[Federal Register: April 24, 2008 (Volume 73, Number 80)]
[Rules and Regulations]
[Page 22215-22252]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24ap08-6]
[[Page 22215]]
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Part II
Department of the Treasury
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Office of the Comptroller of the Currency
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12 CFR Parts 1, 2, 3 et al.
Regulatory Review Amendments; Final Rule
[[Page 22216]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 1, 2, 3, 4, 5, 7, 9, 10, 11, 12, 16, 19, 21, 22, 23,
24, 26, 27, 28, 31, 32, 34, 37, and 40
[Docket ID OCC-2008-0004]
RIN 1557-AC79
Regulatory Review Amendments
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 (OCC) is
revising its rules in order to reduce unnecessary regulatory burden,
update certain rules, and make certain technical, clarifying, and
conforming changes to its regulations. These revisions result from the
OCC's most recent review of its regulations to ensure that they
effectively advance our mission to promote the safety and soundness of
the national banking system, ensure that national banks can compete
efficiently in the financial services marketplace, and foster fairness
and integrity in national banks' dealings with their customers, without
imposing regulatory burden unnecessary to the achievement of those
objectives. The revisions also further the purposes of the Economic
Growth and Regulatory Paperwork Reduction Act of 1996, which, among
other provisions, directs the OCC to identify and, if appropriate,
eliminate regulations that are outdated, unnecessary, or unduly
burdensome.
DATES: This rule is effective on July 1, 2008. National banks, and
foreign banks taking actions with respect to Federal branches and
agencies, may elect to comply voluntarily with any applicable provision
of the rule at any time prior to this effective date.
FOR FURTHER INFORMATION CONTACT: Stuart E. Feldstein, Assistant
Director, Legislative and Regulatory Activities, (202) 874-5090 or
Heidi M. Thomas, Special Counsel, Legislative and Regulatory
Activities, (202) 874-5090, Office of the Comptroller of the Currency,
250 E Street, SW., Washington, DC 20219. In addition, you may also
contact the following OCC staff for further information regarding
specific amendments: licensing/corporate applications-related
amendments: Colleen Coughlin, Senior Licensing Analyst, Licensing
Activities Division, (202) 874-4465, Jan Kalmus, NBE-Senior Licensing
Analyst, Licensing Activities Division, 202-874-4608, and Yoo Jin Na,
Licensing Analyst, Licensing Activities Division, 202-874-4604;
electronic banking-related amendments: Aida Plaza Carter, Director,
Bank Information Technology, (202) 874-4593, Office of the Comptroller
of the Currency, 250 E Street, SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Introduction and Summary of Proposed Rule
On July 3, 2007, the OCC published a notice of proposed rulemaking
\1\ to amend a variety of our regulations to reduce or eliminate
unnecessary regulatory burden, incorporate prior OCC interpretive
opinions, harmonize our rules with those issued by other Federal
agencies, make technical and conforming amendments to improve clarity
and consistency, and conform our rules with the statutory changes made
by the Financial Services Regulatory Relief Act of 2006 (FSRRA) \2\ and
section 8 of the 2004 District of Columbia Omnibus Authorization Act
(DC Bank Act).\3\
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\1\ 72 FR 36550.
\2\ Public Law 109-351, 120 Stat. 1966 (Oct. 13, 2006).
\3\ Public Law 108-386, 118 Stat. 2228 (2004). The DC Bank Act
took effect on October 30, 2004.
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This rulemaking results from our most recent review of our
regulations to identify opportunities to streamline our rules or
regulatory processes. The rulemaking also furthers the purposes of
section 2222 of the Economic Growth and Regulatory Paperwork Reduction
Act of 1996 (EGRPRA),\4\ which directed the OCC and the other member
agencies of the Federal Financial Institutions Examination Council to
identify regulations that are outdated, unnecessary, or unduly
burdensome, and to eliminate them if appropriate.\5\
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\4\ See EGRPRA, Public Law 104-208, Sec. 2222, 110 Stat. 3009-
394, 3009-314-315 (Sept. 30, 1996), codified at 12 U.S.C. 3311.
\5\ Pursuant to EGRPRA's regulatory review requirement, the OCC,
together with the Board of Governors of the Federal Reserve System
(Federal Reserve Board), the Federal Deposit Insurance Corporation
(FDIC), and the Office of Thrift Supervision (OTS), published six
notices seeking comment on ways to reduce unnecessary regulatory
burden and has conducted outreach meetings with bankers and consumer
groups. On November 1, 2007, the Federal Financial Institutions
Examination Council, which includes these agencies and the National
Credit Union Administration, published a Joint Report to Congress on
this regulatory review process, as required by EGRPRA. 72 FR 62036
(Nov. 1, 2007). For additional information about the agencies'
EGRPRA review, see http://www.EGRPRA.gov.
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The OCC received 8 comment letters in response to this proposal.
Two of the commenters, a large bank and a bank trade association,
expressed support for all, or almost all, of the proposed changes.
Another commenter, also a bank trade association, commended the OCC for
proposing ``modest changes'' and expressed its hope that the OCC would
seek to make more significant regulatory improvements in the future.
One commenter, an individual, opposed any lessening of regulatory
supervision of national banks. Six of the 8 comment letters focused on
specific provisions of the proposal--those relating to part 1,
investment securities (Sec. 1.1), operating subsidiaries (Sec.
5.34(e)), financial guarantees (Sec. 7.1017), sales of nonconvertible
debt (Sec. 16.6), and adjustable rate mortgages (Sec. 34.22). These
comments, and the OCC's response to them, are discussed where relevant
in the section-by-section description of the final rule.
Commenters suggested changes to only a few of our proposed
amendments and the OCC is adopting the remaining amendments in final
form as proposed, with minor clarifying or technical changes to a few
provisions, as noted in the section-by-section description.
The most significant of the amendments made by this final rule
include the following:
Amendments to part 1, which pertains to investment
securities, to provide the OCC with additional flexibility in
administering part 1 as investment products evolve, codify existing
precedent, and clarify applicable standards.
Amendments to part 5, which governs national banks'
corporate activities, to:
[cir] Codify prior OCC interpretive opinions recognizing that
national bank operating subsidiaries may take the form of limited
partnerships;
[cir] Update the standards the OCC uses to determine when an entity
qualifies as an operating subsidiary;
[cir] Clarify when a national bank may file an after-the-fact
notice to establish or acquire an operating subsidiary and when the
bank must file an application; and
[cir] Expand the list of operating subsidiary activities eligible
for after-the-fact notice.
Amendments to part 5 to eliminate multiple, repetitive
applications when a national bank opens an intermittent branch to
provide branch banking services for one or more limited periods of time
each year at a specified site during a specified recurring event, such
as during a college registration period or a State fair.
Amendments to part 7, which pertains to national banks'
activities and operations, to provide national banks with greater
flexibility to facilitate customers' financial transactions by
[[Page 22217]]
issuing financial guarantees, provided the financial guarantees are
reasonably ascertainable in amount and consistent with applicable law.
Amendments to part 7, to codify OCC electronic banking
precedent and adapt the OCC's rules to certain current developments.
Amendments to part 16, the OCC's securities offering
disclosure rules, to eliminate unnecessary filing requirements and
clarify the exemptions to the OCC's registration requirements for
certain transactions.
Amendments to part 34, which pertains to real estate
lending and appraisals, to provide national banks with additional
flexibility in selecting indices from which adjustments to interest
rates in adjustable rate mortgages (ARMs) are derived. The final rule
also includes certain technical and conforming amendments to our rules,
including:
Changes to part 4 (the OCC's organizational rules) and
part 5 to reflect the OCC's most current organizational structure.
Changes to conform the OCC's regulations--at parts 5, 23
(leasing), 31 (extensions of credit to insiders and transactions with
affiliates), and 32 (lending limits)--to Regulation W issued by the
Federal Reserve Board,\6\ which governs transactions between Federal
Reserve member banks and their affiliates and implements sections 23A
and 23B of the Federal Reserve Act.\7\
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\6\ 12 CFR part 223.
\7\ 12 U.S.C. 371c and 371c-1.
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Amendments to part 9 (fiduciary activities of national
banks) and part 12 (Securities Exchange Act disclosure rules) to
reflect changes in certain regulations adopted by the Securities and
Exchange Commission (SEC).
Amendments to part 31 to remove an obsolete interpretation
relating to loans to third parties secured by both affiliate-issued
securities and nonaffiliate collateral.
Amendments to parts 1, 2, 3, 5, 10, 11, 16, 19, 21, 22,
26, 27, 28, and 40 to implement the DC Bank Act, which removed the OCC
as the appropriate Federal banking agency for financial institutions
established under the Code of Law for the District of Columbia (DC
banks) and substituted the FDIC or the Federal Reserve Board, as
appropriate to the bank's charter type.\8\
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\8\ Under the DC Bank Act, the FDIC is the appropriate Federal
banking agency for an insured bank chartered under District of
Columbia law that is not a member of the Federal Reserve System, and
the Federal Reserve Board is the appropriate Federal banking agency
for a bank chartered under District of Columbia law that is a member
of the Federal Reserve System, whether or not insured. Thus, while
DC banks are no longer covered by these OCC regulations, they are
subject to comparable regulatory regimes administered by the FDIC or
the Federal Reserve Board.
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Amendments to conform our regulations to the changes made
by the FSRRA, including:
[cir] Amendments to part 5 that simplify a national bank's
authority to pay a dividend and that remove the geographic limits with
respect to bank service companies.
[cir] Amendments to the OCC's Change in Bank Control Act (CBCA)
regulation, Sec. 5.50, that: (1) Require a CBCA notice to include
information on the future prospects of the national bank to be
acquired, (2) permit the OCC to consider the future prospects of the
bank as a basis to issue a notice of disapproval, and (3) permit the
OCC to impose conditions on its action not to disapprove a CBCA notice.
[cir] Amendments to part 7 that permit national banks to choose
whether to provide for cumulative voting in the election of their
directors.
[cir] Amendments to part 19 that reflect changes to the OCC's
enforcement authority with respect to institution-affiliated parties.
[cir] Amendments to part 24 (community development investments)
that implement section 305 of the FSRRA.
Description of Comments Received and Final Rule
Part 1--Investment Securities
Part 1 of our regulations (12 CFR part 1) prescribes the standards
under which a national bank may purchase, sell, deal in, underwrite,
and hold securities, consistent with the National Bank Act (12 U.S.C.
24 (Seventh)) and safe and sound banking practices. This final rule
clarifies the applicable standards by codifying existing precedent and
provides the OCC with additional flexibility to administer part 1 as
investment products evolve.
Authority, Purpose, and Scope (Sec. 1.1)
National banking law explicitly authorizes the OCC to determine the
types of investment securities a national bank may purchase.\9\ Part 1
currently provides a general definition of the term ``investment
security,'' describes several categories or types of permissible
investment securities, and prescribes such limitations as apply to a
national bank's investment in each type. To complement these specific
categories, we proposed a new provision to recognize that the OCC also
may determine, on a case-by-case basis, that a national bank may
acquire an investment security that is not specifically listed in the
regulation, provided the OCC determines that bank's investment is
consistent with the character of investment securities permitted under
section 24 (Seventh) and with safe and sound banking practices. We
received no substantive comments on this provision and, accordingly, it
is adopted essentially as proposed, with a minor revision clarifying
that investments found by the OCC to be permissible under Section
1.1(d) constitute eligible investments under 12 U.S.C. 24.
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\9\ 12 U.S.C. 24 (Seventh).
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In making a determination under amended Sec. 1.1, the OCC will
consider all relevant factors, including an evaluation of the risk
characteristics of the particular instrument compared to those of
investments that the OCC has previously authorized, as well as the
bank's ability effectively to manage such risks. In approving such an
investment, the OCC may impose such limits or conditions as are
appropriate under the circumstances.
In addition, this final rule removes the now-obsolete reference to
DC banks from the scope of part 1 (Sec. 1.1(c)), thus eliminating the
applicability of part 1 to DC banks.
One commenter requested that the OCC continuously update the
electronic version of our annual publication of permissible activities
for national banks, ``Significant Legal, Licensing, and Community
Development Precedents,'' \10\ to add precedents issued pursuant to
Sec. 1.1, as well as other activities, more frequently than once a
year. We note, however, that, in addition to this annual, cumulative
summary of significant precedents, we also publish the full text of
these precedents in Interpretations and Actions, consistent with the
OCC's policy of providing public notice of significant legal opinions
and other important precedents. Interpretations and Actions is
published monthly and is available both in printed form and on the
OCC's internet site at http://www.occ.treas.gov. We believe this method
of publicizing our precedent adequately serves the purpose of providing
prompt notice of our opinions and decisions to national banks and the
public and, accordingly, are making no changes at this time to our
schedule of updating our ``Significant Legal,
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Licensing, and Community Development Precedents'' publication.
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\10\ Our most recent Significant Legal, Licensing, and Community
Development Precedents document, dated June 2007, is available on
our Web site at http://www.occ.gov/sigpre.pdf.
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Pooled Investments (Sec. 1.3(h))
Current Sec. 1.3(h) allows a national bank to purchase and sell
shares in an investment company provided that the portfolio of the
investment company is limited to investment securities authorized in
part 1. However, as explained in the preamble to the proposed rule,
markets increasingly are offering securitized, pooled investment
vehicles that hold bank-permissible assets not limited to investment
securities. For example, a bank may seek to purchase investment grade
shares in an investment company where the underlying assets are loans.
In that case, the bank's risk exposure may be comparable to its
exposure when it purchases shares of identically rated and marketable
pooled vehicles composed of part 1 investment securities.
The proposal amended Sec. 1.3(h) to codify OCC precedents that
permit a national bank to purchase shares in investment vehicles where
the underlying assets are not limited to investment securities
permissible under part 1, so long as the underlying assets otherwise
are bank permissible.\11\ Specifically, the proposal deleted the phrase
``under this part'' both times it appears in Sec. 1.3(h) and revised
the heading to read ``Pooled investments'' to clarify that banks have
the authority to invest in entities holding pooled assets, provided
that the underlying assets are those that a national bank may purchase
and sell for its own account. The proposal also provided that pooled
investments made pursuant to Sec. 1.3(h) must meet certain credit
quality and marketability standards generally applicable to investment
securities. We received no comments on this amendment and are adopting
it in final form with the addition of the following clarifying
language.
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\11\ See, e.g., Interpretive Letter No. 911 (June 4, 2001)
(national bank may purchase interests in loan fund either pursuant
to lending authority or as securities on the basis of reliable
estimates of the issuer).
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Specifically, the final version of Sec. 1.3(h) includes an
explicit reminder that pooled investments under this section must
comply with Sec. 1.5 and conform with applicable published OCC
precedent.\12\ Under, 12 CFR 1.5, when conducting investment activities
described in Sec. 1.3, a national bank must adhere to safe and sound
banking practices and the specific requirements of part 1. Thus, the
bank must consider, as appropriate, the interest rate, credit,
liquidity, price, foreign exchange, transaction, compliance, strategic,
and reputation risks presented by a proposed activity; the particular
activities undertaken by the bank must be appropriate for that bank;
and the bank must conclude that the obligor can satisfy its
obligations.
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\12\ See, e.g. OCC Interpretive Letters No. 779 (April 3, 1997)
and 911 (June 4, 2001). See also OCC BC 181 (Rev), ``Purchases of
Loans In Whole or In Part--Participations'' (Aug. 2, 1984), and
''Interagency Policy Statement on Investment Securities,'' 63 FR
20191 (April 23, 1998).
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Securities Held Based on Estimates of Obligor's Performance (Sec.
1.3(i))
Part 1 defines an investment security in terms of both asset
quality and marketability.\13\ Section 1.2(f) further defines a
``marketable'' security as one that is: (1) Registered under the
Securities Act of 1933 (Securities Act),\14\ (2) a municipal revenue
bond exempt from registration under the Securities Act, (3) offered or
sold pursuant to Securities and Exchange Commission (SEC) Rule 144A
\15\ and rated investment grade or the credit equivalent, or (4) ``can
be sold with reasonable promptness at a price that corresponds
reasonably to its fair value.'' \16\
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\13\ 12 CFR 1.2(e).
\14\ 15 U.S.C. 77a, et. seq.
\15\ 17 CFR 230.144A.
\16\ 12 CFR 1.2(f).
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Section 1.3(i), in contrast, articulates different asset quality
and marketability standards. That section permits a national bank to
treat a debt security as an investment security ``if the bank
concludes, on the basis of estimates that the bank reasonably believes
are reliable, that the obligor will be able to satisfy its obligations
under that security,'' and the bank believes that the security may be
sold with reasonable promptness at a price that corresponds reasonably
to its fair value.\17\ The standard of marketability in the ``reliable
estimates'' provision differs from, and is more limited than, the
marketability definition in Sec. 1.2(f) in that it does not contain
all of the elements of the definition in Sec. 1.2(f). We proposed to
harmonize these marketability standards by amending Sec. 1.3 to
reflect the same standard as in Sec. 1.2. We received no comments on
this proposal, and therefore adopt it as proposed.
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\17\ See 12 CFR 1.3(i)(1).
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Part 2--Sales of Credit Life Insurance
Part 2 sets forth the principles and standards that apply to a
national bank's provision of credit life insurance and the limitations
that apply to the receipt of income from those sales by certain
individuals and entities associated with the bank. This final rule
removes DC banks from the definition of ``bank'' set forth in Sec.
2.2(a) to conform to the DC Bank Act.
Part 3--Minimum Capital Ratios; Issuance of Directives
Part 3 establishes the minimum capital ratios that apply to
national banks, sets out in appendices the rules governing the
computation of those ratios, and provides procedures for the issuance
of individual minimum capital requirements and capital directives. The
current rule provides that local currency claims on, or unconditionally
guaranteed by, central governments that are not members of the
Organization for Economic Development (OECD) receive a zero percent
risk weight to the extent the bank has local currency liabilities in
that country. To align the rule more closely with foreign exchange
risk, we proposed to amend Appendix A to part 3 by removing the current
restriction on the location of the offsetting liability, thus providing
a zero percent risk weight to the extent the bank has liabilities in
that currency. We received no comments on this amendment and are
adopting the changes as proposed, with a conforming technical
amendment.
This final rule also removes DC banks from the definition of
``bank'' in Sec. 3.2(b). Pursuant to the DC Bank Act, DC banks now
will be subject to the regulatory capital requirements prescribed
either by the FDIC or the Federal Reserve Board, depending on whether
the DC bank is a member of the Federal Reserve System.
Part 4--Organization and Functions, Availability and Release of
Information, Contracting Outreach Program, Post-Employment Restrictions
for Senior Examiners
The proposed rule updated Sec. 4.4 to reflect that the Large Bank
Supervision Department supervises the largest national banks under the
OCC's current organizational structure. It also amended Sec. 4.5 by
updating OCC district office addresses and the geographical coverage of
those offices resulting from the OCC's district office realignments. We
received no comments on these changes and are adopting the changes as
proposed, with additional updates to the geographical coverage of OCC
district offices.
Part 5--Rules, Policies, and Procedures for Corporate Activities
Part 5 establishes rules, policies, and procedures for national
banks' corporate activities and corporate structure. It also contains
procedural requirements for
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the filing of corporate applications, including the circumstances under
which applications or notices are required, and the required content of
the filing. A description of our amendments to part 5 is set forth
below, with substantive amendments presented first, followed by
technical or conforming amendments.
Fiduciary Powers (Sec. 5.26)
The OCC's current rule requires a national bank filing an
application for approval to offer fiduciary services to provide an
opinion of counsel that the proposed fiduciary activities do not
violate applicable Federal or State law. However, an opinion of counsel
is not required for expedited applications filed by ``eligible banks.''
\18\ Because our experience has been that an opinion of counsel often
is not necessary to enable the OCC to conclude that the proposed
fiduciary activities are permissible, we proposed to eliminate this
requirement for all applications to exercise fiduciary activities,
unless the OCC specifically requests an opinion. We received no
comments on this amendment and adopt it as proposed. We note that the
removal of this requirement does not relieve the bank of its
responsibility to ensure that its fiduciary activities comport with
applicable Federal and State law.
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\18\ An ``eligible bank'' is a national bank that is well
capitalized, has a composite rating of 1 or 2 under the Uniform
Financial Institutions Rating System, has a CRA rating of
``Outstanding'' or ``Satisfactory,'' and is not subject to a cease
and desist order, consent order, formal written agreement, or prompt
corrective action directive. 12 CFR 5.3(g).
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Establishment, Acquisition, and Relocation of a Branch--Intermittent
Branches (Sec. 5.30)
Section 5.30 describes the procedures and standards governing OCC
review and approval of a national bank's application to establish a new
branch or to relocate a branch. As the preamble to our proposed rule
noted, it is unclear under the current regulation whether a bank must
refile an application under Sec. 5.30 each year to operate branches on
a recurring basis at the same location or event (such as an annual
State fair or at a specific college campus during registration periods)
even where all of the facts relevant to the branch application remain
the same as those previously approved. As a result, some banks have
filed for approval of such branches each time the bank seeks to operate
the branch.
To reduce the regulatory burden associated with these multiple
filings, we proposed to eliminate subsequent applications for
recurring, temporary branches that serve the same site at regular
intervals. We received no comments on this amendment, and we adopt it
as proposed.
Specifically, the final rule adds to Sec. 5.30 the new term,
``intermittent branch,'' which is defined to mean a branch that
provides branch banking services, where legally permissible under the
national bank branching statute,\19\ for one or more limited periods of
time each year at a specified site during a specified recurring event.
Under this final rule, if the OCC grants a national bank approval to
operate an intermittent branch, no further application or notice to the
OCC is required. This amendment does not affect the legal requirements
prescribing the conditions under which a national bank may establish or
retain branches pursuant to the national bank branching statute at 12
U.S.C. 36.
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\19\ 12 U.S.C. 36.
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Operating Subsidiaries (Sec. 5.34)
Section 5.34 of the OCC's rules authorizes national banks to
establish or acquire operating subsidiaries as a means through which to
exercise their powers to conduct the business of banking. The final
rule makes several changes to Sec. 5.34 to update the standards for
determining whether a subsidiary is controlled by the parent bank in
light of changes in accounting standards, to clarify the type of entity
that may qualify as an operating subsidiary, and to modify the
standards under which transactions to establish or acquire operating
subsidiaries qualify for after-the-fact notice procedures rather than
the filing of an application. None of the proposed revisions alters the
fundamental characteristics of an operating subsidiary, that is, that
an operating subsidiary may conduct only bank-permissible activities
and conducts those activities pursuant to the same ``authorization,
terms and conditions'' as apply to the parent bank.\20\
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\20\ 12 CFR 5.34(e).
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Qualifying standards. Under current Sec. 5.34(e)(2), an entity
qualifies as an operating subsidiary only if the parent bank
``controls'' the subsidiary. The rule provides for two alternative
means of establishing control. First, a national bank controls an
operating subsidiary if the bank owns more than 50 percent of the
voting interest (or similar type of controlling interest) in the
subsidiary. Second, control may be established if the parent bank
``otherwise controls'' the operating subsidiary and no other party
controls more than 50 percent of the voting interest (or similar type
of controlling interest) in the subsidiary.
The proposal would have revised this standard to provide that a
national bank may invest in an operating subsidiary if it satisfies the
following requirements: (1) The bank has the ability to control the
management and operations of the subsidiary by owning more than 50
percent of the voting interest in the subsidiary, or otherwise; and (2)
the operating subsidiary is consolidated with the bank under Generally
Accepted Accounting Principles (GAAP). The OCC received two comments
that addressed this issue. One commenter asserted that the proposal was
too broad and that there are many structures that have legitimate
business purposes where the bank controls a majority of the voting and
operational rights but other passive or non-controlling investors have
economic rights. Another commenter noted that the requirement to
consolidate under GAAP would narrow the circumstances under which
national banks may establish operating subsidiaries.
The OCC continues to believe that these changes are appropriate to
clarify that the requirement that a national bank control its operating
subsidiary encompasses the bank's control of the business activities of
the subsidiary to appropriately reflect the status of the operating
subsidiary as a vehicle used by the bank to exercise its powers to
engage in the business of banking, the operations of which are
consolidated with those of the bank as an accounting matter. Therefore,
the OCC has adopted the rule essentially as proposed, with a few
revisions to resolve ambiguity in the proposed text.
As noted above, the first element of the proposed rule required the
bank to have the ability to control the management and operations of
the subsidiary by owning more than 50 percent of the voting interest in
the subsidiary, or otherwise. The proposal could have been read to mean
that a 50 percent voting interest in the subsidiary, without more,
would have satisfied that criterion. The final rule revises the
proposal to make clear that the standard has three elements: (i) The
parent bank has the ability to control the management and operations of
the subsidiary; (ii) the bank owns and controls more than 50 percent of
the voting (or similar type of controlling) interest of the operating
subsidiary, or the parent bank otherwise controls the operating
subsidiary and no other party controls more than 50 percent of the
voting (or similar type of controlling) interest of the operating
subsidiary; and (iii) the operating subsidiary is
[[Page 22220]]
consolidated with the bank under GAAP.\21\ These changes help to ensure
that in all circumstances a parent bank must have true operating
control over an entity for it to be an operating subsidiary.
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\21\ The OCC will address on a case-by-case basis the
appropriate treatment of a national bank's investment in a
subsidiary in which the bank satisfies (i) and (ii), but not (iii)
because the subsidiary is not consolidated with the bank under GAAP.
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Two commenters also suggested grandfathering operating subsidiaries
that were established prior to these changes. These commenters noted
that to do otherwise could disrupt existing arrangements and impose
administrative burdens on banks to restructure their subsidiaries to
comply with the new rule.
The final rule adds a grandfathering provision responsive to these
concerns. The provision makes clear that, unless otherwise notified by
the OCC with respect to a particular operating subsidiary, an operating
subsidiary a national bank lawfully acquired or established and
operated as an operating subsidiary before the publication date of this
rule will not be treated as in violation of Sec. 5.34 as revised,
provided that the bank and the operating subsidiary are, and continue
to be, in compliance with the standards and requirements applicable
when the bank established or acquired the operating subsidiary. This
grandfathering applies only to operating subsidiaries in existence and
conducting authorized activities on April 24, 2008.
Form of operating subsidiary. Current Sec. 5.34(e)(2) permits
national banks to conduct activities through operating subsidiaries
organized in a variety of forms, including as a corporation or limited
liability company. In recent years, national banks have sought to hold
limited partnerships as operating subsidiaries as States have amended
their limited liability company and limited partnership laws to provide
more structural flexibility. The OCC has recognized this and previously
permitted a limited partnership to qualify as an operating subsidiary
where the parent bank exercised ``all economic and management control
over the activities'' of the partnership.\22\ Therefore, the proposal
clarified that a bank may invest in an operating subsidiary organized
as a limited partnership, provided it satisfies the other requirements
of Sec. 5.34.
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\22\ See Corporate Decision No. 2004-16 (Sept. 10, 2004).
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We did not receive any comments on that provision and are adopting
the change as proposed.
After-the-fact notice procedures. Current Sec. 5.34(e)(5) provides
that a well capitalized and well managed national bank may establish or
acquire an operating subsidiary, or conduct a new activity in an
existing operating subsidiary, by providing the OCC written notice
within 10 days after doing so if the activity to be conducted in the
subsidiary is specified in the rule as eligible for notice processing.
The proposal would have permitted a bank to use the after-the-fact
notice procedures if the financial statements of the bank and
subsidiary were consolidated under GAAP, and the bank had the ability
to control the management and operations of the subsidiary by holding:
(i) More than 50% of the voting interests in the subsidiary; or (ii)
voting interests sufficient to select the number of directors needed to
control the subsidiary's board and to select and terminate senior
management.
The final rule slightly revises the criteria for after-the-fact
notices to permit the bank to use that procedure when the bank and
proposed subsidiary meet (1) all the requirements for a notice that do
not pertain to control, (2) the financial statements of the bank and
subsidiary are consolidated under GAAP, and (3) the bank has the
ability to control the management and operations of the subsidiary by
holding: (i) More than 50% of the voting interests in the subsidiary;
and (ii) voting interests sufficient to select the number of directors
needed to control the subsidiary's board and to select and terminate
senior management. These control arrangements are the most suitable for
the after-the-fact notice procedures because the OCC generally is
familiar with these structural arrangements and they do not ordinarily
present unusual control or safety and soundness concerns. Other
arrangements will be reviewed under the full application process.
The proposal also contained an additional standard for a national
bank seeking to hold a limited partnership as an operating subsidiary
through an after-the-fact notice. Under that additional standard, the
proposed limited partnership operating subsidiary would qualify for the
after-the-fact notice procedure only in the limited circumstance where
the bank controls, directly or indirectly, all of the ownership
interests in the limited partnership (and the other requirements of
Sec. 5.34 are satisfied). We explained that this approach would allow
the OCC to review more complex arrangements through the application
process.
We received two comments that addressed the after-the-fact notice
procedure for limited partnerships. These commenters expressed concern
that limiting after-the-fact notice in this manner would
inappropriately require an application process in situations that do
not present heightened complexity or risk. We agree with the commenters
that the after-the-fact notice process could be modestly expanded
without presenting new operational risks or policy considerations.
Accordingly, we have revised the standard for investments in limited
partnership operating subsidiaries to qualify for after-the-fact
notice.
Under the final rule, the after-the-fact notice eligibility
standards for limited partnerships are similar to those for corporate
entities, except that, in the case of a limited partnership, the bank
or its operating subsidiary must be the sole general partner of the
limited partnership and, under the partnership agreement, the limited
partners must have no authority to bind the partnership by virtue
solely of their status as limited partners. This will allow banks to
use the less burdensome after-the-fact notice procedures while still
ensuring that transactions that raise issues of potential liability for
general partners are subject to the higher scrutiny available under the
application process.
In addition, the final rule adds the following to the list of
activities eligible for after-the-fact notice:
Providing data processing, and data transmission services,
facilities (including equipment, technology, and personnel), data
bases, advice and access to such services, facilities, data bases and
advice, for the parent bank and for others, pursuant to 12 CFR 7.5006,
to the extent permitted by published OCC precedent. Currently, only
data processing activity provided to the bank itself or its affiliates
qualifies for after-the-fact notice treatment under Sec.
5.34(e)(5)(v)(H).
Providing bill presentment, billing, collection, and
claims-processing services.\23\
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\23\ See OCC Interpretive Letter No. 712 (Feb. 29, 1996).
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Providing safekeeping for personal information or valuable
confidential trade or business information, such as encryption keys, to
the extent permitted by published OCC precedent.\24\
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\24\ See 12 CFR 7.5002(a)(4).
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Payroll processing.\25\
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\25\ See Conditional Approval No. 384 (April 25, 2000) and
Corporate Decision No. 2002-2 (Jan. 9, 2002).
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[[Page 22221]]
Branch management services.\26\
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\26\ See Conditional Approval No. 612 (Dec. 21, 2003).
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Merchant processing except when the activity involves the
use of third parties to solicit or underwrite merchants.\27\
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\27\ See Conditional Approvals Nos. 582 (March 12, 2003) and 583
(March 12, 2003).
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Administrative tasks involved in benefits
administration.\28\
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\28\ See Corporate Decision No. 98-13 (Feb. 9, 1998).
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The OCC has previously found these activities to be permissible for
a national bank and generally to pose low safety and soundness risks.
We did not receive any comments on these additional activities eligible
for after-the-fact notice and are adopting the above changes as
proposed.
We have determined, however, not to add to this list those
activities approved for a non-controlling investment by a national bank
or its operating subsidiary pursuant to 12 CFR 5.36(e)(2) because the
circumstances of such non-controlling investment activities could be
such that they should be evaluated on a case-by-case basis when
proposed to be conducted by an operating subsidiary controlled by a
national bank.
Application procedures. Current Sec. 5.34(e)(5)(i) sets forth the
rules for when a national bank must file an operating subsidiary
application. The final rule modifies these provisions to make them
consistent with the changes to the qualifying subsidiary and after-the-
fact notice provisions of Sec. 5.34 discussed previously. In
particular, the final rule requires the bank to describe in full detail
structural arrangements where control is based on a factor other than
bank ownership of more than 50 percent of the voting interest of the
subsidiary and the ability to control the management and operations of
the subsidiary by holding voting interests sufficient to select the
number of directors needed to control the subsidiary's board and to
select and terminate senior management. The final rule also requires,
in the case of an application to establish a limited partnership as an
operating subsidiary, that a bank provide a statement explaining why it
is not eligible for the after-the-fact notice procedures. Finally, the
final rule makes conforming changes to Sec. 5.34(e)(5)(vi), which sets
forth the circumstances under which an application or notice is waived,
to reflect the changes discussed above.
Bank Service Companies (Sec. 5.35)
Section 602 of the FSRRA amended the Bank Service Company Act \29\
to repeal the geographic limits that prohibited a bank service company
from performing services for persons other than depository institutions
in any State except the State where its shareholders and members are
located. Section 602 retains the requirements that the services and the
location at which these services are provided must be otherwise
permissible for all depository institution shareholders or members and
that Federal Reserve Board approval be obtained before a bank service
company engages in activities that are only authorized under the Bank
Holding Company Act. Section 602 also permits savings associations to
invest in bank service companies under the same rules that apply to
banks.
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\29\ 12 U.S.C. 1861 et seq.
---------------------------------------------------------------------------
The proposal amended 12 CFR 5.35 to reflect this change in the
statutory geographic restrictions on the operations of bank service
companies. It also changed ``insured bank'' to ``insured institution''
throughout the section, where relevant, to reflect the fact that
savings associations now may invest in bank service companies. We
received no comments on these amendments and adopt them as proposed.
Other Equity Investments (Sec. 5.36)
Section 5.36(e) provides an expedited process for OCC review of a
non-controlling investment by a national bank. Under this section, a
national bank may make, directly or through an operating subsidiary,
certain non-controlling investments in entities by filing an after-the-
fact written notice in which the bank certifies, among other things,
that it is well capitalized and well managed and will account for its
investment under the equity or cost method of accounting.\30\ This
section currently does not, however, provide a procedure for a national
bank to follow when it cannot provide the certifications needed for
after-the-fact notice. Our proposal revised the accounting requirements
needed for after-the-fact notice, added an application procedure where
a bank or the proposed non-controlling investment do not qualify for
the after-the-fact procedure, and made two changes to expedite non-
controlling investments involving assets acquired through foreclosure
or otherwise in good faith to compromise a doubtful claim or in the
ordinary course of collecting a debt previously contracted (DPC
assets). We received no comments on any of these amendments to Sec.
5.36 and adopt them as proposed, with some minor technical changes in
terminology for clarification purposes and a revision to a clarifying
amendment to Sec. 5.36(b).
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\30\ Under the equity method, the carrying value of the bank's
investment is originally recorded at cost but subsequently adjusted
periodically to reflect the bank's proportionate share of the
entity's earnings and losses and decreased by the amount of any cash
dividends or similar distributions received from the entity.
---------------------------------------------------------------------------
Representations concerning accounting treatment. Current Sec.
5.36(e)(5) requires a national bank to certify in its notice that it
will account for its non-controlling investment under the equity or
cost method of accounting. The OCC had adopted this requirement because
an investment accounted for in this manner was not previously
considered under then current GAAP standards to be controlled by the
parent bank and, accordingly, the parent bank did not consolidate the
investment on its books. Thus, the unconsolidated entity could be
considered a non-controlling investment and not an operating
subsidiary. However, as we have noted, under FIN 46R this assumption is
no longer valid in all cases and an investment previously accounted for
using the equity or cost method today may in some instances result in
consolidation of the investment with the bank, depending on which party
holds the majority of risks or rewards.
As in the proposal, the final rule addresses this issue by removing
the requirement that a bank certify in its notice that it will account
for its non-controlling investment under the equity or cost method of
accounting. The final rule also accordingly removes the requirement in
current Sec. 5.36(e)(7) that a bank certify that its loss exposure
related to the non-controlling investment is limited as an accounting
matter. The final rule retains the requirement in paragraph (e)(7) that
the bank certify that as a legal matter its loss exposure is limited
and that it does not have open-ended liability for the obligations of
the enterprise.
Application procedure. Current Sec. 5.36(e) permits use of the
after-the-fact notice procedure only when the bank can make the
representations and certifications required by that section.\31\
[[Page 22222]]
The rule provides no procedure for a national bank to follow when it
cannot provide all of the required representations and certifications.
The final rule revises Sec. 5.36 to establish an application procedure
that a national bank may use to seek approval for non-controlling
investments that do not qualify for after-the-fact notice either
because the proposed activity does not qualify under the standards set
forth in the rule (as described in Sec. 5.36(e)(2)), or because the
bank is not well capitalized or well managed (as described in Sec.
5.36(e)(3)). The final rule does not require a national bank to file
either an application or notice under this section if the investment is
authorized by a separate provision of OCC regulations, such as 12 CFR
part 1 (investment securities) or part 24 (community development). In
these cases, a national bank would follow the procedures required by
these provisions.
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\31\ Section 5.36(e) currently requires that a written after-
the-fact notice contain the following eight elements, set out in
numbered paragraphs, as follows: (1) A description of the proposed
investment; (2) identification of the regulatory provision or prior
precedent that has authorized an activity that is substantively the
same as the proposed activity; (3) certification that the bank is
well capitalized and well managed; (4) a statement of how the bank
can control the activities of the enterprise in which it is
investing or ensure its ability to withdraw its investment; (5) the
accounting certification described in the preamble text (which this
final rule removes); (6) a description of how the investment relates
to the bank's business; (7) certification that the bank's loss
exposure is limited as a legal and accounting matter (the final rule
removes this accounting certification); and (8) certification that
the enterprise in which the bank is investing agrees to be subject
to OCC examination and supervision, subject to limits provided
elsewhere in Federal law.
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The final rule specifically requires the application to provide the
other representations and certifications required in paragraph (e) for
after-the-fact notices as well as the representation required by (e)(2)
(pertaining to the OCC's prior determination that the investment is
permissible) or the certification required by (e)(3) (pertaining to the
bank's capital level and rating for management), as appropriate. A bank
may not make a non-controlling investment in an entity if the bank
cannot provide the representations or certifications that the rule
requires, other than those in paragraphs (e)(2) or (e)(3). In addition,
if the bank is unable to make the representation described in paragraph
(e)(2), the bank's application must explain why the activity is a
permissible activity for a national bank and why the bank should be
permitted to hold a non-controlling investment in an enterprise engaged
in that activity.
This application requirement would fill the gap in the current rule
for investments where a national bank cannot meet all of the after-the-
fact notice requirements. The use of an application procedure provides
certainty to the applicant and also permits the OCC to ensure that all
non-controlling investments comport with applicable legal standards and
appropriate supervisory requirements.
The proposal made two conforming changes to the scope of Sec.
5.36(b) to conform to these changes. We have revised one of these
changes in the final rule. This change would have removed the last
sentence of Sec. 5.36(b), which currently provides that other
investments authorized under Sec. 5.36 may be reviewed on a case-by-
case basis. After further review, we have decided to maintain this
sentence with minor technical revisions, as the scope section covers
all equity investments not governed by other OCC regulations, not
solely non-controlling investments.
DPC assets. As in the proposal, the final rule makes two changes to
expedite non-controlling investments involving assets acquired through
foreclosure or otherwise in good faith to compromise a doubtful claim
or in the ordinary course of collecting a debt previously contracted
(DPC assets). Under the current rule, a national bank making a non-
controlling investment in an entity that holds or manages DPC assets
for the bank must meet all of the requirements in Sec. 5.36, including
the required certifications. However, under Sec. 5.34, a national bank
investing in an operating subsidiary engaged in the same activity need
only file a written notice within 10 days after acquiring or
establishing the subsidiary or commencing the activity. These
procedural differences can be disruptive in workouts involving a
jointly-held entity to resolve loans with multiple lenders where each
lender will hold minority interests in the joint venture. The final
rule harmonizes these provisions by providing that a national bank
making a non-controlling investment in an entity that holds or manages
DPC assets for the bank need only file a simplified written notice with
the appropriate district office \32\ no later than 10 days after making
the non-controlling investment. The notice must contain a complete
description of the bank's investment in the enterprise and the
activities conducted, a description of how the bank plans to divest the
non-controlling investment or the DPC assets within the statutory time
frames, and a representation and undertaking that the bank will conduct
the activities in accordance with OCC policies contained in guidance
issued by the OCC regarding the activities.
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\32\ Part 5 defines ``appropriate district office'' as the
Licensing Department for all national bank subsidiaries of those
holding companies assigned to the Washington, DC, licensing unit;
the appropriate OCC district office for all national bank
subsidiaries of certain holding companies assigned to a district
office licensing unit; the OCC's district office where the national
bank's supervisory office is located for all other banks; or the
licensing unit in the Northeastern District Office for Federal
branches and agencies of foreign banks. 12 CFR 5.3.
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The final rule also amends Sec. 5.36 to clarify that an
application or notice is not required when a national bank acquires DPC
assets. This change conforms this section with Sec. 5.34, which
provides that a subsidiary in which the bank has acquired, in good
faith, shares through foreclosure on collateral, by way of compromise
of a doubtful claim, or to avoid a loss in connection with a debt
previously contracted is not an operating subsidiary for purposes of
Sec. 5.34 and, therefore, no application or notice is required.
Changes in Permanent Capital (Sec. 5.46)
The final rule streamlines the application process for a national
bank seeking OCC approval of a change in its permanent capital. The OCC
did not receive any comments on this change and we are adopting it as
proposed.
The OCC's rules at Sec. 5.46(i)(1) and (2) currently require a
national bank to submit an application and obtain prior approval for a
change in permanent capital. Under the expedited review procedures in
Sec. 5.46(i)(2), the application of an eligible bank is deemed
approved within 30 days of receipt, unless the OCC notifies the
applicant otherwise. The final rule amends Sec. 5.46(i)(2) to change
the expedited review period from 30 days to 15 days.
The final rule also simplifies the certification process for a
national bank that increases its permanent capital. Section 5.46
currently requires a national bank that increases permanent capital to
submit a letter of notification to the OCC in order to receive a
certification of the increase as required by 12 U.S.C. 57.\33\ Under
the final rule, a national bank seeking to increase permanent capital
continues to be required to send a notice to the OCC, but the bank will
no longer receive a paper certification from the OCC. The OCC will deem
the transaction approved and certified by operation of law seven days
after our receipt of the bank's notice. The OCC intends to update the
notification and certification procedures for increases in permanent
capital in the Capital and Dividends Booklet of the Comptroller's
Licensing
[[Page 22223]]
Manual and on E-Corp (the OCC's electronic filing system) to reflect
this final rule.
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\33\ Section 57 provides that increases to permanent capital are
not effective until the bank provides notice to the OCC and the OCC
certifies the amount of the increase and approves it. The precise
terms of the bank's notification and the OCC's approval vary
slightly depending on whether the increase to permanent capital
occurs through the declaration of a stock dividend or otherwise. See
12 U.S.C. 57.
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Change in Bank Control (Sec. 5.50)
Section 5.50 sets forth the OCC's procedures for change in bank
control transactions. Under this rule, any person seeking to acquire
control of a national bank, i.e., acquire the power, directly or
indirectly, to direct the management or policies or to vote 25 percent
or more of any class of voting securities of a national bank, must
provide 60 days prior written notice of the proposed acquisition to the
OCC, with certain exceptions. Currently, the OCC has the burden of
proof in establishing that a group of persons are acting in concert and
will control, as a group, the bank after the acquisition of shares.
When a member of a family acquires stock in a national bank in which
other family members own or control substantial interests, the OCC
frequently will review potential control issues by requesting
additional documentation from, and making additional inquiries of, the
family members. These additional steps can delay the notice process and
increase the burden associated with the transaction for these
individuals.
We proposed to amend Sec. 5.50(f)(2) to establish a rebuttable
presumption that immediate family members are acting in concert when
acquiring shares of a bank. The proposal also amended Sec. 5.50(d) to
define immediate family as a person's spouse, father, mother,
stepfather, stepmother, brother, sister, stepbrother, stepsister,
children, stepchildren, grandparent, grandchildren, father-in-law,
mother-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-
law, and the spouse of any of the foregoing. We did not receive any
comments on these amendments and adopt them unchanged in the final
rule.
As noted in the preamble to the proposed rule, establishing a
clear, but rebuttable, presumption provides notice to prospective
investors of their filing obligations and reduces delays in processing
the notice associated with repeat requests for information. In
addition, this amendment conforms our regulations to the procedures
regarding control by family members in these transactions set forth in
OTS and Federal Reserve Board regulations. We intend to amend the
Comptroller's Licensing Manual to address the process by which an
applicant can rebut this presumption.\34\
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\34\ See 12 CFR 574.4 (OTS) and 12 CFR 225.41(b)(3) and
225.41(d) (Federal Reserve Board).
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The proposed rule also made two amendments to Sec. 5.50 to
implement provisions of the FSRRA. We received no comments on these
amendments and adopt them as proposed. First, section 705 of the FSRRA
amended the CBCA to allow the OCC and the other Federal banking
agencies to extend the time period for considering a CBCA notice so
that the agency may consider the acquiring party's business plans and
the future prospects of the institution and use that information in
determining whether to disapprove the notice. The final rule amends
Sec. 5.50(f) of our regulations to implement this amendment by
providing that the CBCA notice must include information on the future
prospects of the institution and that the OCC may consider the future
prospects of the institution as a basis to issue a notice of
disapproval.
Second, sections 702 and 716 of the FSRRA amended the Federal
Deposit Insurance Act (FDI Act) to provide that the OCC and the other
Federal banking agencies may enforce under 12 U.S.C. 1818 the terms of:
(1) Conditions imposed in writing by the agency on a depository
institution, including a national bank, or an institution-affiliated
party in connection with an application, notice, or other request, and
(2) written agreements between the agency and the institution or the
institution-affiliated party. The amendment also clarifies that a
condition imposed by a banking agency in connection with the
nondisapproval of a notice, e.g., a notice under the CBCA, can be
enforced under the FDI Act. Accordingly, the final rule amends Sec.
5.50(f) to provide that the OCC may impose conditions on its
nondisapproval of a CBCA notice to assure satisfaction of the relevant
statutory criteria for nondisapproval of the notice.
Technical and Conforming Amendments to Part 5
The proposed rule made the following conforming and technical
changes to part 5. None of the commenters addressed these changes and
we adopt them in the final rule as proposed.
Definition of national bank (Sec. 5.3(j)). This amendment removes
the reference to DC banks from the definition of ``national bank''
found in Sec. 5.3(j). As a result, DC banks are no longer subject to
the OCC's rules, policies, and procedures for corporate activities and
transactions, including the OCC's filing requirements.
Filing required (Sec. 5.4). The final rule replaces the terms
``Licensing Manager'' with ``Director for District Licensing'' and
replaces ``Bank Organization and Structure'' with the term ``Licensing
Department.'' This reflects the OCC's current organizational structure.
Decisions (Sec. 5.13). Section 5.13 sets forth the procedures for
OCC decisions on corporate filings. Paragraph (c) of Sec. 5.13
requires a filing with the OCC to contain all required information. The
OCC may require additional information if necessary to evaluate the
application, and may deem a filing abandoned if the information
required or requested is not furnished within the time period specified
by the OCC. The OCC also may return an application that it deems
materially deficient when filed. The final rule amends Sec. 5.13(c) to
define ``materially deficient'' to mean filings that lack sufficient
information for the OCC to make a determination under the applicable
statutory or regulatory criteria. Examples of material deficiencies
that could cause the OCC to return a filing include failure to provide
answers to all questions or failure to provide required financial
information.
Paragraph (f) of this section provides that an applicant may appeal
an OCC decision to the Deputy Comptroller for Licensing or to the OCC
Ombudsman. In some cases, however, the Deputy Comptroller for Licensing
is the deciding official for OCC licensing decisions or has personal
and substantial involvement in the decision-making process.
Accordingly, we are amending this paragraph to provide that an appeal
may be referred instead to the Chief Counsel when the Deputy
Comptroller for Licensing was the deciding official of the matter
appealed or was involved personally and substantially in the matter.
In addition, the final rule replaces the title ``Deputy Comptroller
for Bank Organization and Structure'' with the title ``Deputy
Comptroller for Licensing'' to reflect the OCC's current organizational
structure.
Organizing a bank (Sec. 5.20). Section 5.20 sets forth the
procedures and requirements governing OCC review and approval of an
application to establish a national bank. Paragraph (i)(5) of this
section requires a proposed national bank to be established as a legal
entity before the OCC grants final approval. As currently drafted, our
regulations may be read to imply that organizers must receive OCC
preliminary approval before they may raise capital, which is not
required by OCC policy or the terms of the National Bank Act.\35\
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\35\ The Comptroller's Licensing Manual permits organizers of a
national bank to raise capital prior to preliminary OCC approval.
See Comptroller's Licensing Manual, Charters, pgs. 20-21, March
2007.
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[[Page 22224]]
Accordingly, the final rule amends Sec. 5.20(i)(5) to make clear
that OCC preliminary approval is not required prior to a securities
offering by a proposed national bank, provided that the proposed
national bank qualifies as a body corporate under the National Bank Act
by filing articles of association and an organization certificate, has
filed a completed charter application, and the bank complies with the
OCC's securities offering regulations set forth in Part 16. These
requirements are explained in greater detail in the Comptroller's
Licensing Manual.
The final rule also amends paragraph (i)(3) of Sec. 5.20, which
requires the organizing group to designate a spokesperson to represent
the group in its contacts with the OCC, by replacing the term
``spokesperson'' with the term ``contact person'' each time that term
appears. This change aligns the wording of this section with the
terminology used on the Interagency Charter and Deposit Application and
in the ``Charters'' booklet of the Comptroller's Licensing Manual.
Business combinations (Sec. 5.33). Section 5.33 contains the
provisions governing business combinations involving national banks.
Section 5.33(e)(1) sets forth factors used by the OCC in evaluating
applications for ``business combinations,'' including factors required
pursuant to the Bank Merger Act (BMA) \36\ and the Community
Reinvestment Act of 1977 (CRA).\37\ As currently worded, this section
could be read incorrectly to imply that the BMA and CRA apply to all
business combinations even though these laws do not apply to certain
business combinations, such as the merger of two uninsured national
banks. The final rule revises the wording of Sec. 5.33(e)(1) to make
clear that the OCC considers the factors under the BMA and the CRA for
transactions that are subject to those laws. The factors as set out in
the current rule are substantively unchanged.
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\36\ 12 U.S.C. 1828(c).
\37\ 12 U.S.C. 2901 et seq.
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Section 5.33 also requires a national bank with one or more classes
of securities subject to the registration provisions of sections 12(b)
or 12(g) of the Securities Exchange Act of 1934 (the Exchange Act) \38\
to file preliminary proxy materials or information statements with both
the OCC's Director of Securities and Corporate Practices Division in
Washington, DC and the appropriate district office. The final rule
streamlines the OCC's filing process by eliminating the requirement in
Sec. 5.33(e)(8)(ii) that a registered national bank also file proxy
materials with the district office. This change is consistent with the
instructions in the OCC's Business Combinations Booklet of the
Comptroller's Licensing Manual.
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\38\ 15 U.S.C. 78l(b) or 78l(g).
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Section 5.33(g)(2)(ii) provides the rules for a national bank
consolidation and merger with a Federal savings association when the
resulting institution is a national bank. The final rule removes the
reference to merger transactions in paragraph (g)(2)(ii), which
provides for appraisal or reappraisal of dissenters' shares, because
there are no dissenters' rights for national bank shareholders in a
merger between a national bank and a Federal savings association when
the resulting institution is a national bank. In addition, the final
rule corrects a statutory citation in paragraph (g)(3)(i).
The final rule also makes clarifying changes to Sec. 5.33(h),
which sets forth the standards, requirements, and procedures that apply
to mergers between insured banks with different home States pursuant to
12 U.S.C. 1831u. Although this paragraph references the standards,
requirements, and procedures applicable to transactions that result in
a national bank, it currently does not do so for transactions that
result in a State bank. The final rule adds a reference in this
paragraph to 12 U.S.C. 214a, 214b, and 214c to cover these
transactions. It also amends Sec. 5.33(h) to include a reference to 12
U.S.C. 1831u to clarify that an interstate, single-branch acquisition
is treated as the acquisition of a bank only for purposes of
determining compliance with the Riegle-Neal Act.\39\ This change
eliminates any implication in this paragraph that the procedures of 12
U.S.C. 215 or 215a are intended to apply to branch acquisitions.
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\39\ Public Law 103-328, 108 Stat. 2338 (Sept. 29, 1994).
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Finally, we are amending Sec. 5.33 to specify that the definitions
set forth in Sec. 5.33(d) are only applicable to Sec. 5.33, and are
revising the headings of paragraphs (g), (g)(1) and (g)(3) to conform
to the heading format used in other paragraphs in the regulation.
Financial subsidiaries (Sec. 5.39). Section 5.39 sets forth
authorized activities, approval procedures, and conditions for a
national bank engaging in activities though a financial subsidiary. The
final rule makes a number of technical changes to Sec. 5.39 to conform
this section to the Federal Reserve Board's Regulation W, which governs
transactions between Federal Reserve member banks and their affiliates
and implements sections 23A and 23B of the Federal Reserve Act.\40\
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\40\ 12 U.S.C. 371c and 371c-1.
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In general, under sections 23A and 23B and Regulation W, a
financial subsidiary of a national bank is treated as an affiliate of
the bank. Regulation W, however, excepts from its definition of a
financial subsidiary a subsidiary that would be a financial subsidiary
only because it is engaged in insurance sales as agent or broker in a
manner not permitted to a national bank. Such a financial subsidiary is
not an affiliate for Regulation W purposes (unless it falls into
another category of affiliate). The final rule adds a cross-reference
to Regulation W in the definition of ``affiliate'' at Sec. 5.39(d)(1)
and amends Sec. 5.39(h)(5) to reflect this exception in Regulation W's
definition of financial subsidiary.
In addition, the final rule updates Sec. 5.39(h)(5), which
describes how sections 23A and 23B apply to financial subsidiaries, by
conforming these provisions to Regulation W. Specifically, in addition
to adding a cross-reference to Regulation W in Sec. 5.39(h)(5), we are
amending Sec. 5.39(h)(5)(iii) to state that a bank's purchase of, or
investment in, a security issued by a financial subsidiary of the bank
must be valued at the greater of: (a) The total amount of consideration
given (including liabilities assumed) by the bank, reduced to reflect
amortization of the security to the extent consistent with GAAP, or (b)
the carrying value of the security (adjusted so as not to reflect the
bank's pro rata portion of any earnings retained or losses incurred by
the financial subsidiary after the bank's acquisition of the security).
We also are adding a new reference to the requirement in Regulation
W that any extension of credit to a financial subsidiary of a bank by
an affiliate of the bank is treated as an extension of credit by the
bank to the financial subsidiary if the extension of credit is treated
as capital of the financial subsidiary under any Federal or State law,
regulation, or interpretation applicable to the subsidiary.
Change in bank control (Sec. 5.50). Twelve U.S.C. 1817(j) provides
the standards and procedures for a change in control of insured
depository institutions. As we have discussed, Sec. 5.50 of our rules
implements section 1817(j) in the case of a change in control of a
national bank.\41\ Section 5.50, however, does not include one of the
procedures required by section 1817(j) relating to changes in
management
[[Page 22225]]
officials following a change in control. This omission may be
misleading to banks that consult our rules to ascertain what change in
control procedures apply. Specifically, section 1817(j)(12) provides
that whenever a change in control occurs, the bank will promptly report
to the appropriate Federal banking agency any changes or replacements
of its chief executive officer or of any director occurring in the next
12-month period, including in this report a statement of the past and
current business and professional affiliations of the new chief
executive officer or director. The final rule adds a new paragraph to
Sec. 5.50(h) to incorporate this statutory requirement in order to
provide clearer notice for national banks of their reporting obligation
under section 1817(j)(12).
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\41\ Section 5.50 covers uninsured national banks as well as
insured national banks.
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Earnings limitations under 12 U.S.C. 60 (Sec. 5.64). Section 302
of the FSRRA amended 12 U.S.C. 60 to simplify dividend calculations and
provide a national bank more flexibility to pay dividends as deemed
appropriate by its board of directors. The final rule amends Sec. 5.46
(governing changes in permanent capital) and Sec. 5.64 (governing
dividend earnings limitations) to conform to the new language of
section 60. In addition, the OCC is codifying and clarifying the
interpretation of 12 U.S.C. 60 contained in Interpretive Letter No.
816, issued December 22, 1997.
Prior to its amendment by FSRRA, section 60 provided that a
national bank could only declare a dividend if its surplus fund was at
least equal to its common capital or, in accordance with a computation
prescribed by the statute, it transferred 10 percent of its net income
to surplus. Historically, stock was assigned a par value equivalent to
its estimated market value and the purpose of the transfer requirement
was to provide an additional cushion. This requirement is obsolete
under modern securities issuance practices because stock is issued with
a nominal par value and most of the proceeds received are credited to
the issuer's surplus account. Section 302 of the FSRRA eliminated this
requirement and makes other minor changes to clarify and simplify
dividend calculations.
The final rule makes conforming changes to Sec. 5.64 (earnings
limitation under 12 U.S.C. 60) and Sec. 5.46 (changes in permanent
capital) by eliminating references to the surplus fund requirement. The
final rule also reorganizes and renumbers Sec. 5.64 and adds new
paragraphs (a) and (c)(2). New paragraph (a) adds several defined terms
to make the description of the national bank dividend calculation
clearer. New paragraph (c)(2) codifies Interpretive Letter No. 816,
which discussed the treatment of dividends in excess of a single year's
current net income and concluded that a national bank may offset
certain excess dividends against retained net income from each of the
prior two years. The final rule also clarifies how to calculate
permissible dividends applying the carry-back interpretation described
in Interpretive Letter No. 816. The amendment is intended to eliminate
confusion by providing that excess dividends may be offset by retained
net income in the two years immediately preceding the year in which the
excess occurred.
Specifically, paragraph (c)(2)(i) describes how to calculate
permissible dividends for the current year if a bank has declared a
dividend in excess of net income in the first or second years
immediately preceding the current year. For example, when the excess
dividend occurs in current year minus one, the excess is offset by
retained net income first in current year minus three and then in
current year minus two. When the excess dividend occurs in current year
minus two, the excess is offset by retained net income first in current
year minus four and then in current year minus three. This paragraph
limits the availability of offsets to a maximum of four years prior to
the current year, consistent with the carry-back concept in
Interpretive Letter No. 816. The Interpretive Letter was not intended
to permit a bank to restate retroactively its dividend paying capacity
beyond the four-year period prior to the current year.
Paragraph (c)(2)(ii) clarifies that if a bank still has excess
dividends remaining even after permissible offsets have been applied in
accordance with paragraph (c)(2)(i), the bank must use the remaining
excess dividend amount in calculating its dividend paying capacity.
Paragraph (c)(2)(iii) also clarifies that the carry-back applies only
to retained net loss that results from dividends declared in excess of
a single year's net income, not any other type of current earnings
deficit. As part of the reorganization of Sec. 5.64, information on
how to request a waiver of the dividend limitation was moved to new
paragraph (c)(3) to make it easier to locate.
The final rule also makes a technical amendment to 12 CFR 5.46,
governing changes in permanent capital, to reflect that section 60 as
amended by the FSRRA no longer requires transfers to the surplus fund
as a condition of declaring a dividend.
Part 7--Bank Activities and Operations
National Bank as Guarantor or Surety (Sec. 7.1017)
Section 7.1017 of the OCC's rules currently provides that a
national bank may act as guarantor or surety when it has a substantial
interest in the performance of the transaction or when the transaction
is for the benefit of a customer and the bank obtains from that
customer a segregated deposit account sufficient to cover the amount of
the bank's potential liability. The proposed rule added a new
subsection authorizing national banks to guarantee financial
obligations of a customer, subsidiary, or affiliate under additional
circumstances, provided the amount of the bank's obligation is
reasonably ascertainable and otherwise consistent with applicable law.
As explained in the preamble to the proposed rule, a financial
guaranty or suretyship is essentially a promise to pay if the primary
obligor defaults on its obligation. A guarantor or surety that makes
good on its promise is entitled to reimbursement by the primary
obligor. National banks have authority to ``promise to pay'' or
``guarantee'' the obligations of their customers through bankers'
acceptances and letters of credit. In these transactions, the bank
substitutes its credit for that of its customer and participates in
exchanges of payments as a financial intermediary. These activities
involve the core banking powers of both lending and acting as financial
intermediary.\42\
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\42\ See OCC Interpretive Letter No. 937 (June 27, 2002).
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In approving various types of guarantees in the past, and in
approving a number of arrangements that are functionally similar to
guarantees, the OCC has emphasized that banks must be able to respond
to the evolving needs of their customers, provided always that such
guarantees be issued and managed in a safe and sound manner.\43\
Permitting national banks to exercise their broad authority to act as
guarantor or surety benefits customers by giving banks greater ability
to facilitate customers' financial transactions and by providing banks
with greater flexibility
[[Page 22226]]
to provide financial services in evolving markets.\44\
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\43\ See, e.g., OCC Interpretive Letter No. 177 (Jan. 14, 1981)
(national bank guaranty/reimbursement of third-party payors in
connection with direct deposit pension fund program was permissible;
a contrary holding ``would directly inhibit the growth and
development of direct deposit programs.'') and OCC Interpretive
Letter No. 1010 (Sept. 7, 2004) (national bank may issue financial
warranties on the investment advice and asset allocation services
provided by the bank in the creation and operation of a mutual
fund).
\44\ See NationsBank of North Carolina, N.A. v. Variable Annuity
Life Insurance Co., 513 U.S. 251 (1995).
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In the preamble to the proposed rule, we described the regulatory
change as authorizing a national bank to act as a guarantor or surety
provided the guaranty or surety is financial in nature, reasonably
ascertainable, and otherwise consistent with applicable law. One
commenter asked that we define or modify the terms ``financial in
nature,'' ``reasonably ascertainable in amount,'' and ``complies with
applicable law.'' Specifically, it recommended that we define
``financial in nature'' to reference only those activities determined
by the Federal Reserve Board and Treasury Department to be ``financial
in nature'' as required under 12 U.S.C. 1843(k)(2)(A), require that the
risk in such transactions be ``ascertainable as to amount'' rather than
``reasonably ascertainable in amount,'' and specifically list those
laws that apply to financial guarantees. For the following reasons, we
have not incorporated these suggestions in the regulatory text.
First, the regulatory text as proposed, and in this final rule,
provides that a national bank may ``guarantee financial obligations of
a customer, subsidiary, or affiliate'' provided that the other elements
of the standard are satisfied (emphasis added). The text does not use
the phrase ``financial in nature.'' That phrase appears only in the
preamble and was intended merely to distinguish the types of guarantees
referenced in the amendment which are of a financial character from
other non-financial guarantees, which are not made permissible by the
amendment. The phrase was not intended to connote the range of
activities made permissible for financial holding companies or
financial subsidiaries pursuant to the Gramm-Leach-Bliley Act,\45\ and
our preamble reference to the Gramm-Leach-Bliley Act was intended only
to demonstrate that guaranteeing a financial obligation is itself an
activity that Congress has recognized as permissible and appropriate
for a financial services firm. However, to eliminate any uncertainty
about the scope of the guaranty authority described in subsection (b),
we have added to the regulation language clarifying that only an
obligation that is financial in character is permissible.
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\45\ Public Law 106-102, 113 Stat. 1338 (Nov. 12, 1999).
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The final rule also retains the requirements, without change, that
the amount of the bank's obligation is ``reasonably ascertainable in
amount'' and ``otherwise consistent with applicable law.'' The
requirement that the guaranty or surety be ``reasonably ascertainable
in amount'' is intended to ensure that the issuing bank can determine
the extent of its exposure and engage in the activity in a safe and
sound manner. Moreover, the statement that the guaranty or surety must
be ``consistent with applicable law'' recognizes that other provisions
of law may be applicable to particular transactions. As mentioned in
the preamble to the proposal, these provisions of law include, among
others, limitations on the amount of loans and extensions of credit a
national bank may lend to a borrower (12 CFR part 32) and limitations
on transactions between a bank and its affiliates (sections 23A and 23B
of the Federal Reserve Act). It is not feasible to inventory all laws
that could apply to the financial guaranty transactions permitted under
the amendment as the commenter requested, and we believe the examples
suffice to make clear that other laws may restrict this type of
transaction. Finally, we reiterate the point made in the preamble to
the proposal that the limitations on transactions that would constitute
``insurance'' as principal pursuant to section 302 of the Gramm-Leach-
Bliley Act are unaffected by the amendment.\46\
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\46\ Public Law 106-102, 113 Stat. 1338, 1407 (Nov. 12, 1999),
codified at 15 U.S.C. 6712.
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The preamble to the proposal also indicated that the OCC would
consider whether to provide guidance on risks and risk management in
connection with the issuance of guarantees by national banks. One
commenter responded by requesting that we stipulate specific risk
management standards for any financial guaranty and surety powers we
approve, including, among other things, requirements that the financial
guaranty is prudently priced and appropriately capitalized and
reserved. Another commenter noted that guidance on risks and risk
management would be helpful to the extent that regulatory expectations
vary depending on the method by which a national bank acts as guarantor
or surety. However, this commenter recommended that we narrowly tailor
this guidance to focus on related regulatory expectations and not
dictate terms of agreements entered into by private parties.
We agree that adequate risk measurement and management processes
tailored to manage and control the risks of financial guaranty
activities are necessary to ensure that a bank is conducting its
financial guaranty activity in a safe and sound manner. These include
appropriate standards set by the board of directors, managerial and
staff expertise, policies and operating procedures, risk identification
and measurement, and ongoing evaluation of the specific guarantees
issued; management information systems; and an effective risk control
function that oversees and ensures the appropriateness of the risk
management process. Such risk measurement and risk management processes
should be of a scope and scale appropriate for the nature and
complexity of the bank's financial guaranty activities.
Another commenter suggested that we require national banks to
conduct financial guaranty business through separately capitalized
affiliates that are prohibited from accepting deposits. The OCC
declines to adopt this approach. As indicated above, acting as a
guarantor involves the core banking powers of both lending and acting
as financial intermediary and is therefore a permissible banking
activity that need not be conducted only in a separate legal entity.
OCC rules prescribe the appropriate regulatory capital treatment for
guarantor activities. Moreover, the circumstances under which the
revised provision authorizes guarantor activities--the financial
guaranty is reasonably ascertainable in amount and complies with
applicable law--are safeguards promoting the conduct of these
transactions in a safe and sound manner. Accordingly, it is not
necessary to require national banks to conduct this activity in a
separately capitalized affiliate.
Two commenters specifically addressed capital requirements for
guarantees permitted under this amendment. One commenter recommended
that, because of the ``financial equivalence'' of financial guarantees
and letters of credit, the capital requirements for a financial
guaranty issued by a national bank should be the same as the capital
requirements applicable to a letter of credit in a stated amount equal
to the maximum, as opposed to the expected or ``reasonably
anticipated,'' obligation of the bank under the financial guaranty.
Another commenter asked us to clarify that current capital standards
governing recourse and direct credit substitutes apply to financial
guarantees.
Under the current risk-based capital guidelines, the risk
associated with a bank's guarantees is generally based on the face
amount of the guaranty, where the face amount is usually measured as
[[Page 22227]]
the stated maximum contractual amount of that guaranty.\47\ However,
there are instances where the exposure measure might be less than the
face amount; for example, when the guaranty is conditional or
contingent upon the fulfillment of other criteria.
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\47\ 12 CFR part 3, Appendix A.
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As to recourse and direct credit substitutes, the OCC notes that
the capital regulation for securitization exposures applies to all
direct credit substitutes, which are defined to include guarantees and
financial standby letters of credit that provide credit support to
securitizations. Also, with respect to certain banks that will be
subject to the Internal Ratings Based and Advanced Measurement
Approaches (generally known as ``Basel II''), the capital treatment for
all guaranty exposures is governed by the advanced Internal Ratings
Based Approach.\48\
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\48\ See, generally 12 CFR part 3, Appendix C, part IV (Risk-
Weighted Assets for General Credit Risk) and part V (Risk-Weighted
Assets for Securitization Exposures), 72 FR 69288 (December 7,
2007).
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Accordingly, for the reasons set forth above, we adopt the proposed
financial guarantor provision, with the one clarifying change described
previously.
Cumulative Voting in Election of Directors
Prior to FSRRA, national banking law imposed mandatory cumulative
voting requirements on all national banks. Section 301 of the FSRRA
amended section 5144 of the Revised Statutes of the United States (12
U.S.C. 61) to provide that a national bank may state in its articles of
association whether to provide for cumulative voting in the election of
its directors. Section 301 is consistent with the Model Business
Corporation Act and most States' corporate codes, which provide that
cumulative voting is optional. Our proposal amended 12 CFR 7.2006 to
incorporate this change. We received no comments on this amendment and
adopt it as proposed.
Electronic Banking-Related Amendments
Twelve CFR part 7, Subpart E, contains OCC regulations relating to
various electronic activities. In 2002, the OCC undertook revisions to
part 7 to address the ways in which technological developments were
affecting the business of banking. The proposal included several
additions to this regulation. None of the comment letters addressed
these electronic banking-related amendments and we adopt them in the
final rule as proposed, with updates to the citations listed in the
footnote to Sec. 7.1016. These amendments are described below.
Incidental Electronic Activities. Currently, 12 CFR 7.5001(d) sets
forth the standards that the OCC uses to determine whether an
electronic activity is incidental to, though not part of, the business
of banking because the activity is convenient or useful to the conduct
of the business of banking. The OCC has already codified in its
regulations two incidental electronic activities: The sale of excess
electronic capacity and by-products (Sec. 7.5004) and incidental non-
financial data processing (Sec. 7.5006). We are amending Sec.
7.5001(d) to add other examples of electronic incidental activities
that we have since approved for national banks. These activities are:
Web site development where incidental to other electronic banking
services; \49\ Internet access and e-mail provided on a non-profit
basis as a promotional activity; \50\ advisory and consulting services
on electronic activities where the services are incidental to customer
use of electronic banking services; \51\ and the sale of equipment that
is convenient or useful to customers' 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).\52\ This list is illustrative and not exclusive, and the
OCC may determine in the future that activities not on this list are
permissible pursuant to this authority.
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\49\ See OCC Corporate Decision No. 2002-13, July 31, 2002.
\50\ See OCC Conditional Approval No. 612, Nov. 21, 2003.
\51\ See OCC Corporate Decision No. 2002-11, June 28, 2002.
\52\ See OCC Interpretive Letter No. 1036, Aug. 10, 2005.
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Electronic Letters of Credit. Section 7.1016 permits national banks
to issue letters of credit within the scope of applicable laws or rules
of practice recognized by law, and includes an illustrative footnote
that cites examples of these laws and practices. Section 7.5002 permits
a national bank to perform, provide or deliver through electronic means
and facilities any activity, function, product, or service that a bank
is otherwise authorized to perform, provide, or deliver, if the
electronic activity is subject to standards or conditions designed to
provide that the activity functions as intended, is conducted safely
and soundly, and accords with other applicable statutes, regulations,
or supervisory policies and guidance of the OCC. Section 7.5002
includes a list of permissible electronic activities that currently
does not include electronic letters of credit. Because the OCC has
determined that a national bank may issue an electronic letter of
credit in a safe and sound manner in accordance with applicable laws
and OCC guidance and policies, the OCC is amending Sec. 7.5002 by
adding the issuance of electronic letters of credit within the scope of
Sec. 7.1016 to the list of banking activities that a national bank can
conduct by electronic means and facilities.
The proposal also amended the footnote in Sec. 7.1016 to include a
reference to the International Chamber of Commerce (ICC) supplement to
UCP 500 for Electronic Presentation (eUCP) (the uniform customs and
practices for documentary credits for electronic presentations) as a
law that supports electronic letters of credit. We have updated this
citation in the final rule to reflect the new version of the ICC's
Uniform Customs and Practices for Documentary Credits, Publication No.
600, which became effective in July 2007. We also have made a
corresponding update to the citation to the ICC's Uniform Customs and
Practices for Documentary Credits already included in the current
footnote.
Software That Is Part of the Business of Banking. Currently, OCC
regulations list software acquired or developed by the bank for banking
purposes or to support its banking business as an example of an
electronic by-product that a national bank can sell to others as a
permissible ``incidental'' activity.\53\ This final rule expands Sec.
7.5006 to address, as ``part of the business of banking,'' the sale of
software that performs services or functions that a national bank can
perform directly, thereby codifying previous OCC interpretations.\54\
We note that software that is part of the business of banking can be
sold without regard to any other banking product or service, whereas
software that is incidental must be shown to be convenient or useful to
another activity that is authorized for national banks.\55\
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\53\ 12 CFR 7.5004.
\54\ See, e.g., Corporate Decision 2003-6, March 17, 2003.
\55\ See 12 CFR 7.5001(c) and 7.5001(d).
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Our proposal asked commenters to identify any other areas of
subpart E that should be revised to recognize the evolving role of
technology. We received no comments in response to this request and
have not made any additional amendments to subpart E in this final
rule.
[[Page 22228]]
Part 9--Fiduciary Activities of National Banks
In response to recent amendments made by the SEC to its rules and
forms under section 17A of the Exchange Act, the OCC proposed to amend
its transfer agent rule at Sec. 9.20 to clarify the procedures
applicable to national bank transfer agents. None of the comment
letters addressed these amendments, and the final rule includes these
amendments as proposed.
Specifically, under the SEC's amended rules, all transfer agents,
including national bank transfer agents, are required to file annual
reports electronically with the SEC through the SEC's Electronic Data
Gathering, Analysis, and Retrieval (``EDGAR'') system. In addition,
nonbank transfer agents now must file registration and withdrawal forms
electronically with the SEC through the EDGAR system. The SEC's amended
rules do not require national bank transfer agents to file registration
or withdrawal forms with the SEC electronically or otherwise.
Currently, Sec. 9.20(a) of the OCC's rules cross-references to the
SEC's rules with respect to registration. This cross-reference may make
it appear that national bank transfer agents also are subject to the
requirement to file registration and withdrawal forms through the SEC's
EDGAR system. To avoid confusion regarding electronic filing, the final
rule replaces the cross-reference in Sec. 9.20(a) to the SEC's
transfer agent registration and withdrawal rules with specific
procedures for filing applications for registration, amending
registrations, and withdrawals from registration with the OCC. This
amendment will not result in any substantive changes for national bank
transfer agents. National bank transfer agents will continue to file
applications for registration, amendments to registration, and
withdrawals from registration with the OCC as previously required.
In addition, to reflect the SEC's revision and renumbering of its
transfer agent rules, the final rule removes the specific citations in
Sec. 9.20(b) to the SEC's rules in favor of a more general reference.
This amendment makes no substantive changes to Sec. 9.20(b). This
change will, however, avoid the need for the OCC to revise our
regulation each time the SEC makes changes to its transfer agent rules.
Part 10--Municipal Securities Dealers
As in our proposal, the final rule amends Sec. 10.1(a) to
eliminate the application of part 10 to DC banks, consistent with the
DC Bank Act.
Part 11--Securities Exchange Act Disclosure Rules
Part 11 addresses the rules, regulations, and filing requirements
that apply to national banks with one or more classes of securities
subject to the registration provisions of sections 12(b) and (g) of the
Exchange Act (15 U.S.C. 78l(b) & (g)). As in the proposal, this final
rule amends Sec. 11.1(a) to remove DC banks from the scope of part 11,
consistent with the DC Bank Act.
Part 12--Recordkeeping and Confirmation Requirements for Securities
Transactions
Section 12.7(a)(4) requires bank officers and employees who make
investment recommendations or decisions for customers to report their
personal transactions in securities to the bank within ten business
days after the end of the calendar quarter. The OCC modeled this
reporting requirement on SEC Rule 17j-1 (17 CFR 270.17j-1), issued
pursuant to the Investment Company Act of 1940, which, at the time of
the most recent revision to this OCC requirement in 1996, required
``access persons'' to report their personal transactions in securities
within ten days after the end of the calendar quarter.\56\ However, in
July 2004 the SEC amended Rule 17j-1 to expand this ten-day deadline to
30 days.\57\
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\56\ See 61 FR 63958 (Dec. 2, 1996). The OCC's reporting
requirement under 12 CFR 12.7(a)(4) is a separate requirement from
any applicable requirements under SEC Rule 17j-1. However, an
''access person'' required to file a report with a national bank
pursuant to SEC Rule 17j-1 need not file a separate report under the
OCC's reporting requirement if the required information is the same.
See 12 CFR 12.7(d). The SEC rule defines ''access person'' as
including directors, officers, and certain employees of the
investment adviser. 17 CFR 270.17j-1(a)(1).
\57\ See 69 FR 41696 (July 9, 2004).
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To conform part 12 with the current SEC filing deadline in SEC Rule
17j-1, the proposed rule amended Sec. 12.7(a)(4) by replacing the 10-
business day filing deadline for reporting personal transactions in
securities with the deadline specified in SEC rule 17j-1. We received
no comments on this change and adopt it as proposed. This amendment
will enable bank employees that are subject to both SEC Rule 17j-1 and
the OCC's securities recordkeeping and confirmation regulation to file
by the same deadline, thereby eliminating employee confusion as well as
the regulatory burden associated with complying with two separate
filing deadlines.
Part 16--Securities Offering Disclosure Rules
Part 16 governs offers and sales of bank securities by issuers,
underwriters, and dealers. The proposed rule made a number of
amendments to Part 16. We received only one comment on these part 16
amendments, relating to Sec. 16.6 (sale of nonconvertible debt). As
explained below, we decline to revise our proposed amendment to Sec.
16.6, and adopt all of our amendments to part 16 as proposed.\58\
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\58\ We note that the OCC has made an additional amendment to
Part 16 in a separate rulemaking. This amendment reduces unnecessary
regulatory burden by amending Sec. 16.15 to provide a general
waiver of certain requirements for organizing groups seeking to
establish a national bank charter. See 73 FR 12009 (March 6, 2008).
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Definitions (Sec. 16.2)
As in the proposal, the final rule eliminates DC banks from the
definition of ``bank'' in Sec. 16.2(b), consistent with the DC Bank
Act.
Sales of Nonconvertible Debt (Sec. 16.6)
Section 16.6(a)(3) requires bank debt issued under Sec. 16.6 to be
in a minimum denomination of $250,000 and requires each note or
debenture to show on its face that it cannot be exchanged for notes or
debentures in smaller denominations. However, this legend requirement
cannot be satisfied--and would serve no purpose--if the bank is using a
paperless book entry form, which has become the more current form of
issuance used by banks and other securities issuers. Our proposal
amended Sec. 16.6(a)(3) to provide that this legend requirement only
applies to debt issued in certificate form. All other requirements of
Sec. 16.6, including the requirement of minimum denominations of
$250,000, would continue to apply to all bank sales of nonconvertible
debt, whether issued in certificate or book entry form.
We received one comment on this proposed amendment that recommended
that we also remove the requirements in Sec. 16.6 that the debt be
offered and sold only to accredited investors and sold in minimum
denominations of $250,000, as these requirements do not apply to State
member banks and State-licensed branches of non-U.S. banks. We decline
to make this change. These requirements--sales only to accredited
investors and only in a minimum denomination of $250,000--serve as
important investor/consumer protection tools and foster safe and sound
banking practices. Therefore, the final rule makes no changes from the
proposal in this regard.
[[Page 22229]]
Nonpublic Offerings (Sec. 16.7)
Part 16 provides that, absent an available exemption, no person may
offer and sell a security issued by a national bank without meeting the
registration and prospectus delivery requirements of part 16. Part 16
generally incorporates by reference the definitions, registration, and
prospectus delivery requirements of the Securities Act and SEC
implementing rules, including Regulation D under the Securities
Act.\59\ Section 16.7(a) of the OCC's nonpublic offering regulation
provides that the OCC will deem offers and sales of bank-issued
securities to be exempt from the registration and prospectus
requirements of part 16 if they meet certain requirements, including
filing with the OCC a notice on Form D that meets the requirements of
Regulation D.\60\
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\59\ 17 CFR 230.501 et seq.
\60\ 17 CFR 230.503.
---------------------------------------------------------------------------
Form D requires the issuer to disclose basic information concerning
the identity of the issuer and the offering, including the exemption
being claimed and information regarding the offering price, number of
investors, expenses, and use of proceeds. However, the OCC does not use
the information in the Form D for any supervisory or other particular
purpose, and the OCC does not treat the requirement to file a Form D as
a condition to the availability of an exemption under part 16.
Furthermore, the SEC adopted Form D for reasons that do not directly
apply to the OCC.\61\ Accordingly, as proposed, we have eliminated the
requirement to file a Form D.
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\61\ Specifically, Form D serves a useful purpose for the SEC as
a uniform State notification form for purposes of the States'
Uniform Limited Offering Exemption, which is inapplicable to
national banks. In addition, the SEC uses the information in the
forms to conduct economic and other analyses of the private
placement market in general. The OCC does not use the information in
the Form D for this purpose. See Sec. Act. Release No. 33-6339, 46
FR 41,791 (Aug. 18, 1981).
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Securities Offered and Sold in Bank Holding Company Dissolution (New
Sec. 16.9)
The OCC's current securities offering disclosure rules, at part 16,
have resulted in some confusion as to whether offers and sales of bank-
issued securities in connection with the dissolution of the bank's
holding company are exempt from the Sec. 16.3 registration statement
and prospectus requirements. As in the proposal, the final rule
resolves this uncertainty by codifying specific requirements that apply
in order for the offer and sale of bank securities in a bank holding
company dissolution to be exempt from the Sec. 16.3 registration
statement and prospectus requirements.
Specifically, the final rule adds a new Sec. 16.9 that would
expressly exempt from the Sec. 16.3 registration statement and
prospectus requirements offers and sales of bank-issued securities in
connection with the dissolution of the holding company of the bank if
those transactions satisfy the following requirements: (1) The offer
and sale of bank-issued securities occurs solely as part of a
dissolution in which the security holders exchange their shares of
stock in a holding company that had no significant assets other than
securities of the bank, for bank stock; (2) the security holders
receive, after the dissolution, substantially the same proportional
share of interests in the bank as they held in the holding company; (3)
the rights and interests of the security holders in the bank are
substantially the same as those in the holding company prior to the
transaction; and (4) the bank has substantially the same assets and
liabilities as the holding company had on a consolidated basis prior to
the transaction.
As we noted in the preamble to the proposed rule, these
requirements parallel the conditions that must be satisfied in order
for securities issued in connection with an acquisition by a holding
company of a bank (pursuant to section 3(a) of the Bank Holding Company
Act of 1956) to be eligible for exemption from the registration
requirements of section 3(a)(12) of the Securities Act, and are equally
appropriate in the reverse context where bank-issued securities are
offered and sold in connection with the dissolution of the bank's
holding company.
From a shareholder protection standpoint, the rationale for not
requiring a registration statement for the formation of a shell holding
company--that the interests of the bank and company shareholders are
essentially the same--would apply equally to dissolution of a shell
holding company. The business rationale--reduction of costs of
dissolution of a holding company if a bank decides it does not need the
flexibility of a holding company structure--also is similar.
The final rule also makes conforming amendments to part 16 by
amending Sec. 16.5(a) to clarify that the exemption under section
3(a)(12) of the Securities Act is not available and adding a reference
to new Sec. 16.9 in the listing of exempt securities under Sec. 16.5.
Removal of Current and Periodic Report Filing (Sec. 16.20)
State banks and national banks are both subject to the Exchange
Act's periodic and current reporting requirements if they have one or
more classes of securities subject to the registration provisions of
section 12(g) of the Exchange Act.\62\ Pursuant to that statute, banks
having a class of equity securities held by 500 or more owners of
record are required to register that class of securities under Sec.
12(g) of the Exchange Act.\63\ Once registered, a bank becomes subject
to the periodic and current reporting requirements of the Exchange Act.
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\62\ See Exchange Act Sec. 12(i), 15 U.S.C. 78l(i), 12 CFR part
335, and 12 CFR part 11.
\63\ Section 12(g) of the Exchange Act also requires a bank to
have more than $1 million of assets.
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Section 16.20 of the OCC's regulations imposes periodic and current
reporting requirements for national banks that file registration
statements with the OCC for the public offering of their securities.
Pursuant to Sec. 16.20, a national bank must file periodic and current
reports after the registration statement becomes effective, even if the
bank is not otherwise required to register its securities under the
Exchange Act. This periodic and current reporting requirement was based
on that imposed by section 15(d) of the Exchange Act on other entities
filing Securities Act registration statements with the SEC.\64\ The OCC
adopted this periodic and current reporting requirement in
consideration of the interests of potential purchasers in a bank's
public offering to have access to updated information necessary for
their investment decisions, in the same manner as investors in other
companies.
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\64\ 59 FR 54789 (Nov. 2, 1994).
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The periodic and current reporting requirements of Sec. 16.20
apply to national banks until the securities to which the national
bank's registration statement relates are held of record by fewer than
300 persons. The FDIC and the Federal Reserve Board have not imposed a
comparable obligation on State banks. Instead, a State bank that
conducts public offerings of their securities are subject to Exchange
Act periodic and current reporting requirements only if the bank has
more than 500 shareholders.
As in the proposal, the final rule eliminates Sec. 16.20 in order
to reduce regulatory burden with respect to small national banks that
file registration statements with the OCC for the public offering of
their securities. Thus, only a national bank that has 500 or more
shareholders of record will be subject to
[[Page 22230]]
the Exchange Act periodic and current reporting requirements.\65\ We
also make a conforming change to Sec. 16.6 by deleting the reference
to Sec. 16.20 in that section.
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\65\ See Exchange Act Sec. 12(i), 15 U.S.C. 78l(i) and 12 CFR
part 11.
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As noted in the preamble to our proposal, this change will not
significantly diminish financial information about a bank that will be
available to investors, as updated financial information, including the
bank's most recent balance sheet and statement of income filed with the
OCC as part of the bank's most recent Consolidated Report of Condition
(Call Report), is publicly available to investors. This change also
will have no effect on the requirement under the OCC's Exchange Act
disclosure rule at 12 CFR part 11 that a national bank whose securities
are registered under section 12(b) or 12(g) of the Exchange Act must
file current and periodic reports that conform to section 13 of the
Exchange Act.
Part 19--Rules of Practice and Procedure
The FSRRA made several changes affecting the OCC's exercise of its
enforcement authority pursuant to section 8 of the FDI Act \66\ and our
proposed rule amended part 19 to reflect these changes. We also
proposed to update the titles of OCC officials referenced in Sec. Sec.
19.111 and 19.112 and to eliminate the applicability of part 19 to DC
banks by deleting a reference to DC banks in the definition of
``institution'' in Sec. 19.3(g) and in the scope section of subpart P,
Sec. 19.241, which relates to the removal, suspension, and debarment
of accountants from performing audit services. No commenter discussed
these amendments, and we adopt them as proposed, with two technical
amendments, as discussed below.
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\66\ 12 U.S.C. 1818.
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More specifically, section 303 of the FSRRA changed the procedures
for issuing orders of suspension, removal or prohibition against
institution-affiliated parties (IAPs) of national banks. Previously,
section 8(e)(4) of the FDI Act 12 U.S.C. 1818(e)(4) required that,
following proceedings before an administrative law judge, the
determination whether to issue such orders would be made by the Federal
Reserve Board. Section 303 of the FSRRA repealed that requirement, so
that the OCC now has the authority to issue such orders, as it does
with respect to other types of orders resulting from an OCC-initiated
enforcement action. Our final rule amends Sec. 19.100, pertaining to
OCC adjudications, to reflect this change in the law.
Section 8(g) of the FDI Act pertains to the suspension, removal, or
prohibition of an IAP when the IAP is the subject of an information,
indictment, or complaint involving certain crimes set forth in the
statute or when the IAP has been convicted of such a crime.\67\ Section
708 of the FSRRA revised the statutory grounds that warrant suspension,
removal or prohibition of an IAP from further participation in the
conduct of the affairs of a depository institution, including a
national bank, in such a case. Section 708 also clarified that, if
grounds exist, an appropriate Federal banking agency, including the
OCC, may suspend or prohibit the IAP from participating in the affairs
of any depository institution, and not only the institution with which
the party is, or was last, affiliated. The amendment further clarified
that this authority applies even if the IAP is no longer associated
with the depository institution at which the offense allegedly occurred
or if the depository institution with which the IAP was affiliated no
longer exists. The final rule amends Sec. Sec. 19.110, and 19.111, and
19.113 to conform to these amendments. We also have made a technical
correction to our amendment to Sec. 19.111, adding back in language
inadvertently removed from our current rule relating to the time period
allowed for an institution-affiliated party to request a hearing. In
addition, the final rule includes a technical amendment to both
Sec. Sec. 19.110 and 19.111 not included in the proposed rule.
Specifically, we are inserting the phrase ``pursuant to 12 U.S.C.
1818(g)'' in these two paragraphs to clarify that these provisions
provide procedures for suspensions and removals of institution-
affiliated parties charged with a felony.
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\67\ Id. at 1818(g).
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Part 21--Minimum Security Devices and Procedures, Reports of Suspicious
Activities, and Bank Secrecy Act Compliance Program
Part 21 consists of three subparts. Subpart A requires each bank to
adopt appropriate security procedures to discourage robberies,
burglaries, and larcenies and to assist in identifying and apprehending
persons who commit such acts. Subpart B ensures that national banks
file a Suspicious Activity Report when they detect a known or suspected
violation of Federal law or a suspicious transaction related to a money
laundering activity or a violation of the Bank Secrecy Act. Subpart C
requires that all national banks establish and maintain procedures
reasonably designed to assure and monitor their compliance with the
requirements of the Bank Secrecy Act and its implementing regulations.
As in the proposed rule, the final rule removes references to DC
banks in the scope section of part 21 to clarify that part 21 no longer
applies to DC banks, pursuant to the DC Bank Act.
Part 22--Loans in Areas Having Special Flood Hazards
Part 22 applies to loans secured by buildings or mobile homes
located or to be located in areas subject to special flood hazards. It
implements the requirements of the National Flood Insurance Act of 1968
and the Flood Disaster Protection Act of 1973. As in the proposed rule,
this final rule eliminates the applicability of part 22 to DC banks by
removing DC banks from the definition of ``bank'' in Sec. 22.2(b).
Part 23--Leasing
Part 23 contains the standards for personal property lease
financing transactions authorized for national banks. Section 23.6
applies the lending limits of 12 U.S.C. 84 or, if the lessee is an
affiliate of the bank, the restrictions on transactions with affiliates
prescribed by 12 U.S.C. 371c and 371c-1 to these lease transactions.
The proposal added to Sec. 23.6 cross-references to the Federal
Reserve Board's Regulation W, 12 CFR part 223, which implements 12
U.S.C. 371c and 371c-1. We proposed this change because Regulation W
contains new provisions that do not appear in 12 U.S.C. 371c and 371c-
1. In addition, Regulation W contains a definition of the term
``affiliate'' that is broader than the definition that appears in Sec.
371c and Sec. 371c-1. The proposal also added to Sec. 23.6 a cross-
reference to 12 CFR part 32, which implements 12 U.S.C. 84, for
consistency in reader reference. We adopt these amendments as proposed,
with minor corrections to the regulatory text.
Part 24--Community Development Investments
The FSRRA made a number of changes to section 24 (Eleventh), the
authorizing statute for 12 CFR part 24. Prior to its amendment by the
FSRRA, 12 U.S.C. 24 (Eleventh) authorized a national bank to ``make
investments designed primarily to promote the public welfare, including
the welfare of low- and moderate-income communities or families (such
as by providing housing, services, or jobs)'' (the public welfare
test). A national bank could
[[Page 22231]]
``make such investments directly or by purchasing interests in an
entity primarily engaged in making such investments.'' The FSRRA
narrowed the grant of authority in section 24 (Eleventh) by providing
that a national bank may ``make investments, directly or indirectly,
each of which promotes the public welfare by benefiting primarily low-
and moderate-income communities or families (such as by providing
housing, services, or jobs).'' The FSRRA also revised section 24
(Eleventh) to state explicitly that the authority to make public
welfare investments applies to investments made by a national bank
directly and by its subsidiaries.\68\ In addition, the FSRRA raised the
maximum aggregate outstanding investment limit under section 24
(Eleventh) from 10 to 15 percent of the bank's unimpaired capital and
surplus.
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\68\ FSRRA, Sec. 305, 120 Stat. at 1970-71.
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The proposal revised part 24 to conform to these changes. In
addition, the proposal made changes to the procedure that applies when
a national bank requests OCC approval to exceed the investment limit,
and made a number of conforming and technical changes to part 24. The
commenters did not address these amendments to part 24. We therefore
adopt them in the final rule as proposed, with the exception of Sec.
24.2(c) in which we correct a drafting error. These amendments are
described below.
Definition of ``Community and Economic Development Entity'' (CEDE)
(Sec. 24.2(c))
The final rule amends the definition of a CEDE in Sec. 24.2(c) to
implement the FSRRA change to the public welfare test. Paragraph (c)
now defines a CEDE as ``an entity that makes investments or conducts
activities that promote the public welfare by benefiting primarily low-
and moderate-income areas or individuals''. We also have made a
technical correction to the Federal Register formatting instructions,
which in the proposed rule had inadvertently removed the remaining part
of this definition that contained a non-exclusive list of examples of
the types of entities that may be CEDEs. The final rule replaces this
text.
Definition of ``Benefiting Primarily Low- and Moderate-Income Areas or
Individuals'' (Sec. 24.2(g))
As indicated above, 12 U.S.C. 24 (Eleventh) now authorizes a
national bank and its subsidiaries to make investments that promote the
public welfare by ``benefiting primarily'' low- and moderate-income
areas or individuals. The final rule defines ``benefiting primarily low
and moderate-income areas or individuals'' when used to describe an
investment to mean that: (1) A majority (more than 50 percent) of the
investment benefits low- and moderate-income areas or individuals; or
(2) the express, primary purpose of the investment (evidenced, for
example, by government eligibility requirements) is to benefit ``low-
and moderate-income areas or individuals.'' As we noted in the preamble
to the proposed rule, this definition is consistent with the way in
which the OCC and the other Federal banking agencies have construed the
concept of ``primary'' in the phrase ``primary purpose'' for community
development activities pursuant to the CRA rules.\69\
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\69\ See Interagency Questions and Answers Regarding Community
Reinvestment, Q&A Sec. Sec. --.12(i) and 563e.12(h)-7, 66 FR 36620,
36627 (July 12, 2001) (explaining ``primary purpose'' for community
development activities in the context of the CRA rules).
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Public Welfare Investments (Sec. Sec. 24.3, 24.1)
The final rule revises Sec. 24.3, which contains the authorization
to make investments pursuant to section 24 (Eleventh), to conform with
the changes made by the FSRRA. The final rule also adds a new Sec.
24.1(e) to clarify that investments made, or written commitments to
make investments entered into, before the enactment of the FSRRA
continue to be subject to the statutes and regulations in effect prior
to October 13, 2006.\70\
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\70\ See 152 Cong. Rec. H7586 (daily ed. Sept. 29, 2006)
(colloquy between Chairman Oxley of the House Financial Services
Committee and Ranking Member Frank) (explaining that the revised
standard in section 24 (Eleventh) applies prospectively only and
does not affect investments made, or written commitments to make
investments that were entered into, prior to the enactment of the
new standard).
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