Activities and Investments of Insured State Banks

AGENCY:

Federal Deposit Insurance Corporation (FDIC).

ACTION:

Interim final rule; request for comment.

SUMMARY:

The FDIC is adopting a rule on an interim basis to implement certain provisions of the Gramm-Leach-Bliley Act. The interim final rule impacts the FDIC's rules and regulations governing activities and investments of insured state banks. Under the rule, FDIC insured state nonmember banks must file a notice before they may conduct activities as principal through a subsidiary that a national bank can conduct only in a financial subsidiary. State nonmember banks must comply with four requirements to carry out these activities. Also, state nonmember banks along with their insured depository institution affiliates must have received a rating of not less than satisfactory under the Community Reinvestment Act. Under the rule, the FDIC may impose standards and prudential safeguards to insulate the bank from liability for activities of the subsidiary.

DATES:

The interim final rule is effective March 11, 2000. Comments must be received by May 22, 2000.

ADDRESSES:

Send written comments to Robert E. Feldman, Executive Secretary, Attention: Comments/OES, Federal Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments may be hand delivered to the guard station at the rear of the 17th Street Building (located on F Street), on business days between 7:00 a.m. and 5:00 p.m. Fax number (202) 898-3838; Internet Address: comments @fdic.gov. Comments may be inspected and photocopied in the FDIC Public Information Center, Room 100, 801 17th Street, N.W., Washington, D.C. 20429, between 9:00 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT:

Curtis Vaughn, Examination Specialist ((202) 898-6759), Division of Supervision; Linda L. Stamp, Counsel ((202) 898-7310) or Janet V. Norcom, Counsel ((202) 898-8886), Legal Division, FDIC, 550 17th Street, N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. Financial Subsidiary Activities

On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act (G-L-B Act) (Pub. L. 106-102) into law. Section 121(d) of the G-L-B Act amended the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1811 et seq.) by adding a new section 46 (12 U.S.C. 1831w). New section 46(a) of the FDI Act provides that an insured state bank may control or hold an interest in a subsidiary that engages as principal in activities that would be permissible for a national bank to conduct only through a “financial subsidiary,” subject to certain conditions.

A financial subsidiary is a new type of subsidiary for national banks, governed by new section 5136A of the Revised Statutes as created under section 121(a) of the G-L-B Act. Section 5136A permits a financial subsidiary to engage in specified, newly authorized activities that are financial in nature and in activities that are incidental to financial activities if the bank and the subsidiary meet certain requirements and comply with stated safeguards. A financial subsidiary also may combine these financial subsidiary activities with activities that are permissible for national banks to engage in directly. The financial subsidiary activities include many of the activities which are authorized for the new “financial holding companies” as laid out in new section 4(k) of the Bank Holding Company Act (BHCA) (12 U.S.C. 1841 et seq.) as created by section 103(a) of the G-L-B Act. Section 5136A also permits the Secretary of the Treasury (in consultation with the Board of Governors of the Federal Reserve System) to determine that additional activities are authorized for a financial subsidiary.

A state bank seeking to engage as principal in a financial subsidiary activity under section 46(a) must comply with four conditions listed in section 46(a) itself. In addition, section 103(a) of the G-L-B Act added a new subsection (4)(l)(2) to the BHCA (12 U.S.C. 1843(l)(2)), which contains a mandatory Community Reinvestment Act (CRA) (12 U.S.C. 2901 et seq.) requirement enforceable by the FDIC. This differs from the situation before enactment of the G-L-B Act, when some of these activities were impermissible for a national bank and the FDIC reviewed such activities under section 24 of the FDI Act (12 U.S.C. 1831a) as implemented in part 362 of the FDIC's rules and regulations. Among other things, section 24 provides that a state bank subsidiary may not engage as principal in activities which are not permissible for a subsidiary of a national bank, unless the state bank meets its applicable capital requirements and the FDIC determines that the activity does not pose a significant risk to the appropriate deposit insurance fund.

Certain activities which the FDIC has addressed under subpart A of part 362, such as general securities underwriting, are now authorized for a financial subsidiary of a national bank. This means such activities will now be analyzed under section 46(a), and the restrictions the FDIC previously outlined in subpart A of part 362 will not apply to new state bank subsidiaries (or to existing state bank subsidiaries engaging in new financial activities). Existing state bank subsidiaries are grandfathered by section 46(b). 12 U.S.C. 1831w(b).

Where section 5136A of the Revised Statutes specifically prohibits financial subsidiaries from engaging in certain activities as principal, such as real estate development or investment, these activities are outside the scope of section 46(a) and will continue to be dealt with under section 24 and subpart A of part 362. Also, as the Secretary of the Treasury exercises his or her authority in the future to determine that additional activities are authorized for a financial subsidiary, such activities will cease being governed by section 24 or subpart A of part 362, and will begin being governed by section 46(a).

II. Status of Rulemakings Addressing State Bank Activities

Among other things, subpart B of part 362 creates safety and soundness guidelines for an insured state nonmember bank subsidiary which engages in real estate investment activities that would be permissible for a subsidiary of a national bank but not permissible for a national bank directly. On December 1, 1998, the FDIC proposed an amendment to subpart B that would have added safety and soundness guidelines to govern an insured state nonmember bank subsidiary which engages in the public sale, distribution or underwriting of stocks, bonds, debentures, notes or other securities activity that would be permissible for a subsidiary of a national bank but not permissible for a national bank directly. These real estate and securities provisions were intended to address pending or approved applications under regulations issued by the Office of the Comptroller of the Currency (OCC) which permitted national banks to request OCC approval to engage in certain activities through subsidiaries, even though the activities were not permissible for the national bank itself. In an effort to be proactive in terms of future approvals of activities by the OCC under these regulations, the FDIC also sought comment on a requirement that a notice be filed with the FDIC before an insured state nonmember bank subsidiary engages in any other activity permissible for a subsidiary of a national bank that is not permissible for the parent national bank directly. Now that the OCC is proposing to eliminate its regulations and the G-L-B Act, through section 5136A and section 46(a), has established a new analytical framework, the FDIC will not be pursuing these amendments to subpart B.

The FDIC's December 1, 1998 proposal to amend subpart B also included a proposal to consolidate the remaining provisions of the FDIC's securities activities regulation, § 337.4, into subpart B. In light of the changes made as a result of the G-L-B Act, these revisions will be technical in nature. The FDIC will deal with those aspects of its proposal when the FDIC finalizes the interim final rule adopted in this rulemaking, or at a later time.

The interim final rule adopted in this rulemaking establishes conditions and procedures that apply when a subsidiary of a state nonmember bank seeks to engage as principal in financial activities as authorized under section 46(a). The interim rule contains a general provision advising state nonmember banks of the inapplicability of subpart A of part 362, but the FDIC has not published revised regulatory text modifying subpart A provisions addressing those financial activities which are now addresed by section 46(a). When the FDIC adopts a final version of the interim final rule proposed in this rulemaking, the FDIC will revise current subpart A of part 362 to modify treatment of those activities, such as securities underwriting, which will now be treated under section 46(a) rather than section 24 and subpart A. Also, the real estate provisions of subpart B of part 362 are no longer of any effect, and will be removed. The FDIC invites public comment on such revisions.

III. Description of the Interim Final Rule

The implementation of section 46(a) is lodged in a new subpart E of part 362. Section 362.16 sets out the purpose and scope of the subpart, including the scope of the activities covered. Subpart E will apply to any “financial subsidiary activity,” which is defined as an activity which has been authorized for a financial subsidiary of a national bank under section 5136A of the Revised Statutes and which may be conducted by a national bank only through a financial subsidiary. Similar to subpart A of part 362, the purpose and scope section also clarifies what is meant by “as principal” activities, and specifies that the financial subsidiary activity also must be in conformance with other applicable state and federal law.

Sections 362.18(a)-(c) reiterate the four statutory conditions applicable to financial subsidiary activities under section 46(a) as well as the mandatory CRA requirement under section 4(l) of the BHCA. Section 362.18(a) also provides the FDIC with a mechanism which gives the FDIC an opportunity to impose safety and soundness constraints or prudential safeguards on insured state nonmember bank subsidiaries that engage in financial subsidiary activities as principal. If a bank meeting the statuory requirements chooses to engage in such activities, then the bank must file a notice with the FDIC 30 days before the bank's subsidiary may engage in such activities. If the FDIC does not object, the bank's subsidiary may commence the activity. This 30-day advance notice is designed to allow the FDIC time to review the activity and consider whether safety and soundness considerations make it prudent that additional conditions be placed on the conduct of the activity.

The four statutory conditions contained in section 46(a) and reiterated in § 362.18(a) are:

• Each insured depository institution affiliate of the state bank must be well capitalized, and the state bank must be well capitalized after deducting the bank's investment, including retained earnings, in all subsidiaries engaged in financial subsidiary activities as principal.
• The state bank must disclose the capital deduction and the separate assets and liabilities of the subsidiary in any published financial statement.
• The state bank must comply with the financial and operational safeguards required by section 5136A(d) of the Revised Statutes of the United States, which require operational safeguards to separate the bank from the risks of the subsidiary.
• The state bank must comply with sections 23A and 23B of the Federal Reserve Act as amended by section 121(b) of the G-L-B Act, requiring certain transactional restrictions to be observed.

Section 362.18(b) provides that the bank must comply with the above requirements at the time of filing of its notice and continue to comply with these four requirements as long as the bank's subsidiary is engaged in the financial activity. In addition, as specified in § 362.18(c), a subsidiary of an insured state nonmember bank may not commence any financial subsidiary activity as principal if the state bank or any of the state bank's insured depository institution affiliates has received at each one's most recent examination a CRA rating of less than a satisfactory record of meeting community credit needs.

The prior notice procedure under § 362.18 will give the FDIC an opportunity to review a state nonmember bank's proposal and, if necessary, impose additional prudential safeguards to insulate the bank from liability for the activities of the subsidiary. The FDIC holds authority to impose such safeguards under the FDIC's supervisory authority in section 8 of the FDI Act (12 U.S.C. 1818). In addition, section 114(c) of the G-L-B Act (12 U.S.C. 1828a(c)) confirms the FDIC's prudential authority to govern the relationships or transactions between a state nonmember bank and its subsidiaries. Although one of the four conditions imposed by section 46(a) itself requires the bank to have financial and operational safeguards to separate the bank from risks of the subsidiary, the FDIC believes that it is still necessary that the FDIC review the activities that state nonmember banks propose to undertake to evaluate whether the bank's financial and operational safeguards are sufficient. The financial and operational safeguard requirement in section 46(a) cross-references to the same requirement as imposed on financial subsidiaries of national banks under section 5136A(d) of the Revised Statutes, but the OCC has not released any guidance or interpretations of these financial and operational safeguards. The FDIC's review is likely to be especially important in the area of securities underwriting. The FDIC has a long history of imposing prudential safeguards to protect the bank from liability from subsidiaries and affiliates that engage in securities underwriting.

Section 362.18(d) incorporates the grandfather provided under section 46(b), permitting insured state banks to retain their interests in subsidiaries lawfully held before the date of enactment of the G-L-B Act. Section 362.18(d) also clearly states that state banks may not apply to the FDIC under section 24 or subpart A of part 362 (as well as § 337.4 of the FDIC's rules) for approval to engage in a financial subsidiary activity subject to restrictions different than are contemplated under section 46.

The FDIC also has amended its notice processing rules at 303.122(a) to add a reference to the new notices required by the interim final rule.

IV. Administrative Procedure Act

The FDIC will make this interim final rule effective on March 11, 2000 without first reviewing public comments. Pursuant to 5 U.S.C. 553, the FDIC finds that it is impracticable to review public comments prior to the effective date of the interim final rule, and that there is good cause to make the interim rule effective on March 11, 2000, due to the fact that the rule sets forth procedures to implement statutory changes that will become effective on March 11, 2000. The FDIC is seeking public comment on all aspects of the interim final rule and will amend the rule as appropriate after reviewing the comments. The FDIC is specifically seeking comment on whether the FDIC should set forth specific standards applicable to activities conducted under the new section 46 of the FDI Act as it has done in subpart A with respect to activities conducted under section 24 of the FDI Act.

V. Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq.), the FDIC may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid Office of Management and Budget (OMB) control number. The collection of information contained in this rule has been submitted to OMB for review. OMB will take action within 60 days of this Federal Register publication. The FDIC will publish notice if OMB takes an action other than approval of the collection. The FDIC invites comment on:

(1) Whether the collection of information contained in the regulation is necessary for the proper performance of the FDIC's functions, including whether the information has practical utility;

(2) The accuracy of the estimate of the burden of the information collection;

(3) Ways to enhance the quality, utility, and clarity of the information to be collected;

(4) Ways to minimize the burden of the information collections on respondents, including the use of automated collection techniques or other forms of information technology; and

(5) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

For further information on the Paperwork Reduction Act aspect of this rule, contact Steven F. Hanft at FDIC Clearance Officer, Office of the Executive Secretary, Federal Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429, (202) 898-3907.

Title of the collection: The interim final rule modifies an information collection previously approved by OMB titled “Activities and Investments of Insured State Banks” under control number 3064-0111.

Summary of the collection: Generally, the collection includes the description of the activity in which an insured state bank or its subsidiary proposes to engage that would be impermissible absent the FDIC's consent or nonobjection, and information about the relationship of the activity to the bank's and/or subsidiary's operation and compliance with applicable laws and regulations.

Need and Use of the information: The FDIC uses the information to determine whether to grant consent or provide a nonobjection for the insured state bank or its subsidiary to engage in the activity that otherwise would be impermissible. The FDIC's uses its authority under section 8 of the FDI Act and 12 CFR part 362.

Changes to the collection: The interim final rule will modify the collection by adding at § 362.18(a) the requirement of a notice to the FDIC before the state nonmember bank engages through a subsidiary in activities that are authorized for a financial subsidiary of a national bank under section 5136A of the Revised Statutes but are not permissible for the national bank itself. The contents of the notice are described at § 303.121(b).

Respondents: Banks or their subsidiaries desiring to engage in activities that would be impermissible absent the FDIC's consent or nonobjection.

Estimated annual burden resulting from this rulemaking:

Frequency of response: Occasional.

Number of responses: 1.

Average number of hours to prepare a response: 8 hours.

Total annual burden: 8 hours.

VI. Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the Regulatory Flexibility Act, the FDIC certifies that this interim final rule will not have a significant economic impact on a substantial number of small entities. As noted above in connection with the Paperwork Reduction Act, the FDIC estimates that the incidences in which insured state nonmember banks will be required to file a notice under the rule will be infrequent and will not require significant time to complete. Furthermore, the interim final rule streamlines requirements for insured state nonmember banks. It simplifies the requirements that apply when insured state nonmember banks conduct certain activities through subsidiaries. Whenever possible, the interim final rule clarifies the expectations of the FDIC when it requires notices or applications to consent to activities by insured state banks. The interim final rule also will make it easier for small insured state banks to locate the rules that apply to their investments.

VII. Assessment of Impact of Federal Regulation on Families

The FDIC has determined that this regulation will not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act, 1999, enacted as part of the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999 (Pub. L. 105-277, 112 Stat. 2681).

VIII. Congressional Review Act

The OMB has determined that this interim final rule is not a “major rule” within the meaning of the Congressional Review Act (5 U.S.C. 801 et seq.). The FDIC will file the appropriate reports with Congress and the General Accounting Office so that this interim final rule can be reviewed.

List of Subjects

12 CFR Part 303

• Administrative practice and procedure
• Authority delegations (Government agencies)
• Banks, banking
• Bank deposit insurance
• Reporting and recordkeeping requirements
• Savings associations

12 CFR Part 362

• Administrative practice and procedure
• Authority delegations (Government agencies)
• Bank deposit insurance
• Banks, banking
• Insured depository institutions
• Investments
• Reporting and record keeping requirements
• Savings associations

For the reasons set forth above and under the authority of 12 U.S.C. 1819(a)(Tenth), the FDIC Board of Directors hereby amends 12 CFR chapter III as follows:

PART 303—FILING PROCEDURES AND DELEGATIONS OF AUTHORITY

1. The authority citation for part 303 is revised to read as follows:

Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817, 1818, 1819 (Seventh and Tenth), 1820, 1823, 1828, 1828a, 1831a, 1831e, 1831 o, 1831p-1, 1831w, 1835a, 1843(l), 3104, 3105, 3108; 3207; 15 U.S.C. 1601-1607.

2. Section 303.120 is revised to read as follows:

3. Section 303.121 is revised to read as follows:

4. In § 303.122, the first sentence of paragraph (a) is revised to read as follows:

5. In § 303.123, paragraph (b) is revised to read as follows:

PART 362—ACTIVITIES OF INSURED STATE BANKS AND INSURED SAVINGS ASSOCIATIONS

6. The authority citation for part 362 is revised to read as follows:

Authority: 12 U.S.C. 1816, 1818, 1819(a) (Tenth), 1828(m), 1828a, 1831a, 1831e, 1831w, 1843(l) .

7. A new subpart E is added as follows:

Subpart E—Financial Subsidiary Activities of Insured State Nonmember Banks

By order of the Board of Directors.