[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR250.221]

[Page 679-680]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 250--MISCELLANEOUS INTERPRETATIONS--Table of Contents
 
Sec. 250.221  Issuance and sale of short-term debt obligations by bank holding companies.

    (a) The opinion of the Board of Governors of the Federal Reserve 
System has been requested recently with respect to the proposed sale of 
``thrift notes'' by a bank holding company for the purpose of supplying 
capital to its wholly-owned nonbanking subsidiaries.
    (b) The thrift notes would bear the name of the holding company, 
which in the case presented, was substantially similar to the name of 
its affiliated banks. It was proposed that they be issued in 
denominations of $50 to $100 and initially be of 12-month or less 
maturities. There would be no maximum amount of the issue. Interest 
rates would be variable according to money market conditions but would 
presumably be at rates somewhat above those permitted by Regulation Q 
ceilings. There would be no guarantee or indemnity of the notes by any 
of the banks in the holding company system and, if required to do so, 
the holding company would place on the face of the notes a negative 
representation that the purchase price was not a deposit, nor an 
indirect obligation of banks in the holding company system, nor covered 
by deposit insurance.
    (c) The notes would be generally available for sale to members of 
the public, but only at offices of the holding company and its 
nonbanking subsidiaries. Although offices of the holding company may be 
in the same building or quarters as its banking offices, they would be 
physically separated from the banking offices. Sales would be made only 
by officers or employees of the holding company and its nonbanking 
subsidiaries. Initially, the notes would only be offered in the State in 
which the holding company was principally doing business, thereby 
complying with the exemption provided by section 3(a)(11) of the 
Securities Act of 1933 (15 U.S.C. 77c) for ``intra-state'' offerings. If 
it was decided to offer the notes on an interstate basis, steps would be 
taken to register the notes under the Securities Act of 1933. Funds from 
the sale of the notes would be used only to supply the financial needs 
of the nonbanking subsidiaries of the holding company. These nonbank 
subsidiaries are, at present, a small loan company, a mortgage banking 
company and a factoring company. In no instance would the proceeds from 
the sale of the notes be used in the bank subsidiaries of the holding 
company nor to maintain the availability of funds in its bank 
subsidiaries.
    (d) The sale of the thrift notes, in the specific manner proposed, 
is an activity described in section 20 of the Banking Act of 1933 (12 
U.S.C. 377), that is, ``the issue, flotation, underwriting, public sale 
or distribution * * * of * * * notes, or other securities''. Briefly 
stated, this statute prohibits a member bank to be affiliated with a 
company ``engaged principally'' in such activity. Since the continued 
issuance and sale of such securities would be necessary to permit 
maintenance of the holding company's activities without substantial 
contraction and would be an integral part of its operations, the Board 
concluded that the issuance and sale of such notes would constitute a 
principal activity of a holding company within the spirit and purpose of 
the statute.

[[Page 680]]

(For prior Board decisions in this connection, see 1934 Federal Reserve 
Bulletin 485, 12 CFR 218.104, 12 CFR 218.105 and 12 CFR 218.101.)
    (e) In reaching this conclusion, the Board distinguished the 
proposed activity from the sale of short-term notes commonly known as 
commercial paper, which is a recognized form of financing for bank 
holding companies. For purposes of this interpretation, commercial paper 
may be defined as notes, with maturities not exceeding nine months, the 
proceeds of which are to be used for current transactions, which are 
usually sold to sophisticated institutional investors, rather than to 
members of the general public, in minimum denominations of $10,000 
(although sometimes they may be sold in minimum denominations of 
$5,000). Commercial paper is exempt from registration under the 
Securities Act of 1933 by reason of the exemption provided by section 
3(a)(3) thereof (15 U.S.C. 77c). That exemption is inapplicable where 
the securities are sold to the general public (17 CFR 231.4412). The 
reasons for such exemption, taken together with the abuses that gave 
rise to the passage of the Banking Act of 1933 (``the Glass-Steagall 
Act''), have led the Board to conclude that the issuance of commercial 
paper by a bank holding company is not an activity intended to be 
included within the scope of section 20.

(Interprets and applies 12 U.S.C. 377 and 1843)

[Reg. Y, 38 FR 35231, Dec. 26, 1973]