place the word
``must'';
0
d. Redesignating paragraph (c) as paragraph (d) and revising it; and
0
e. Adding a new paragraph (c).
The addition and revisions are as follows:

Sec. 7.2000 National bank corporate governance.

(a) In general. The corporate governance provisions in a national
bank's articles of association and bylaws and the bank's conduct of its
corporate governance affairs must comply with applicable Federal
banking statutes and regulations and safe and sound banking practices.
* * * * *
(c) Continued use of former holding company State. A national bank
that has elected to follow the corporate governance provisions of the
law of the State in which its holding company is incorporated may
continue to use those provisions even if the bank is no longer
controlled by that holding company.
(d) Request for OCC staff position. A national bank may request the
views of OCC staff on the permissibility of a national bank's adoption
of a particular State corporate governance provision. Requests must
include the following information:
(1) The name of the national bank;
(2) Citation to the State statutes or regulations involved;
(3) A discussion as to whether a similarly situated State bank is
subject to or may adopt the corporate governance provision;
(4) Identification of all Federal banking statutes or regulations
that are on the same subject as, or otherwise have a bearing on, the
subject of the proposed State corporate governance provision; and
(5) An analysis of how the proposed practice is not inconsistent
with applicable Federal statutes or regulations and is not inconsistent
with bank safety and soundness.

0
32. Add Sec. 7.2001 to read as follows:

Sec. 7.2001 National bank adoption of anti-takeover provisions.

(a) In general. Pursuant to Sec. 7.2000(b), a national bank may
adopt anti-takeover provisions included in State corporate governance
law if the provisions are not inconsistent with Federal banking
statutes or regulations and not inconsistent with bank safety and
soundness.
(b) State anti-takeover provisions that are not inconsistent with
Federal banking statutes or regulations. State anti-takeover provisions
that are not inconsistent with Federal banking statutes or regulations
include the following:
(1) Restrictions on business combinations with interested
shareholders. State provisions that prohibit, or that permit the
corporation to prohibit in its certificate of incorporation or other
governing document, the corporation from engaging in a business
combination with an interested shareholder or any related entity for a
specified period of time from the date on which the shareholder first
becomes an interested shareholder, subject to certain exceptions such
as board approval. An interested shareholder is one that owns an amount
of stock specified in the State provision.
(2) Poison pill. State provisions that provide, or that permit the
corporation to provide in its certificate of incorporation or other
governing document, that all the shareholders, other than the hostile
acquiror, have the right to purchase additional stock at a substantial
discount upon the occurrence of a triggering event.
(3) Requiring all shareholder actions to be taken at a meeting.
State provisions that provide, or that permit the corporation to
provide in its certificate of incorporation or other governing
document, that all actions to be taken by shareholders must occur at a
meeting and that shareholders may not take action by written consent.
(4) Limits on shareholders' authority to call special meetings.
State provisions that provide, or that permit the corporation to
provide in its certificate of incorporation or other governing
document, that:
(i) Only the board of directors, and not the shareholders, have the
right to call special meetings of the shareholders; or
(ii) If shareholders have the right to call special meetings, a
high percentage of shareholders is needed to call the meeting.
(5) Shareholder removal of a director only for cause. State
provisions that provide, or that permit the corporation to provide in
its certificate of incorporation or other governing document, that
shareholders may remove a director only for cause, and not both for
cause and without cause.
(c) State anti-takeover provisions that are inconsistent with
Federal banking statutes or regulations. The following State anti-
takeover provisions are inconsistent with Federal banking statutes or
regulations:
(1) Supermajority voting requirements. State provisions that
require, or that permit the corporation to require in its certificate
of incorporation

[[Page 83734]]

or other governing document, a supermajority of the shareholders to
approve specified matters are inconsistent when applied to matters for
which Federal banking statutes or regulations specify the required
level of shareholder approval.
(2) Restrictions on a shareholder's right to vote all the shares it
owns. State provisions that prohibit, or that permit the corporation in
its certificate of incorporation or other governing document to
prohibit, a person from voting shares acquired that increase their
percentage of ownership of the company's stock above a certain level
are inconsistent when applied to shareholder votes governed by 12
U.S.C. 61.
(d) Bank safety and soundness--(1) In general. Except as provided
in paragraph (d)(2) of this section, any State corporate governance
provision, including anti-takeover provisions, that would render more
difficult or discourage an injection of capital by purchase of bank
stock, a merger, the acquisition of the bank, a tender offer, a proxy
contest, the assumption of control by a holder of a large block of the
bank's stock, or the removal of the incumbent board of directors or
management is inconsistent with bank safety and soundness if:
(i) The bank is less than adequately capitalized (as defined in 12
CFR part 6);
(ii) The bank is in troubled condition (as defined in 12 CFR
5.51(c)(7));
(iii) Grounds for the appointment of a receiver under 12 U.S.C.
191, as determined by the OCC, are present; or
(iv) The bank is otherwise in less than satisfactory condition, as
determined by the OCC.
(2) Exception. Anti-takeover provisions are not inconsistent with
bank safety and soundness if, at the time the bank adopts the
provisions:
(i) The bank is not subject to any of the conditions in paragraph
(d)(1) of this section; and
(ii) The bank includes, in its articles of association or its
bylaws, as applicable pursuant to paragraph (f) of this section, a
limitation that would make the provisions ineffective if:
(A) The conditions in paragraph (d)(1) of this section exist; or
(B) The OCC otherwise directs the bank not to follow the provision
for supervisory reasons.
(e) Case-by-case review--(1) OCC determination. Based on the
substance of the provision or the individual circumstances of a
national bank, the OCC may determine that a State anti-takeover
provision, as proposed or adopted by a bank, is:
(i) Inconsistent with Federal banking statutes or regulations,
notwithstanding paragraph (b) of this section; or
(ii) Inconsistent with bank safety and soundness other than as
provided in paragraph (d) of this section.
(2) Review. The OCC may initiate a review, or a bank may request
OCC review pursuant to Sec. 7.2000(d), of a State anti-takeover
provision.
(f) Method of adoption for anti-takeover provisions--(1) Board and
shareholder approval. A national bank must follow the provisions for
approval by the board of directors and approval of shareholders for the
adoption of an anti-takeover provision in the State corporate
governance law it has elected to follow. However, if the provision is
included in the bank's articles of association, the bank's shareholders
must approve the amendment of the articles pursuant to 12 U.S.C. 21a,
even if the State law does not require approval by the shareholders.
(2) Documentation. If the State corporate governance law requires
the anti-takeover provision to be in the company's articles of
incorporation, certificate of incorporation, or similar document, the
national bank must include the provision in its articles of
association. If the State corporate governance law does not require the
provision to be in the company's articles of incorporation, certificate
of incorporation, or similar document, but allows it to be in the
bylaws, then the national bank must include the provision in either its
articles of association or in its bylaws, provided, however, that if
the State corporate governance law requires shareholder approval for
changes to the corporation's bylaws, then the national bank must
include the provision in its articles of association.

0
33. Amend Sec. 7.2002 by:
0
a. Revising the section heading;
0
b. Removing the word ``bank's'' and adding in its place the phrase
``national bank's'' wherever it appears; and
0
c. Adding the phrase ``for shareholder voting'' after the word
``proxy'' wherever it appears.
The revision reads as follows:

Sec. 7.2002 National bank director or attorney as proxy.

* * * * *

0
34. Revise Sec. 7.2003 to read as follows:

Sec. 7.2003 National bank shareholder meetings; Board of directors
meetings.

(a) Notice of shareholders' meetings. A national bank must mail
shareholders notice of the time, place, and purpose of all
shareholders' meetings at least 10 days prior to the meeting by first
class mail, unless the OCC determines that an emergency circumstance
exists. Where a national bank is a wholly-owned subsidiary, the sole
shareholder is permitted to waive notice of the shareholder's meeting.
The articles of association, bylaws, or law applicable to a national
bank may require a longer period of notice.
(b) Annual meeting for election of directors. When the day fixed
for the regular annual meeting of the shareholders falls on a legal
holiday in the State in which the bank is located, the shareholders'
meeting must be held, and the directors elected, on the next following
banking day.
(c) Virtual participation at shareholder meetings--(1) In general.
A national bank may provide for telephonic or electronic participation
at shareholder meetings.
(2) Procedures. A national bank must follow the procedures for
telephonic or electronic participation in a shareholder meeting of the
corporate governance provisions it has elected to follow pursuant to
Sec. 7.2000(b), if those elected provisions include telephonic or
electronic participation procedures; the Delaware General Corporation
Law, Del. Code Ann. Tit. 8 (1991, as amended 1994, and as amended
thereafter); or the Model Business Corporation Act, provided, however,
that such procedures are not inconsistent with applicable Federal
statutes and regulations and safety and soundness. The national bank
must indicate the use of these procedures in its bylaws.
(d) Virtual participation at board of directors meetings. A
national bank may provide for telephonic or electronic participation at
a meeting of its board of directors.

0
35. Revise the heading for Sec. 7.2004 to read as follows:

Sec. 7.2004 Honorary national bank directors or advisory boards.

* * * * *

0
36. Amend Sec. 7.2005 by:
0
a. Revising the section heading and the heading in paragraph (a); and
0
b. Removing in paragraph (c)(3)(ii), the word ``shall'' and adding in
its place the word ``must''.
The revision reads as follows:

Sec. 7.2005 Ownership of stock necessary to qualify as director of a
national bank.

(a) In general. * * *
* * * * *

0
37. Amend Sec. 7.2006 by:
0
a. Revising the section heading; and
0
b. In the first sentence, removing the phrase ``When electing
directors, a shareholder shall'' and adding in its

[[Page 83735]]

place the phrase ``When electing national bank directors, a shareholder
must''.
The revision reads as follows:

Sec. 7.2006 Cumulative voting in election of national bank
directors.

* * * * *

0
38. Amend Sec. 7.2007 by:
0
a. Revising the section heading;
0
b. In paragraph (a), adding the word ``national'' before the phrase
``bank's articles of association'' in the first sentence; and
0
c. In paragraph (b), removing the phrase ``If a vacancy occurs on the
board of directors,'' and adding in its place the phrase ``If a vacancy
occurs on the national bank's board of directors,''.
The revision reads as follows:

Sec. 7.2007 Filling vacancies and increasing board of directors of a
national bank other than by shareholder action.

* * * * *

0
39. Amend Sec. 7.2008 by:
0
a. Revising the section heading and paragraph (a); and
0
b. In paragraph (b):
0
i. Removing the phrase ``Each director shall execute'' and adding in
its place the phrase ``Each national bank director must execute'' in
the first sentence; and
0
ii. Removing the phrase ``A director shall take'' and adding in its
place the phrase ``A national bank director must take'' in the second
sentence.
The revision reads as follows:

Sec. 7.2008 Oath of national bank directors.

(a) Administration of the oath. The oath of directors must be
administered by:
(1) A notary public, including one who is a director but not an
officer of the national bank; or
(2) Any person, including one who is a director but not an officer
of the national bank, having an official seal and authorized by the
State to administer oaths.
* * * * *

0
40. Amend Sec. 7.2009 by:
0
a. Revising the section heading; and
0
b. Removing the word ``shall'' and adding in its place the word
``must''.
The revision reads as follows:

Sec. 7.2009 Quorum of a national bank board of directors; proxies
not permissible.

* * * * *

0
41. Amend Sec. 7.2010 by:
0
a. Revising the section heading; and
0
b. Removing the phrase ``affairs of the bank shall'' and adding in its
place the phrase ``affairs of a national bank must'' in the first
sentence.
The revision reads as follows:

Sec. 7.2010 National bank directors' responsibilities.

* * * * *

0
42. Revise the heading of Sec. 7.2011 to read as follows:

Sec. 7.2011 National bank compensation plans.

* * * * *

0
43. Revise Sec. 7.2012 to read as follows:

Sec. 7.2012 President as director of a national bank.

Pursuant to 12 U.S.C. 76, the person serving as, or in the function
of, president of a national bank, regardless of title, must be a member
of the board of directors. A director other than the person serving as,
or in the function of, president may be elected chairman of the board.

0
44. Revise the heading of Sec. 7.2013 to read as follows:

Sec. 7.2013 Fidelity bonds covering national bank officers and
employees.

* * * * *

0
45. Revise Sec. 7.2014 to read as follows:

Sec. 7.2014 Indemnification of national bank and Federal savings
association institution-affiliated parties.

(a) Indemnification under State law. Subject to the limitations of
paragraph (b) of this section, a national bank or Federal savings
association may indemnify an institution-affiliated party for damages
and expenses, including the advancement of expenses and legal fees, in
accordance with the law of the State the bank or savings association
has designated for its corporate governance pursuant to Sec. 7.2000(b)
(for national banks), 12 CFR 5.21(j)(3)(ii) (for Federal mutual savings
associations), or 12 CFR 5.22(j)(2)(ii) (for Federal stock savings
associations), provided such payments are consistent with safe and
sound banking practices. The term ``institution-affiliated party'' has
the same meaning as set forth at 12 U.S.C. 1813(u).
(b) Administrative proceedings or civil actions initiated by
Federal banking agencies. With respect to an administrative proceeding
or civil action initiated by any Federal banking agency, a national
bank or Federal savings association may only make or agree to make
indemnification payments to an institution-affiliated party that are
reasonable and consistent with the requirements of 12 U.S.C. 1828(k)
and 12 CFR chapter III.
(c) Written agreement required for advancement. Before advancing
funds to an institutional-affiliated party under this section, a
national bank or Federal savings association must obtain a written
agreement that the institution-affiliated party will reimburse the bank
or savings association, as appropriate, for any portion of that
indemnification that the institution-affiliated party is ultimately
found not to be entitled to under 12 U.S.C. 1828(k) and 12 CFR chapter
III, except to the extent that the bank's or savings association's
expenses have been reimbursed by an insurance policy or fidelity bond.
(d) Insurance premiums. A national bank or Federal savings
association may provide for the payment of reasonable premiums for
insurance covering the expenses, legal fees, and liability of
institution-affiliated parties to the extent that the expenses, fees,
or liability could be indemnified under this section.

0
46. Revise the heading of Sec. 7.2015 to read as follows:

Sec. 7.2015 National bank cashier.

* * * * *

0
47. Amend Sec. 7.2016 by:
0
a. Revising the section heading;
0
b. Redesignating paragraphs (a) and (b) as paragraphs (a)(1) and (2),
respectively, and adding a heading for paragraph (a); and
0
c. Adding a new paragraph (b).
The revision and additions read as follows:

Sec. 7.2016 Restricting transfer of national bank stock and record
dates; stock certificates.

(a) Restricting transfer of stock and record dates--* * *
(b) Bank stock certificates. (1) A national bank may prescribe the
manner in which its stock must be transferred in its bylaws or articles
of association. A bank issuing stock in certificated form must comply
with the requirements of 12 U.S.C. 52, including as to:
(i) The name and location of the bank;
(ii) The name of the holder of record of the stock represented
thereby;
(iii) The number and class of shares which the certificate
represents;
(iv) If the bank issues more than one class of stock, the
respective rights, preferences, privileges, voting rights, powers,
restrictions, limitations, and qualifications of each class of stock
issued (unless incorporated by reference to the articles of
association);
(v) Signatures of the president and cashier of the bank, or such
other officers as the bylaws of the bank provide; and
(vi) The seal of the bank.
(2) The requirements of paragraph (b)(1)(v) of this section may be
met through the use of electronic means or by facsimile.

Sec. Sec. 7.2017 and 7.2018 [Removed]

0
48. Remove Sec. Sec. 7.2017 and 7.2018.

[[Page 83736]]

0
49. Revise the heading of Sec. 7.2019 to read as follows:

Sec. 7.2019 Loans secured by a national bank's own shares.

* * * * *

Sec. 7.2020 [Removed]

0
50. Remove Sec. 7.2020.

0
51. Revise the heading of Sec. 7.2021 to read as follows:

Sec. 7.2021 National bank preemptive rights.

* * * * *

0
52. Amend Sec. 7.2022 by:
0
a. Revising the section heading; and
0
b. Removing the word ``state'' and adding in its place the word
``State''.
The revision reads as follows:

Sec. 7.2022 National bank voting trusts.

* * * * *

0
53. Revise the heading of Sec. 7.2023 to read as follows:

Sec. 7.2023 National bank reverse stock splits.

* * * * *

Sec. 7.2024 [Amended]

0
54. Amend Sec. 7.2024(a) and (c) by removing the word ``shall'' and
adding in its place the word ``must'' wherever it appears.

0
55. Add Sec. 7.2025 to read as follows:

Sec. 7.2025 Capital stock-related activities of a national bank.

(a) In general. A national bank must obtain the necessary
shareholder approval required by 12 U.S.C. 51a, 57, or 59 for any
change in its permanent capital. An increase or decrease in the amount
of a national bank's common or preferred stock is a change in permanent
capital subject to the notice and approval requirements of 12 CFR 5.46
and applicable law. A national bank may obtain the required shareholder
approval of changes in permanent capital, as provided in paragraphs
(b), (c), and (d) of this section.
(b) Issuance of previously approved and authorized common stock. In
compliance with 12 U.S.C. 57, a national bank may issue common stock up
to an amount previously approved and authorized in the national bank's
articles of association by holders of two-thirds of the national bank's
shares without obtaining additional shareholder approval for each
subsequent issuance within the authorized amount.
(c) Issuance, repurchase, and redemption of preferred stock
pursuant to certain procedures. Subject to the requirements of 12
U.S.C. 51a and 59, a national bank may adopt procedures to authorize
the board of directors to issue, determine the terms of, repurchase,
and redeem one or more series of preferred stock, if permitted by the
corporate governance provisions adopted by the bank under Sec. 7.2000.
To satisfy the shareholder approval requirements of 12 U.S.C. 51a and
59, the adoption of such procedures must be approved by shareholders in
advance through an amendment to the national bank's articles of
association. Any amendment to a national bank's articles of association
that authorizes both the issuance and the repurchase and redemption of
shares must be approved by holders of two-thirds of the national bank's
shares.
(d) Share repurchase programs. Subject to the requirements of 12
U.S.C. 59, a national bank may establish a program for the repurchase,
from time to time, of the national bank's common or preferred stock, if
permitted by the corporate governance provisions adopted by the bank
under Sec. 7.2000. To satisfy the shareholder approval requirement of
12 U.S.C. 59, the repurchase program must be approved in advance by the
holders of two-thirds of the national bank's shares, including through
an amendment to the national bank's articles of association that
authorizes the board of directors to repurchase the national bank's
common or preferred stock from time to time under board-determined
parameters that can limit the frequency, type, aggregate limit, or
purchase price of repurchases.
(e) Preferred Stock Features. A national bank's preferred stock may
be cumulative or non-cumulative and may or may not have voting rights
on one or more series.

0
56. Revise the heading for subpart C to read as follows:

Subpart C--National Bank and Federal Savings Association Operations

0
57. Revise Sec. 7.3000 to read as follows:

Sec. 7.3000 National bank and Federal savings association operating
hours and closings.

(a) Operating hours. The board of directors of a national bank or
Federal savings association, or an equivalent person or committee of a
Federal branch or agency, should review its hours of operations for
customers and, independently of any other bank, savings association, or
Federal branch or agency, take appropriate action to establish a
schedule of operating hours for customers.
(b) Emergency closings declared by the Comptroller. Pursuant to 12
U.S.C. 95(b)(1) and 1463(a)(1)(A), the Comptroller of the Currency
(Comptroller), may declare any day a legal holiday if emergency
conditions exist. That day is a legal holiday for national banks,
Federal savings associations, and Federal branches or agencies in the
affected geographic area (i.e., throughout the United States, in a
State, or in part of a State), and national banks, Federal savings
associations, and Federal branches and agencies may temporarily limit
or suspend operations at their affected offices, unless the Comptroller
by written order directs otherwise. Emergency conditions may be caused
by acts of nature or of man and may include natural and other
disasters, public health or safety emergencies, civil and municipal
emergencies, and cyber threats or other unauthorized intrusions (e.g.,
severe flooding, a pandemic, terrorism, a cyber-attack on bank systems,
or a power emergency declared by a local power company or government
requesting that businesses in the affected area close). The Comptroller
may issue a proclamation authorizing the emergency closing in
anticipation of the emergency condition, at the time of the emergency
condition, or soon thereafter. In the absence of a Comptroller
declaration of a bank holiday, a national bank, Federal savings
associations, or Federal branch or agency may choose to temporarily
close offices in response to an emergency condition. The national bank,
Federal savings associations, or Federal branch or agency should notify
the OCC of such temporary closure as soon as feasible.
(c) Emergency and ceremonial closings declared by a State or State
official. In the event a State or a legally authorized State official
declares any day to be a legal holiday for emergency or ceremonial
reasons in that State or part of the State, that same day is a legal
holiday for national banks, Federal savings associations, and Federal
branches or agencies or their offices in the affected geographic area.
National banks, Federal savings associations, and Federal branches or
agencies or their affected offices may close their affected offices or
remain open on such a State-designated holiday, unless the Comptroller
by written order directs otherwise.
(d) Liability. A national bank, Federal savings association, or
Federal branch or agency should assure that all liabilities or other
obligations under the applicable law due to its closing are satisfied.
(e) Definition. For the purpose of this subpart, the term ``State''
means any of the several States, the District of Columbia, the
Commonwealth of Puerto

[[Page 83737]]

Rico, the Northern Mariana Islands, Guam, the Virgin Islands, American
Samoa, the Trust Territory of the Pacific Islands, or any other
territory or possession of the United States.

Sec. 7.3001 [Amended]

0
58. Amend Sec. 7.3001 by:
0
a. In paragraph (a)(1), removing the phrase ``Lease excess space'' and
adding in its place the phrase ``Consistent with Sec. 7.1024, lease
excess space'';
0
b. In paragraph (c) introductory text, removing the word ``shall'' and
adding in its place the word ``must''; and
0
c. In paragraph (c)(3), removing the word ``state'' and adding in its
place the word ``State''.

Sec. Sec. 7.4003 through 7.4005 [Removed]

0
59. Remove Sec. Sec. 7.4003 through 7.4005.

0
60. Revise Sec. 7.5001 to read as follows:

Sec. 7.5001 Electronic activities that are incidental to the business
of banking.

In addition to the electronic activities specifically permitted in
Sec. 7.5004 (sale of excess electronic capacity and by-products) and
Sec. 7.5006 (incidental non-financial data processing), the OCC has
determined that the following electronic activities are incidental to
the business of banking, pursuant to Sec. 7.1000. This list of
activities is illustrative and not exclusive; the OCC may determine
that other activities are permissible pursuant to this authority.
(a) Website development where incidental to other banking services;
(b) Internet access and email provided on a non-profit basis as a
promotional activity;
(c) Advisory and consulting services on electronic activities where
the services are incidental to customer use of electronic banking
services; and
(d) Sale of equipment that is convenient or useful to customer's
use of related electronic banking services, such as specialized
terminals for scanning checks that will be deposited electronically by
wholesale customers of banks under the Check Clearing for the 21st
Century Act, Public Law 108-100 (12 U.S.C. 5001-5018) (the Check 21
Act).

PART 145--FEDERAL SAVINGS ASSOCIATIONS--OPERATIONS

0
61. The authority citation for part 145 continues to read as follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1828, 5412(b)(2)(B).

Sec. 145.121 [Removed]

0
62. Remove Sec. 145.121.

PART 160--LENDING AND INVESTMENT

0
63. The authority citation for part 160 continues to read as follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1701j-3, 1828,
3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106.

Sec. 160.50 [Removed]

0
64. Remove Sec. 160.50.

Sec. 160.120 [Removed]

0
65. Remove Sec. 160.120.

Brian P. Brooks,
Acting Comptroller of the Currency.
[FR Doc. 2020-26225 Filed 12-21-20; 8:45 am]
BILLING CODE 4810-33-P