Federal Deposit Insurance Corporation

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federal registerTuesdayDecember 1, 1998Part IIIFederal DepositInsuranceCorporation12 CFR Parts 303, 337, and 362Activities of Insured State Banks andInsured Savings Associations; Proposedand Final Rules

66276Federal Register / Vol. 63, No. 230 / Tuesday, December 1, 1998 / Rules and RegulationsFEDERAL DEPOSIT INSURANCECORPORATIONSale of Nondeposit InvestmentProducts.EFFECTIVE DATE: January 1, 1999.12 CFR Parts 303, 337 and 362Federal Deposit InsuranceCorporation (FDIC).ACTION: Final rule.FOR FURTHER INFORMATION CONTACT:Curtis Vaughn, Examination Specialist,(202/898–6759), Division ofSupervision; Linda L. Stamp, Counsel,(202/898–7310) or Jamey Basham,Counsel, (202/898–7265), LegalDivision, FDIC, 550 17th Street, N.W.,Washington, D.C. 20429.SUPPLEMENTARY INFORMATION:SUMMARY: As part of the FDIC’ssystematic review of its regulations andwritten policies under section 303(a) ofthe Riegle Community Development andRegulatory Improvement Act of 1994(CDRI), the FDIC has revised andconsolidated its rules and regulationsgoverning activities and investments ofinsured state banks and insured savingsassociations. The rule implementssections 24, 28, and 18(m) of the FederalDeposit Insurance Act, and alsoestablishes certain safety and soundnessstandards pursuant to the FDIC’sauthority under section 8. The FDIC’sfinal rule establishes a number of newexceptions and allows institutions toconduct certain activities afterproviding the FDIC with notice ratherthan filing an application. Subject toappropriate separations and limitations,the activities that may be conductedthrough a majority-owned subsidiaryunder these expedited notice processingcriteria are real estate investment andsecurities underwriting. The FDICcombined its regulations governing theactivities and investments of insuredstate banks with those governinginsured savings associations. Inaddition, the FDIC’s final rule updatesits regulations governing the safety andsoundness of securities activities ofsubsidiaries and affiliates of insuredstate nonmember banks. The FDIC’sfinal rule modernizes this group ofregulations and harmonizes theprovisions governing activities that arenot permissible for national banks withthose governing the securitiesunderwriting and distribution activitiesof subsidiaries of state nonmemberbanks. The FDIC’s final rule makes anumber of substantive changes andamends the regulations by deletingobsolete provisions, rewriting theregulatory text to make it more readable,conforming the treatment of state banksand savings associations to the extentpossible given the underlying statutoryand regulatory scheme governing thedifferent charters. The FDIC’s final rulealso conforms most of the disclosuresrequired under the current regulation tothe Interagency Statement on the RetailI. BackgroundSection 303 of the Riegle CommunityDevelopment and RegulatoryImprovement Act of 1994 (RCDRIA)required that the FDIC review itsregulations for the purpose ofstreamlining those regulations, reducingany unnecessary costs and eliminatingunwarranted constraints on creditavailability while faithfullyimplementing statutory requirements.Pursuant to that statutory direction, theFDIC reviewed part 362 ‘‘Activities andInvestments of Insured State Banks,’’subpart G of Part 303, effective October1, 1998, (formerly § 303.13) ‘‘Filings bySavings Associations’’, and § 337.4‘‘Securities Activities of Subsidiaries ofInsured State Banks: Bank Transactionswith Affiliated Securities Companies’’,and proposed making a number ofchanges to those regulations. Thatproposal is found in the September 12,1997, issue of the Federal Register at 62FR 47969.The FDIC’s final rule restructuresexisting part 362, placing the substanceof the text of the current regulation intonew subpart A. Subpart A addresses theActivities of Insured State Banksimplementing section 24 of the FederalDeposit Insurance Act (FDI Act). 12U.S.C. 1831a. Section 24 restricts andprohibits insured state banks and theirsubsidiaries from engaging in activitiesand investments of a type that are notpermissible for national banks and theirsubsidiaries. Through this new finalrule, the FDIC introduces a newstreamlined notice processing conceptfor insured state nonmember banks thatwant to engage in certain activities thatare impermissible for national banksand their subsidiaries.Due to the experience that the FDIChas gained in reviewing applicationsfrom insured state nonmember bankssince the enactment of section 24, theFDIC has standardized the eligibilitycriteria and conditions for twoactivities. This mechanism givesinsured state nonmember banks a levelof certainty that has been lacking forbanks that want to diversify theirearnings and maintain theirRIN 3064–AC12Activities of Insured State Banks andInsured Savings AssociationsAGENCY:competitiveness by investing insubsidiaries that engage in activities notpermissible for national banks. Thisframework sets forth the eligibilitycriteria and conditions for majorityowned subsidiaries of insured statenonmember banks to engage in realestate investment and securitiesunderwriting. This framework allowsinsured state nonmember banks toproceed with their business plans inthese areas with relative certainty thatthe FDIC will consent to the executionof their plans and with assurance thatconsent will be forthcoming on apredictable schedule. This frameworkallows the insured state nonmemberbanks to be creative and innovative intheir business plan within the structureappropriate to the activities beingundertaken. The FDIC hopes that thisrule will assist the insured statenonmember banks as they progress intothe competitive financial environmentof the 21st century in which theyoperate their business.The FDIC’s final rule moves the partof the FDIC’s regulations governingsecurities underwriting not permissiblefor national banks (currently at 12 CFR337.4) into subpart A of part 362.Although the proposal contemplatedthat the entire regulation, SecuritiesActivities of Insured State NonmemberBanks, found in § 337.4 of this chapterwould be removed and reserved, wehave postponed that action whileredeveloping some of the safety andsoundness criteria that govern insuredstate bank subsidiaries that engage inthe public sale, distribution orunderwriting of securities and otheractivities that are not permissible for anational bank but that are permissiblefor national bank subsidiaries. Theredeveloped regulatory language thatwill amend subpart B of this regulationis published as a proposed ruleelsewhere in this issue of the FederalRegister for further public comment.During the period that § 337.4 stillexists, where activities are covered byboth § 337.4 and this final rule, we haveprovided relief from the requirements of§ 337.4 in this rulemaking.For those activities that were coveredunder § 337.4 and are now coveredunder this part 362, we have attemptedto modernize the regulations governingthose activities by updating therequirements, revising the regulationsby deleting obsolete provisions,rewriting the regulatory text to make itmore readable, removing a number ofthe obsolete current restrictions onthose activities, and removing thedisclosures required under the currentregulation.

Federal Register / Vol. 63, No. 230 / Tuesday, December 1, 1998 / Rules and RegulationsSafety and Soundness RulesGoverning Insured State NonmemberBanks is found in the new subpart B.Subpart B establishes modern standardsfor insured state nonmember banks toconduct real estate investment activitiesthrough a subsidiary, and for thoseinsured state nonmember banks that arenot affiliated with a bank holdingcompany (nonbank banks), to conductsecurities activities in an affiliatedorganization. The existing restrictionson these securities activities are foundin § 337.4 of this chapter.Subpart G of part 303, effectiveOctober 1, 1998, (formerly § 303.13) ofthis chapter which relates to activitiesand filings by savings associations isrevised in a number of ways. First, thesubstantive portions applicable to statesavings associations of subpart G areplaced in new subpart C of part 362.The substantive requirements applicableto all savings associations whenAcquiring, Establishing, or ConductingNew Activities through a Subsidiary aremoved to new subpart D.In the proposal, subpart E containedthe revised application and noticeprocedures as well as delegations ofauthority for insured state banks, andsubpart F contained the revisedapplication and notice procedures aswell as delegations of authority forinsured savings associations. On aparallel track, the FDIC has completedits revision of part 303 of the FDIC’srules and regulations. Part 303 containssubstantially all of the FDIC’sapplications procedures and delegationsof authority. Subparts G and H of part303 were designated as the place wherethe text of subparts E and F of ourproposed rule would be located. As apart of the part 303 review process andfor ease of reference, the FDIC isremoving the applications proceduresrelating to activities and investments ofinsured state banks from part 362 andplacing them in subpart G of part 303.The procedures applicable to insuredsavings associations are consolidated insubpart H of part 303. These subpartsare published as an amendment to part303 as a part of this final regulation.Part 362 of the FDIC’s regulationsimplements the provisions of section 24of the FDI Act. Section 24 was added tothe FDI Act by the Federal DepositInsurance Corporation Improvement Actof 1991 (FDICIA). With certainexceptions, section 24 limits the directequity investments of state charteredinsured banks to equity investments ofa type permissible for national banks.Section 24 prohibits an insured statebank from directly, or indirectly througha subsidiary, engaging as principal inany activity that is not permissible fora national bank unless the bank meetsits capital requirements and the FDICdetermines that the activity will notpose a significant risk to the appropriatedeposit insurance fund. In addition,section 24 prohibits the subsidiary of aninsured state bank from directly orindirectly engaging as principal in anyactivity that is not permissible for anational bank subsidiary unless thebank meets its capital requirements andthe FDIC determines that the activitywill not pose a significant risk to theappropriate deposit insurance fund. TheFDIC may make such determinations byregulation or order. The statute requiresinstitutions that held equity investmentsnot conforming to the new requirementsto divest no later than December 19,1996. The statute also requires thatbanks file certain notices with the FDICconcerning grandfathered investments.Part 362 was adopted in two stages.The provisions of the current regulationconcerning equity investments appearedin the Federal Register on November 9,1992, at 57 FR 53234. The provisions ofthe current regulation concerningactivities of insured state banks andtheir majority-owned subsidiariesappeared in the Federal Register onDecember 8, 1993, at 58 FR 64455.Subpart G of Part 303, effectiveOctober 1, 1998, (formerly § 303.13) ofthe FDIC’s regulations (12 CFR 303.140)implements FDI Act sections 28 (12U.S.C. 1831e) and 18(m) (12 U.S.C.1828(m)). Both sections were added tothe FDI Act by the Financial InstitutionsReform, Recovery, and Enforcement Actof 1989 (FIRREA). While section 28 ofthe FDI Act and section 24 of the FDIAct are similar, there are a number offundamental differences between thetwo provisions which caused theimplementing regulations to differ insome respects.Section 18(m) of the FDI Act requiresstate and federal savings associations toprovide the FDIC with notice 30 daysbefore establishing or acquiring asubsidiary or engaging in any newactivity through a subsidiary. Section 28governs the activities and equityinvestments of state savings associationsand provides that no state savingsassociation may engage as principal inany activity of a type or in an amountthat is impermissible for a federalsavings association unless the FDICdetermines that the activity will notpose a significant risk to the affecteddeposit insurance fund and the savingsassociation is in compliance with thefully phased-in capital requirementsprescribed under section 5(t) of theHome Owners’ Loan Act (12 U.S.C.1464(t)) (HOLA). Except for itsinvestment in service corporations, a66277state savings association is prohibitedfrom acquiring or retaining any equityinvestment that is not permissible for afederal savings association. A statesavings association may acquire orretain an investment in a servicecorporation of a type or in an amountnot permissible for a federal savingsassociation if the FDIC determines thatneither the amount invested in theservice corporation nor the activities ofthe service corporation pose asignificant risk to the affected depositinsurance fund and the savingsassociation continues to meet the fullyphased-in capital requirements. Asavings association was required todivest itself of prohibited equityinvestments no later than July 1, 1994.Section 28 also prohibits state andfederal savings associations fromacquiring any corporate debt securitythat is not of investment grade(commonly known as ‘‘junk bonds’’).Section 303.13 of the FDIC’sregulations was adopted as an interimfinal rule on December 29, 1989 (54 FR53548). The FDIC revised the rule afterreviewing the comments and theregulation as adopted appeared in theFederal Register on September 17, 1990(55 FR 38042). The regulationestablished application and noticeprocedures governing requests by a statesavings association to directly, orthrough a service corporation, engage inactivities that are not permissible for afederal savings association; the intent ofa state savings association to engage inpermissible activities in an amountexceeding that permissible for a federalsavings association; or the intent of astate savings association to divestcorporate debt securities not ofinvestment grade. The regulation alsoestablished procedures to give priornotice for the establishment oracquisition of a subsidiary or theconduct of new activities through asubsidiary. Section 303.13 was recentlymoved with stylistic, but notsubstantive changes, to subpart G of part303, effective October 1, 1998 of theFDIC’s regulations.Section 337.4 of the FDIC’sregulations (12 CFR 337.4) governssecurities activities of subsidiaries ofinsured state nonmember banks as wellas transactions between insured statenonmember banks and their securitiessubsidiaries and affiliates. Theregulation was adopted in 1984 (49 FR46723) and is designed to promote thesafety and soundness of insured statenonmember banks that havesubsidiaries which engage in securitiesactivities, including activities that areimpermissible for banks directly undersection 16 of the Banking Act of 1933

66278Federal Register / Vol. 63, No. 230 / Tuesday, December 1, 1998 / Rules and Regulations(12 U.S.C. section 24 (seventh)),commonly known as the Glass-SteagallAct. For those subsidiaries that engagein underwriting activities that areprohibited for a bank, the regulationrequires that these subsidiaries qualifyas bona fide subsidiaries, establishestransaction restrictions between a bankand its subsidiaries or other affiliatesthat engage in such securities activities,requires that an insured statenonmember bank give prior notice tothe FDIC before establishing oracquiring any securities subsidiary,requires that disclosures be provided tosecurities customers in certaininstances, and requires that a bank’sinvestment in such a securitiessubsidiary be deducted from the bank’scapital.On August 23, 1996, the FDICpublished a notice of proposedrulemaking (61 FR 43486, August 23,1996) (August 1996 proposed rule) toamend part 362. Under that proposedrule, a notice procedure would havereplaced the application currentlyrequired in the case of real estate, lifeinsurance, and annuity investmentactivities provided certain conditionsand restrictions were met. The proposedrule set forth notice processingprocedures for real estate, life insurancepolicies, and annuity contractinvestments for well-capitalized, wellmanaged insured state banks. While theAugust 1996 proposed rule would haveamended existing part 362, this newfinal rule replaces existing part 362.After considering the comments to theAugust 1996 proposed rule andreconsidering the issues underlying thecurrent regulation, the FDIC withdrewthat proposed rule in favor of the morecomprehensive approach presentlyadopted. One major change was theelimination of a life insurance policyand annuity contract investment noticedue to intervening guidance providedby the Office of the Comptroller of theCurrency (OCC) that appears toeliminate the necessity for anapplication with respect to virtually allof the life insurance and annuityinvestments received by the FDIC in thepast. While section 24 and the part 362application process would continue toapply to those life insurance andannuity investments which areimpermissible for national banks, theFDIC has decided that there is no needto adopt a notice process thatspecifically addresses what we expect tobe an extremely small number ofsituations.II. Description of the Final RuleThe FDIC divided part 362 into foursubparts and changed some of thestructure of the rule. Generally, wemoved substantive aspects of theregulation that were formerly found inthe definitions of terms like ‘‘bona fidesubsidiary’’ to the applicable regulationtext. This reorganization should assistthe reader in understanding andapplying the regulation. Next wedeleted most of the provisions relatingto divesture because we found them tobe unnecessary due to the passage oftime. Third, we combined the rulescovering the equity investments ofbanks and savings associations into part362 to regulate these investments asconsistently as possible given thelimitations imposed by the differentstatutes that govern each kind of insuredinstitution. Finally, although the FDICagrees with the principles applicable totransactions between insured depositoryinstitutions and its affiliates containedin sections 23A and 23B of the FederalReserve Act (12 U.S.C. 371c and 371c–1), our experience over the last fiveyears in applying section 24 has led usto conclude that extending 23A and 23Bby reference to bank subsidiaries isinadvisable. For that reason, the finalregulation does not incorporate sections23A and 23B of the Federal Reserve Actby cross-reference; rather, the regulationadapts similar principles to those setforth in sections 23A and 23B to thebank/subsidiary relationship asappropriate. In drafting the final rule,we have considered each of therequirements contained in sections 23Aand 23B in the context of transactionsbetween an insured institution and itssubsidiary and refined the restrictionsappropriately. We are comfortable thatthis approach strikes a better balancebetween caution and commercial realityby harmonizing the capital deductionsand the principles of 23A and 23B.Subpart A of the final rule deals withthe activities and investments of insuredstate banks. Except for those sectionspertaining to the applications, noticesand related delegations of authority(procedural provisions), existing part362 essentially becomes subpart Aunder the current proposal. Theprocedural provisions of existing part362 have been transferred to subpart Gof part 303. Subpart A addresses theactivities of insured state banks in§ 362.3. The activities carried on insubsidiaries of insured state banks areaddressed separately in § 362.4.Under a safety and soundnessstandard, subpart B of the finalregulation requires subsidiaries ofinsured state nonmember banks engagedin certain activities to meet thestandards established by the FDIC, evenif the OCC determines that thoseactivities are permissible for a nationalbank subsidiary. The FDIC hasdetermined that real estate investmentactivities may pose significant risks tothe deposit insurance funds. For thatreason, the FDIC established standardsthat an insured

savings associations of subpart G are placed in new subpart C of part 362. The substantive requirements applicable to all savings associations when Acquiring, Establishing, or Conducting New Activities through a Subsidiary are moved to new subpart D. In the proposal, subpart E contained the revised application and notice procedures as well as delegations of authority for insured state banks .

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