Federal Reserve System Pt. 250 - GPO · PDF fileFederal Reserve System Pt. 250 §231.2...

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Federal Reserve System Pt. 250

§ 231.2 Definitions.

As used in this part, unless the con-text requires otherwise:

(a) Act means the Federal Deposit In-surance Corporation Improvement Actof 1991 (Pub. L. 102–242, 105 Stat. 2236),as amended.

(b) Affiliate, with respect to a person,means any other person that controls,is controlled by, or is under commoncontrol with the person.

(c) Financial contract means a quali-fied financial contract as defined insection 11(e)(8)(D) of the Federal De-posit Insurance Act (12 U.S.C.1821(e)(8)(D)), as amended, except thata forward contract includes a contractwith a maturity date two days or lessafter the date the contract is enteredinto (i.e., a ‘‘spot’’ contract).

(d) Financial market means a marketfor a financial contract.

(e) Gross mark-to-market positions inone or more financial contracts meansthe sum of the absolute values of posi-tions in those contracts, adjusted to re-flect the market values of those posi-tions in accordance with the methodsused by the parties to each contract tovalue the contract.

(f) Person means any legal entity, for-eign or domestic, including a corpora-tion, unincorporated company, part-nership, government unit or instru-mentality, trust, natural person, orany other entity or organization.

§ 231.3 Qualification as a financial in-stitution.

(a) A person qualifies as a financialinstitution for purposes of sections 401–407 of the Act if it represents, orally orin writing, that it will engage in finan-cial contracts as a counterparty onboth sides of one or more financialmarkets and either—

(1) Had one or more financial con-tracts of a total gross dollar value of atleast $1 billion in notional principalamount outstanding on any day duringthe previous 15-month period withcounterparties that are not its affili-ates; or

(2) Had total gross mark-to-marketpositions of at least $100 million (ag-gregated across counterparties) in oneor more financial contracts on any dayduring the previous 15-month period

with counterparties that are not its af-filiates.

(b) If a person qualifies as a financialinstitution under paragraph (a) of thissection, that person will be considereda financial institution for the purposesof any contract entered into during theperiod it qualifies, even if the personsubsequently fails to qualify.

(c) If a person qualifies as a financialinstitution under paragraph (a) of thissection on March 7, 1994, that personwill be considered a financial institu-tion for the purposes of any outstand-ing contract entered into prior toMarch 7, 1994.

[Reg. EE, 59 FR 4784, Feb. 2, 1994, as amendedat 61 FR 1274, Jan. 19, 1996]

PART 250—MISCELLANEOUSINTERPRETATIONS

INTERPRETATIONS

Sec.250.120 Underwriting bonds payable from

proceeds of State sales taxes.250.121 Application of investment securities

regulation to member State banks.250.122 Underwriting of public Authority

bonds payable from rents under leasewith governmental entity having generaltaxing powers.

250.123 Underwriting of notes payable fromproceeds of subsequent sale of general ob-ligation bonds.

250.140 Member bank acquisition of stock ofanother bank.

250.141 Member bank purchase of stock of‘‘operations subsidiaries.’’

250.142 Meaning of ‘‘obligor or maker’’ indetermining limitation on securities in-vestments by member State banks.

250.143 Member bank purchase of stock offoreign operations subsidiaries.

250.160 Federal funds transactions.250.161 Capital notes and debentures as

‘‘capital,’’ ‘‘capital stock,’’ or ‘‘surplus.’’250.162 Undivided profits as ‘‘capital stock

and surplus’’.250.163 Inapplicability of amount limita-

tions to ‘‘ineligible acceptances.’’250.164 Bankers’ acceptances.250.165 Bankers’ acceptances: definition of

participations.250.166 Treatment of mandatory convertible

debt and subordinated notes of statemember banks and bank holding compa-nies as ‘‘capital’’.

250.180 Reports of changes in control ofmanagement.

250.181 Reports of change in control of bankmanagement incident to a merger.

250.182 Terms defining competitive effects

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of proposed mergers.250.200 Investment in bank premises by

holding company banks.250.220 Whether member bank acting as

trustee is prohibited by section 20 of theBanking Act of 1933 from acquiring ma-jority of shares of mutual fund.

250.221 Issuance and sale of short-term debtobligations by bank holding companies.

250.240 Applicability of section 23A of theFederal Reserve Act to transactions be-tween a member State bank and its ‘‘op-erations subsidiary’’.

250.241 Exclusion from section 23A of theFederal Reserve Act for certain trans-actions subject to review under the BankMerger Act.

250.242 Section 23A of the Federal ReserveAct—definition of capital stock and sur-plus.

250.250 Applicability of section 23A of theFederal Reserve Act to a member Statebank’s purchase of, or participation in, aloan originated by a mortgage bankingaffiliate.

250.260 Miscellaneous interpretations; goldcoin and bullion.

BANK SERVICE ARRANGEMENTS

250.300 Kinds of bank servicers subject toBoard examination under the Bank Serv-ice Corporation Act.

250.301 Scope of investment authority andnotification requirement under the BankService Corporation Act.

250.302 Applicability of Bank Service Cor-poration Act to bank credit card serviceorganization.

INTERPRETATIONS OF SECTION 32 OF THEGLASS-STEAGALL ACT

250.400 Service of open-end investment com-pany.

250.401 Director serving member bank andclosed-end investment company being or-ganized.

250.402 Service as officer, director, or em-ployee of licensee corporation under theSmall Business Investment Act of 1958.

250.403 Service of member bank and real es-tate investment company.

250.404 Serving as director of member bankand corporation selling own stock.

250.405 No exception granted a special orlimited partner.

250.406 Serving member bank and invest-ment advisor with mutual fund affili-ation.

250.407 Interlocking relationship involvingsecurities affiliate of brokerage firm.

250.408 Short-term negotiable notes ofbanks not securities under section 32,Banking Act of 1933.

250.409 Investment for own account affectsapplicability of section 32.

250.410 Interlocking relationships between

bank and its commingled investment ac-count.

250.411 Interlocking relationships betweenmember bank and variable annuity in-surance company.

250.412 Interlocking relationships betweenmember bank and insurance company-mutual fund complex.

250.413 ‘‘Bank-eligible’’ securities activities.

AUTHORITY: 12 U.S.C. 78, 248(i) and 371c(e).

SOURCE: 33 FR 9866, July 10, 1968, unlessotherwise noted.

INTERPRETATIONS

§ 250.120 Underwriting bonds payablefrom proceeds of State sales taxes.

(a) The opinion of the Board of Gov-ernors of the Federal Reserve Systemhas been requested with respect to theauthority of member State banks tounderwrite securities issued by Statesand political subdivisions thereof, withparticular reference to $35,750,000 ofPublic Building Bonds, 1961, Series D,and Public School Plant FacilitiesBonds, 1961, Series C, of the State ofWashington. The Comptroller of theCurrency has held that said bonds areeligible for underwriting by nationalbanks.

(b) Paragraph Seventh of section 5136of the Revised Statutes (12 U.S.C. 24)provides that a national bank ‘‘shallnot underwrite any issue of securities’’,but further provides that this restric-tion ‘‘shall not apply to * * * generalobligations of any State or of any po-litical subdivision thereof’’. The 20thparagraph of section 9 of the FederalReserve Act (12 U.S.C. 335) subjectsState member banks to the same limi-tations with respect to the underwrit-ing of investment securities ‘‘as are ap-plicable in the case of national banksunder paragraph ‘Seventh’ of section5136.’’

(c) Under the statutory provisionsquoted above, member banks are pro-hibited from underwriting securitiesissued by a State unless those securi-ties are ‘‘general obligations’’. In theopinion of the Board of Governors, se-curities are not ‘‘general obligations’’unless they are backed by the full faithand credit of the issuer. As stated inparagraph 520 of the ‘‘Digest of Opin-ions of the Office of the Comptroller ofthe Currency’’, ‘‘Securities payableonly out of particular funds or out of


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the obligor’s revenues from a particu-lar source are not general obligations.’’In order to be eligible for underwritingby member banks, the issuer must pos-sess the power of general property tax-ation and the securities must be sup-ported by that power, as a part of the‘‘full faith and credit’’ of the issuer.

(d) The bonds in question are issuedpursuant to Washington Laws of 1961,Ex Sess., Chapters 3 and 23. These stat-utes provide that the bonds ‘‘shall notbe a general obligation of the state ofWashington but shall be payable * * *from the proceeds of retail sales taxes* * *.’’ The statutes also provide that‘‘the state undertakes to continue tolevy the taxes referred to herein and tofix and maintain said taxes in suchamounts as will provide sufficientfunds to pay said bonds and interestthereon until all such obligations havebeen paid in full.’’

(e) The statutory provisions that thebonds in question ‘‘shall not be a gen-eral obligation of the State of Wash-ington’’ and ‘‘shall be payable * * *from the proceeds of retail sales taxes’’appear to indicate that the bonds willnot be supported by the full faith andcredit of the State, including its powerof general property taxation. If this iscorrect it follows on the principles pre-viously stated, that these bonds wouldnot be ‘‘general obligations’’ of theState within the meaning of R.S. 5136and would not be eligible to be under-written by member banks. The under-taking to levy retail sales taxes thatwill provide sufficient funds to pay thebonds in full reflects the intent of theState that the bonds (and interestthereon) shall be paid, but it does notnegate the plain statement in theWashington statute that the bondsshall be payable from a particularsource—namely, the proceeds of retailsales taxes—and are not general obliga-tions.

(f) This conclusion does not conflictwith the decision of the Supreme Courtof Washington in State of Washingtonv. Martin, decided August 7, 1963. Itwas there held that bonds of this na-ture are ‘‘issued upon the credit of thestate and are in truth debts of thestate.’’ However, the Court made itquite clear that such bonds are notsupported by the full faith and credit of

the State and its plenary taxing power.Under the State constitutional andstatutory provisions dealt with in thatdecision, bonds of the State of Wash-ington that are payable from a particu-lar source of revenue constitute a debtof that State but are not general obli-gations thereof.

(g) For these reasons, the Board con-cludes that the bonds in question arenot ‘‘general obligations’’ within thepurview of section 5136 of the RevisedStatutes and consequently are not eli-gible for underwriting by State banksthat are members of the Federal Re-serve System.

(12 U.S.C. 24, 335)

§ 250.121 Application of investment se-curities regulation to member Statebanks.

(a) General. A revision of the Invest-ment Securities Regulation (Part 1 ofthis title) was issued recently by theComptroller of the Currency. Undersection 9 of the Federal Reserve Act (12U.S.C. 335) the regulation is applicableto member State banks as well as tonational banks, insofar as it conformsto paragraph Seventh of section 5136 ofthe Revised Statutes (R.S. 5136; 12U.S.C. 24).

(b) Provisions of regulation with respectto ‘‘exempt securities’’. (1) ParagraphSeventh refers to two areas of securi-ties transactions by a bank: (i) Under-writing and dealing, which are groupedas ‘‘underwriting’’ herein, and (ii) in-vesting (called ‘‘purchasing for its ownaccount’’ in the statute).

(2) The statute contains a generalprohibition against a member bank (i)underwriting securities or (ii) investingmore than 10 percent of its capital andsurplus in the securities of any one ob-ligor. In addition to this 10 percentlimitation, the power of national banksand member State banks to purchasesecurities for investment is subject to‘‘such limitations and restrictions asthe Comptroller of the Currency mayby regulation prescribe’’. The term in-vestment securities is defined in para-graph Seventh and is subject to ‘‘suchfurther definition * * * as may by regu-lation be prescribed by the Comptrol-ler’’.


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(3) The statute also provides, how-ever, that ‘‘The limitations and restric-tions herein contained as to dealing in,underwriting and purchasing for [thebank’s] own account, investment secu-rities shall not apply to obligations ofthe United States or general obliga-tions of any State or of any politicalsubdivision thereof,’’ or certain othersecurities. In other words, nationalbanks and member State banks are le-gally free (i) to underwrite such ‘‘ex-empt securities’’ and (ii) to investtherein without regard to the 10 per-cent limitation mentioned in this sec-tion.

(4) The authority of the Comptrollerof the Currency to issue investmentregulations pursuant to R.S. 5136 doesnot include authority to exempt addi-tional kinds of securities from the pro-hibition against underwriting or theprohibition against investing morethan 10 percent of capital and surplusin securities of any one obligor. De-spite this, § 1.3 of this title, the Comp-troller’s recent revision of the Invest-ment Securities Regulation, contains adefinition of public security and § 1.4 ofthis title states that ‘‘A bank may dealin, underwrite, purchase and sell for itsown account a public security subjectonly to the exercise of prudent bankingjudgment.’’ The term public security isso defined that, in effect, the regula-tion purports to authorize nationalbanks and member State banks to un-derwrite, and to purchase without limi-tation on amount, securities that arenot exempted by law from the statu-tory prohibition against underwritingand against investing in excess of the10 percent limitation. For example, theterms of the regulation would author-ize such banks to underwrite some se-curities of public corporations that arepayable solely out of revenues derivedfrom the operation of a tunnel, turn-pike, bridge, or the like, despite thefact that the applicable statute doesnot exempt such securities from thegeneral prohibition against underwrit-ing by banks.

(5) Since the Comptroller is not au-thorized by law to expand the categoryof exempt securities established anddescribed in paragraph Seventh of R.S.5136, the current regulation does nothave the force and effect of law insofar

as it attempts to do this. Accordingly,member State banks are informed that,in the opinion of the Board of Gov-ernors, the only securities that are ex-empt from the limitations and restric-tions of paragraph Seventh are thosespecified in R.S. 5136. Unless a particu-lar issue of securities is exempt by vir-tue of that provision of law, memberState banks may not underwrite theissue, and the 10 percent limit is appli-cable to investments therein. Since so-called revenue obligations of the kindsmentioned above, as well as other reve-nue obligations, are not exempt fromthe limitations and restrictions of R.S.5136, it would be unlawful for a memberState bank to underwrite such securi-ties or to invest in them in excess ofthe 10 percent limit.

(c) Convertible securities. (1) Fromtime to time corporations issue deben-tures or similar securities that con-stitute an obligation to pay a specifieddollar amount of principal (as well asinterest) and in addition give the hold-er an option to convert the securityinto a specified number of shares of thecorporation’s stock. When the marketvalue of the stock into which such adebenture is convertible is substan-tially less than the face value of thedebenture, the debenture ordinarilywill sell at a price that reflects prin-cipally its value as a corporate obliga-tion, without regard to the conversionoption. However, the market value ofthe stock sometimes increases to suchan extent that the shares into which adebenture is convertible have a marketvalue that is much greater than theface value of the debenture. For exam-ple, a number of convertible debenturestraded on the New York Stock Ex-change sell at prices of $2,000, $3,000, ormore, for securities with a face value of$1,000. These prices approximate veryclosely the current market value of theshares of stock for which the convert-ible may be exchanged at the holder’soption.

(2) A question has arisen as to thecircumstances in which a memberState bank may purchase convertibledebentures for its investment portfoliounder the provisions of the InvestmentSecurities Regulation of the Comptrol-ler of the Currency, as recently revised.


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(3) Section 1.3(b) of this title definesinvestment security to exclude securities‘‘which are predominantly speculativein nature’’, so that, under R.S. 5136 andthe regulation, the purchase of predomi-nantly speculative securities is not per-missible. When the market price of aconvertible debenture is far in excessof its face value because of the conver-sion feature, and its price fluctuationsparallel the fluctuations in the price ofthe stock into which it is convertible,the debenture is necessarily specula-tive. Market conditions may induceprice fluctuations that may have no re-lationship to the quality of the deben-ture or even of the particular stockinto which it can be converted.

(4) Accordingly, it would appear thata bank is prohibited from purchasingconvertible debentures in the cir-cumstances described. However, uncer-tainty as to this matter could arisefrom the terms of § 1.10 of this title(Comptroller’s Revised Regulation),which might be read as indicating thata bank may purchase convertible secu-rities generally, provided that the costof such a security is written downpromptly ‘‘to an amount which rep-resents the investment value of the se-curity considered independently of theconversion feature’’.

(5) Quite apart from questions of in-terpretation of the revised regulation,however, it is to be noted that the lawitself (paragraph Seventh of R.S. 5136)in effect forbids national banks andmember State banks to purchase ‘‘anyshares of stock of any corporation’’.When the market price of a convertiblesecurity reaches 200 percent or 300 per-cent of its face value due to a rise inthe price of the related stock, purchaseof the convertible security is, for prac-tical purposes, equivalent to the pur-chase of the stock it represents.

(6) In the light of these statutory andregulatory provisions, it is the positionof the Board of Governors that a mem-ber State bank may not lawfully investin a convertible security whose priceexceeds, by more than an insignificantamount, the investment value of theobligation, considered independently ofthe conversion feature. Adherence tothis principle will avoid violations ofthe statute and regulation that wouldoccur if a bank were to purchase con-

vertible securities in such cir-cumstances that the security nec-essarily would be ‘‘predominantly spec-ulative in nature’’, for the reasons de-scribed, and the transaction would betantamount to a purchase of corporatestock.

(12 U.S.C. 24, 335)

§ 250.122 Underwriting of public Au-thority bonds payable from rentsunder lease with governmental en-tity having general taxing powers.

(a) The Board of Governors has beenasked whether securities of a publicAuthority that are to be paid fromrents payable under a lease of theAuthority’s facilities to a govern-mental entity that possesses generalpowers of taxation, including propertytaxation, constitute ‘‘general obliga-tions’’ within the meaning of section5136 of the U.S. Revised Statutes (12U.S.C. 24). In cases where this questioncan be answered in the affirmative,member State banks of the Federal Re-serve System may lawfully underwriteand deal in such securities, and investtherein without limitation on amount,as far as Federal banking law is con-cerned.

(b) The Board understands that theissuing Authorities usually have notaxing powers and that their obliga-tions are not, under pertinent Stateconstitutional and statutory provisionsas interpreted by the courts, ‘‘debt’’ ofthe lessee—that is, the governmentalentity with general powers of taxation.However, whether a security con-stitutes a debt for purposes of State lawis not determinative as to whether it isa general obligation within the meaningof section 5136, a Federal statute. (See§ 250.120.)

(c) During recent Hearings before theCommittee on Banking and Currencyof the House of Representatives, pub-lished under the title ‘‘Increased Flexi-bility for Financial Institutions—1963’’,the Board expressed its understandingof the meaning of the phrase ‘‘generalobligations of any State or of any po-litical subdivision thereof’’ as used insection 5136.

(d) As the House Committee was in-formed, the Board understands thatphrase to include ‘‘only obligationsthat are supported by an unconditional


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promise to pay, directly or indirectly,an aggregate amount which (togetherwith any other funds available for thepurpose) will suffice to discharge, whendue, all interest on and principal ofsuch obligations, which promise (1) ismade by a governmental entity thatpossesses general powers of taxation,including property taxation, and (2)pledges or otherwise commits the fullfaith and credit of said promisor; saidterm does not include obligations notso supported that are to be repaid onlyfrom specified sources such as the in-come from designated facilities or theproceeds of designated taxes.’’ (Hear-ings, p. 1018.)

(e) A major requirement of the fore-going definition is that a general obliga-tion must be supported by general pow-ers of taxation, including property tax-ation. The Board recognizes, however,that such support by general powers oftaxation may be indirect as well as di-rect.

(f) If a State (or other governmentalentity having general powers of tax-ation) agrees unconditionally to pay toan Authority rentals that will be suffi-cient and will be used, in all events, tocover required payments of interestand principal on the relevant securitieswhen due, the securities, in the opinionof the Board, are indirectly supportedby general taxing powers, and, accord-ingly, constitute general obligationswithin the meaning of R.S. 5136. On theother hand, if the lease does not con-tain an unconditional promise of theState to provide sums sufficient, in allevents, to cover required payments ofinterest and principal on the bonds ofthe lessor Authority as they becomedue, the securities cannot be consid-ered general obligations.

(g) The status of a particular issue ofsuch lease-supported bonds thus de-pends upon the terms of the lease in-volved. Where the lease is for a term ofyears not less than the maximum ma-turity of the relevant bond issue, andthe State unconditionally promises topay rentals sufficient to cover all pay-ments on the bonds as they becomedue, the bonds ordinarily will qualifyas general obligations. Where the prom-ise of the State is to pay a fixed dollarrental, the securities will not qualifyas general obligations unless the lease

provides that rental payments inamounts sufficient to service the bondscannot be expended by the authorityfor any other purpose than the pay-ment of principal and interest thereon.

(h) This interpretation is intended toindicate the circumstances in which se-curities issued by public Authoritieswithout taxing powers constitute gen-eral obligations that are eligible for un-derwriting by member banks, underR.S. 5136. The status of any particularissue can only be determined throughexamination of all relevant laws andcontracts, in order to ascertain the ac-tual legal and financial arrangements.

(12 U.S.C. 24, 335)

§ 250.123 Underwriting of notes pay-able from proceeds of subsequentsale of general obligation bonds.

(a) The Board of Governors has re-ceived inquiries whether CaliforniaBond Anticipation Notes constitutegeneral obligations of the State of Cali-fornia within the meaning of paragraphSeventh of section 5136 of the U.S. Re-vised Statutes (12 U.S.C. 24).

(b) The Board understands that, inanticipation of the sale of general obli-gation bonds duly authorized, FinanceCommittees of certain public authori-ties of the State are empowered, undersection 16736 of the Government Codeof California, to direct the State Treas-urer to issue Bond Anticipation Noteswhenever ‘‘the committee deems it inthe best interests of the State’’.

(c) Although there appears to be nojudicial decision as to the nature ofBond Anticipation Notes under Califor-nia law, the State Attorney Generalhas issued an opinion (No. 63/182 of Nov.8, 1963) concluding that the Notes donot constitute ‘‘a general obligation ofthe State in the sense that they are se-cured by the State General Fund andgeneral taxing power of the State’’.

(d) While the California AttorneyGeneral’s opinion is not controlling ina determination as to whether theNotes are general obligations within themeaning of section 5136, a Federal stat-ute, it is significant in such a deter-mination insofar as it indicates thatthe Notes are not secured by theState’s ‘‘general powers of taxation, in-cluding property taxation’’, a sine qua


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non of general obligations under section5136. (See § 250.122.)

(e) Although the Board of Governorshas recognized that the pledge of the‘‘general powers of taxation, includingproperty taxation’’ may be indirect aswell as direct, with respect to paymentof the principal of its Bond Anticipa-tion Notes the State of California doesnot commit its general taxing powerseither directly or indirectly. The prin-cipal of such Notes is payable solelyfrom the proceeds of subsequent sale ofother securities, which means that theState retires the Notes through the ex-ercise of its borrowing powers as dis-tinct from its taxing powers.

(f) That the general obligation bonds,from the proceeds of whose sale theNotes are expected to be paid, willpledge the State’s taxing powers can-not be considered an indirect pledge ofthat power to secure the Notes, be-cause the pledge of the State’s taxingpowers attaches to the general obliga-tion bonds only after they are sold andcan in no way be utilized for the pay-ment of the Notes. In order for obliga-tions to be secured directly or indi-rectly by general taxing power, thatpower must be available for use, if nec-essary, to provide funds for the re-quired payments of both principal andinterest.

(g) The Board of Governors accord-ingly concludes that California BondAnticipation Notes do not constitutegeneral obligations within the meaningof section 5136. The Notes, therefore,would not be eligible for underwritingand dealing in by member State banks.

(12 U.S.C. 24, 335)

§ 250.140 Member bank acquisition ofstock of another bank.

(a) The Board of Governors has re-cently considered, in several cases,whether a member bank may lawfullyacquire stock of another bank. In someinstances, a direct acquisition was in-volved; in another, the stock was to bepurchased by a wholly owned subsidi-ary of the member bank. In one in-stance, the bank stock was to be pur-chased for cash; in others, the consider-ation was to consist of newly issuedshares of stock of the acquiring bank.All of the cases involved acquisition of

a majority of the stock of the subsidi-ary bank.

(b) The Board reaffirmed its position,originally taken shortly after enact-ment of the Banking Act of 1933 (1933Federal Reserve Bulletin 449), thatsuch acquisitions by member banks arenot legally permissible. Section 5136 ofthe U.S. Revised Statutes (12 U.S.C. 24)forbids a national bank to purchase‘‘for its own account * * * any shares ofstock of any corporation.’’ That prohi-bition is also applicable to State mem-ber banks, under section 9 of the Fed-eral Reserve Act (12 U.S.C. 335). Legis-lative history and judicial interpreta-tions in this field support the view thatCongress did not intend to permit na-tional banks or State member banks toacquire, for their own account, thestock of other banks, either directly orthrough intermediary corporations.The statutory prohibition applies toany voluntary acquisition of the stockof another bank, whether the consider-ation given for the stock consists ofcash, other bank assets, or shares ofstock of the acquiring bank.

(c) The Board concluded that such ac-quisitions would also violate the provi-sions of section 5155 of the RevisedStatutes and section 9 of the FederalReserve Act (12 U.S.C. 36 and 321) thatprohibit the establishment of branchesby member banks except under pre-scribed conditions. Those provisions oflaw were intended to permit nationalbanks and State member banks to op-erate additional banking offices onlywith the prior approval of the Comp-troller of the Currency or the Board ofGovernors, respectively. When onebank owns all or a majority of thestock of another, the offices and re-sources of the latter are a part of thebanking organization owned by, andsubject to the control of, the parentbank, despite the existence of separatecorporate entities. Consequently, ifsuch acquisitions of stock were permis-sible, member banks could conductbanking operations through additionaloffices without obtaining supervisoryapproval, which would undermine animportant regulatory purpose of theFederal statutes relating to multiple-office banking.


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1 In the Board’s judgment, the statutoryenumeration of three specific functions thatestablish branch status is not meant to beexclusive but to assure that offices at whichany of these functions is performed are re-garded as branches by the bank regulatoryauthorities. In applying the statute the em-phasis should be to assure that significantbanking functions are made available to thepublic only at governmentally authorized of-fices.

(d) This incompatibility with theFederal banking statutes is particu-larly apparent when the offices of thesubsidiary bank are situated in placeswhere the acquiring bank may not law-fully establish and maintain directbranches, under applicable State andFederal laws. If a bank in those cir-cumstances could acquire an existingbank or establish a new one, it couldeffectively circumvent public policyand accomplish indirectly what itcould not accomplish directly—name-ly, ownership and control of bankingoffices in places (even in anotherState) where it is forbidden by law toconduct banking operations.

(12 U.S.C. 24, 36, 321, 335)

§ 250.141 Member bank purchase ofstock of ‘‘operations subsidiaries.’’

(a) The Board of Governors has reex-amined its position that the so-called‘‘stock-purchase prohibition’’ of sec-tion 5136 of the Revised Statutes (12U.S.C. 24), which is made applicable tomember State banks by the 20th para-graph of section 9 of the Federal Re-serve Act (12 U.S.C. 335), forbids thepurchase by a member bank ‘‘for itsown account of any shares of stock ofany corporation’’ (the statutory lan-guage), except as specifically permittedby provisions of Federal law or as com-prised within the concept of ‘‘such inci-dental powers as shall be necessary tocarry on the business of banking’’, re-ferred to in the first sentence of para-graph ‘‘Seventh’’ of R.S. 5136.

(b) In 1966 the Board expressed theview that said incidental powers do notpermit member banks to purchasestock of ‘‘operations subsidiaries’’—that is, organizations designed toserve, in effect, as separately-incor-porated departments of the bank, per-forming, at locations at which thebank is authorized to engage in busi-ness, functions that the bank is em-powered to perform directly. (See 1966Federal Reserve Bulletin 1151.)

(c) The Board now considers that theincidental powers clause permits abank to organize its operations in themanner that it believes best facilitatesthe performance thereof. One methodof organization is through depart-ments; another is through separate in-corporation of particular operations. In

other words, a wholly owned subsidiarycorporation engaged in activities thatthe bank itself may perform is simplya convenient alternative organiza-tional arrangement.

(d) Reexamination of the apparentpurposes and legislative history of thestock-purchase prohibition referred toabove has led the Board to concludethat such prohibition should not be in-terpreted to preclude a member bankfrom adopting such an organizationalarrangement unless its use would be in-consistent with other Federal law, ei-ther statutory or judicial.

(e) In view of the relationship be-tween the operation of certain subsidi-aries and the branch banking laws, theBoard has also reexamined its rulingson what constitutes ‘‘money lent’’ forthe purposes of section 5155 of the Re-vised Statutes (12 U.S.C. 36), which pro-vides that ‘‘The termbranch * * * shallbe held to include any branch bank,branch office, branch agency, addi-tional office, or any branch place ofbusiness * * * at which deposits are re-ceived, or checks paid, or moneylent.’’ 1

(f) The Board noted in its 1967 inter-pretation that offices that are open tothe public and staffed by employees ofthe bank who regularly engage in solic-iting borrowers, negotiating terms, andprocessing applications for loans (so-called loan production offices) con-stitute branches. (1967 Federal ReserveBulletin 1334.) The Board also notedthat later in that year it consideredthe question whether a bank holdingcompany may acquire the stock of aso-called mortgage company on the basisthat the company would be engaged in‘‘furnishing services to or performingservices for such bank holding com-pany or its banking subsidiaries’’ (theso-called servicing exemption of section4(c)(1)(C) of the Bank Holding Company


599


Act; 12 U.S.C. 1843). In concluding af-firmatively, the Board stated that ‘‘theappropriate test for determiningwhether the company may be consid-ered as within the servicing exemptionis whether the company will perform asprincipal any banking activities—suchas receiving deposits, paying checks,extending credit, conducting a trustdepartment, and the like. In otherwords, if the mortgage company is toact merely as an adjunct to a bank forthe purpose of facilitating the bank’soperations, the company may appro-priately be considered as within thescope of the servicing exemption.’’ (1967Federal Reserve Bulletin 1911; 12 CFR225.122.)

(g) The Board believes that the pur-poses of the branch banking laws andthe servicing exemption are related.Generally, what constitutes a branchdoes not constitute a servicing organi-zation and, vice versa, an office thatonly performs servicing functionsshould not be considered a branch. (See1958 Federal Reserve Bulletin 431, lastparagraph; 12 CFR 225.104(e).) Whenviewed together, the above-cited inter-pretations on loan production officesand mortgage companies represent adeparture from this principle. In recon-sidering the laws involved, the Boardhas concluded that a test similar tothat adopted with respect to the servic-ing exemption under the Bank HoldingCompany Act is appropriate for use indetermining whether or not what con-stitutes money [is] lent at a particularoffice, for the purpose of the Federalbranch banking laws.

(h) Accordingly, the Board considersthat the following activities, individ-ually or collectively, do not constitutethe lending of money within the mean-ing of section 5155 of the revised stat-utes: Soliciting loans on behalf of abank (or a branch thereof), assemblingcredit information, making propertyinspections and appraisals, securingtitle information, preparing applica-tions for loans (including making rec-ommendations with respect to actionthereon), soliciting investors to pur-chase loans from the bank, seeking tohave such investors contract with thebank for the servicing of such loans,and other similar agent-type activities.When loans are approved and funds dis-

bursed solely at the main office or abranch of the bank, an office at whichonly preliminary and servicing stepsare taken is not a place where money[is] lent. Because preliminary and serv-icing steps of the kinds described donot constitute the performance of sig-nificant banking functions of the typethat Congress contemplated should beperformed only at governmentally ap-proved offices, such office is accord-ingly not a branch.

(i) To summarize the foregoing, theBoard has concluded that, insofar asFederal law is concerned, a memberbank may purchase for its own accountshares of a corporation to perform, atlocations at which the bank is author-ized to engage in business, functionsthat the bank is empowered to performdirectly. Also, a member bank may es-tablish and operate, at any location inthe United States, a loan production of-fice of the type described herein. Suchoffices may be established and operatedby the bank either directly, or indi-rectly through a wholly-owned subsidi-ary corporation.

(j) This interpretation supersedesboth the Board’s 1966 ruling on oper-ations subsidiaries and its 1967 ruling onloan production offices, referred toabove.

(12 U.S.C. 24, 36, 321, 335)

[33 FR 11813, Aug. 21, 1968; 43 FR 53414, Nov.16, 1978]

§ 250.142 Meaning of ‘‘obligor ormaker’’ in determining limitationon securities investments by mem-ber State banks.

(a) From time to time the New YorkState Dormitory Authority offersissues of bonds with respect to each ofwhich a different educational institu-tion enters into an agreement to makerental payments to the Authority suffi-cient to cover interest and principalthereon when due. The Board of Gov-ernors of the Federal Reserve Systemhas been asked whether a memberState bank may invest up to 10 percentof its capital and surplus in each suchissue.

(b) Paragraph Seventh of section 5136of the U.S. Revised Statutes (12 U.S.C.24) provides that ‘‘In no event shall thetotal amount of the investment securi-ties of any one obligor or maker, held


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12 CFR Ch. II (1–1–98 Edition)§ 250.143

1 National banking associations are pro-hibited by section 5136 of the Revised Stat-utes from purchasing and holding shares ofany corporation except those corporationswhose shares are specifically made eligibleby statute. This prohibition is made applica-ble to State member banks by section 9 ¶ 20of the Federal Reserve Act (12 U.S.C. 335).

by [a national bank] for its own ac-count, exceed at any time 10 per cen-tum of its capital stock * * * and sur-plus fund’’. That limitation is made ap-plicable to member State banks by the20th paragraph of section 9 of the Fed-eral Reserve Act (12 U.S.C. 335).

(c) The Board considers that, withinthe meaning of these provisions of law,obligor does not include any person thatacts solely as a conduit for trans-mission of funds received from anothersource, irrespective of a promise bysuch person to pay principal or intereston the obligation. While an obligordoes not cease to be such merely be-cause a third person has agreed to paythe obligor amounts sufficient to coverprincipal and interest on the obliga-tions when due, a person that promisesto pay an obligation, but as a practicalmatter has no resources with which toassume payment of the obligation ex-cept the amounts received from suchthird person, is not an obligor withinthe meaning of section 5136.

(d) Review of the New York Dor-mitory Authority Act (N.Y. Public Au-thorities Law sections 1675–1690), theAuthority’s interpretation thereof, andmaterials with respect to theAuthority’s ‘‘Revenue Bonds, Mills Col-lege of Education Issue, Series A’’ indi-cates that the Authority is not an obli-gor on those and similar bonds. Al-though the Authority promises tomake all payments of principal and in-terest, a bank that invests in suchbonds cannot be reasonably consideredas doing so in reliance on the promiseand responsibility of the Authority.Despite the Authority’s obligation tomake payments on the bonds, if theparticular college fails to perform itsagreement to make rental payments tothe Authority sufficient to cover allpayments of bond principal and inter-est when due, as a practical matter thesole source of funds for payments tothe bondholder is the particular col-lege. The Authority has general bor-rowing power but no resources fromwhich to assure repayment of any bor-rowing except from the particular col-leges, and rentals received from onecollege may not be used to servicebonds issued for another.

(e) Accordingly, the Board has con-cluded that each college for which the

Authority issues obligations is the soleobligor thereon. A member State bankmay therefore invest an amount up to10 percent of its capital and surplus inthe bonds of a particular college thatare eligible investments under the In-vestment Securities Regulation of theComptroller of the Currency (12 CFRPart 1), whether issued directly or indi-rectly through the Dormitory Author-ity.

(12 U.S.C. 24, 335)

§ 250.143 Member bank purchase ofstock of foreign operations subsidi-aries.

(a) In a previous interpretation, theBoard determined that a State memberbank would not violate the ‘‘stock-pur-chase prohibition’’ of section 5136 ofthe Revised Statutes (12 U.S.C. 24 ¶ 7)by purchasing and holding the sharesof a corporation which performs ‘‘at lo-cations at which the bank is authorizedto engage in business, functions thatthe bank is empowered to perform di-rectly’’. 1 (1968 Federal Reserve Bulletin681, 12 CFR 250.141). The Board of Gov-ernors has been asked by a State mem-ber bank whether, under that interpre-tation, the bank may establish such aso-called operations subsidiary outsidethe United States.

(b) In the above interpretation theBoard viewed the creation of a wholly-owned subsidiary which engaged in ac-tivities that the bank itself could per-form directly as an alternative organi-zational arrangement that would bepermissible for member banks unless‘‘its use would be inconsistent withother Federal law, either statutory orjudicial’’.

(c) In the Board’s judgment, the useby member banks of operations subsidi-aries outside the United States wouldbe clearly inconsistent with the statu-tory scheme of the Federal Reserve Actgoverning the foreign investments andoperations of member banks. It is clearthat Congress has given member banks


601


2 Under section 9 of the Federal ReserveAct, State member banks, subject, of course,to any necessary approval from their Statebanking authority, may establish foreignbranches on the same terms and subject tothe same limitations and restrictions as areapplicable to the establishment of branchesby national banks (12 U.S.C. 321). State mem-ber banks may also purchase and hold sharesof stock in Edge or Agreement Corporationsand foreign banks because national banks, asa result of specific statutory exceptions tothe stock purchase prohibitions of section5136, can purchase and hold stock in theseCorporations or banks.

the authority to conduct operationsand make investments outside theUnited States only through graduallyadopting a series of specific statutoryamendments to the Federal ReserveAct, each of which has been carefullydrawn to give the Board approval, su-pervisory, and regulatory authorityover those operations and investments.

(d) As part of the original FederalReserve Act, national banks were, withthe Board’s permission, given thepower to establish foreign branches. 2

In 1916, Congress amended the FederalReserve Act to permit national banksto invest in international or foreignbanking corporations known as Agree-ment Corporations, because such cor-porations were required to enter intoan agreement or understanding withthe Board to restrict their operations.Subject to such limitations or restric-tions as the Board may prescribe, suchAgreement corporations may prin-cipally engage in international or for-eign banking, or banking in a depend-ency or insular possession of theUnited States, either directly orthrough the agency, ownership or con-trol of local institutions in foreigncountries, or in such dependencies orinsular possessions of the UnitedStates. In 1919 the enactment of sec-tion 25(a) of the Federal Reserve Act(the ‘‘Edge Act’’) permitted nationalbanks to invest in federally charteredinternational or foreign banking cor-porations (so-called Edge Corporations)which may engage in international orforeign banking or other internationalor foreign financial operations, or inbanking or other financial operationsin a dependency or insular possessionof the United States, either directly orthrough the ownership or control of

local institutions in foreign countries,or in such dependencies or insular pos-sessions. Edge Corporations may onlypurchase and hold stock in certain for-eign subsidiaries with the consent ofthe Board. And in 1966, Congressamended section 25 of the Federal Re-serve Act to allow national banks toinvest directly in the shares of a for-eign bank. In the Board’s judgment,the above statutory scheme of the Fed-eral Reserve Act evidences a clear Con-gressional intent that member banksmay only purchase and hold stock insubsidiaries located outside the UnitedStates through the prescribed statu-tory provisions of sections 25 and 25(a)of the Federal Reserve Act. It isthrough these statutorily prescribedforms of organization that memberbanks must conduct their operationsoutside the United States.

(e) To summarize, the Board has con-cluded that a member bank may onlyorganize and operate operations subsidi-aries at locations in the United States.Investments by member banks in for-eign subsidiaries must be made eitherwith the Board’s permission under sec-tion 25 of the Federal Reserve Act or,with the Board’s consent, through anEdge Corporation subsidiary under sec-tion 25(a) of the Federal Reserve Act orthrough an Agreement Corporationsubsidiary under section 25 of the Fed-eral Reserve Act. In addition, it shouldbe noted that bank holding companiesmay acquire the shares of certain for-eign subsidiaries with the Board’s ap-proval under section 4(c)(13) of theBank Holding Company Act. Thesestatutory sections taken together al-ready give member banks a great dealof organizational flexibility in con-ducting their operations abroad.(Interprets and applies 12 U.S.C. 24, 335)

[40 FR 12252, Mar. 18, 1975]

§ 250.160 Federal funds transactions.(a) It is the position of the Board of

Governors of the Federal Reserve Sys-tem that, for purposes of provisions oflaw administered by the Board, atransaction in Federal funds involves aloan on the part of the selling bank anda borrowing on the part of the purchas-ing bank.

(b) For example, for purposes of sec-tion 23A of the Federal Reserve Act (12


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12 CFR Ch. II (1–1–98 Edition)§ 250.161

U.S.C. 371c), a sale of Federal funds bya member bank, whether State or na-tional, to an affiliate of the memberbank is subject to the limitations pre-scribed in that section.

(12 U.S.C. 371c)

§ 250.161 Capital notes and debenturesas ‘‘capital,’’ ‘‘capital stock,’’ or ‘‘sur-plus.’’

(a) The Board of Governors has beenpresented with the question whethercapital notes or debentures issued bybanks, that are subordinated to depositliabilities, may be considered as part ofa bank’s capital stock, capital, or sur-plus, for purposes of various provisionsof the Federal Reserve Act that imposerequirements or limitations uponmember banks.

(b) A note or debenture is an evidenceof debt, embodying a promise to pay acertain sum of money on a specifieddate. Such a debt instrument issued bya commercial bank is quite differentfrom its stock, which evidences a pro-prietary or equity interest in the assetsof the bank. Likewise, the proceeds ofa note or debenture that must be re-paid on a specified date cannot reason-ably be regarded as surplus funds of theissuing corporation.

(c) Federal law (12 U.S.C. 51c) ex-pressly provides that the term capital,as used in provisions of law relating tothe capital of national banks, shallmean ‘‘the amount of unimpaired com-mon stock plus the amount of preferredstock outstanding and unimpaired.’’ Inaddition, when Congress in 1934 deemedit desirable to permit certain notes anddebentures—those sold by State banksto the Reconstruction Finance Cor-poration—to be considered as capital orcapital stock for purposes of member-ship in the Federal Reserve System,Congress felt it necessary to imple-ment that objective by a specificamendment to section 9 of the FederalReserve Act (12 U.S.C. 321). These plainevidences of Congressional intent com-pel the conclusion that, for purposes ofstatutory limitations and require-ments, capital notes and debenturesmay not properly be regarded as part ofeither capital or capital stock.

(d) Accordingly, under the law, cap-ital notes or debentures do not con-stitute capital, capital stock, or surplus

for the purposes of provisions of theFederal Reserve Act, including, amongothers, those that limit member bankswith respect to purchases of invest-ment securities (12 U.S.C. 24, 335), in-vestments in bank premises (12 U.S.C.371d), loans on stock or bond collateral(12 U.S.C. 248(m)), deposits with non-member banks (12 U.S.C. 463), and bankacceptances (12 U.S.C. 372, 373), as wellas provisions that limit the amount ofpaper of one borrower that may be dis-counted by a Federal Reserve Bank forany member bank (12 U.S.C. 84, 330,345).

(12 U.S.C. 24, 84, 248, 321, 330, 335, 345, 371c,371d, 372, 373, 463)

[33 FR 9866, July 10, 1968, as amended at 61FR 19806, May 3, 1996]

§ 250.162 Undivided profits as ‘‘capitalstock and surplus’’.

(a) The Board of Governors has reex-amined the question whether a memberbank’s undivided profits may be consid-ered as part of its capital stock and sur-plus, as that or a similar term is usedin provisions of the Federal ReserveAct that limit member banks with re-spect to the following: Purchases of in-vestment securities (12 U.S.C. 335),loans on stock or bond collateral (12U.S.C. 248(m)), deposits with nonmem-ber banks (12 U.S.C. 463), bank accept-ances (12 U.S.C. 372, 373), investmentsin and by Edge and Agreement corpora-tions (12 U.S.C. 601, 615, 618), and theamount of paper of one borrower thatmay be discounted or accepted as col-lateral for an advance by a Federal Re-serve Bank (12 U.S.C. 330, 345, 347).

(b) Upon such reexamination theBoard concludes that its negative viewexpressed in 1964 is unnecessarily re-strictive in the light of the Congres-sional purpose in establishing limita-tions on bank activities in terms of abank’s capital structure. Accordingly,the Board has decided that, for the pur-poses of the limitations set forthabove, undivided profits may be in-cluded as part of capital stock and sur-plus.

(c) As used herein, the term undividedprofits includes paid-in or earned prof-its (unearned income must be de-ducted); reserves for loan losses or baddebts, less the amount of tax whichwould become payable with respect to


603


the tax-free portion of the reserve ifsuch portion were transferred from thereserve; valuation reserves for securi-ties; and reserves for contingencies. Itdoes not include reserves for dividendsdeclared or reserves for taxes, interestand expenses.

(Interprets and applies 12 U.S.C. 24, 84, 330,335, 345, 347, 371c, 372, 373, 464, 601, 615, 618)

[36 FR 5673, Mar. 26, 1971, as amended at 61FR 19806, May 3, 1996]

§ 250.163 Inapplicability of amountlimitations to ‘‘ineligible accept-ances.’’

(a) Since 1923, the Board has been ofthe view that ‘‘the acceptance power ofState member banks is not necessarilyconfined to the provisions of section 13(of the Federal Reserve Act), inasmuchas the laws of many States conferbroader acceptance powers upon theirState banks, and certain State memberbanks may, therefore, legally make ac-ceptances of kinds which are not eligi-ble for rediscount, but which may beeligible for purchase by Federal reservebanks under section 14.’’ 1923 FR bul-letin 316, 317.

(b) In 1963, the Comptroller of theCurrency ruled that ‘‘[n]ational banksare not limited in the character of ac-ceptances which they may make in fi-nancing credit transactions, and bank-ers’ acceptances may be used for suchpurpose, since the making of accept-ances is an essential part of bankingauthorized by 12 U.S.C. 24.’’ Comptrol-ler’s manual 7.7420. Therefore, nationalbanks are authorized by the Comptrol-ler to make acceptances under 12U.S.C. 24, although the acceptances arenot the type described in section 13 ofthe Federal Reserve Act.

(c) A review of the legislative historysurrounding the enactment of the ac-ceptance provisions of section 13, re-veals that Congress believed in 1913,that it was granting to national banksa power which they would not other-wise possess and had not previouslypossessed. See remarks of CongressmenPhelan, Helvering, Saunders, andGlass, 51 Cong. Rec. 4676, 4798, 4885, and5064 (September 10, 12, 13, and 17 of1913). Nevertheless, the courts havelong recognized the evolutionary na-ture of banking and of the scope of the‘‘incidental powers’’ clause of 12 U.S.C.

24. See Merchants Bank v. State Bank, 77U.S. 604 (1870) (upholding the power of anational bank to certify a check underthe ‘‘incidental powers’’ clause of 12U.S.C. 24).

(d) It now appears that, based on theBoard’s 1923 ruling, and the Comptrol-ler’s 1963 ruling, both State memberbanks and national banks may makeacceptances which are not of the typedescribed in section 13 of the FederalReserve Act. Yet, this appears to be adevelopment that Congress did not con-template when it drafted the accept-ance provisions of section 13.

(e) The question is presented whetherthe amount limitations of section 13should apply to acceptances made by amember bank that are not of the typedescribed in section 13. (The amountlimitations are of two kinds:

(1) A limitation on the amount thatmay be accepted for any one customer,and

(2) A limitation on the aggregateamount of acceptances that a memberbank may make.)FP≤In interpretingany Federal statutory provision, theprimary guide is the intent of Con-gress, yet, as noted earlier, Congressdid not contemplate in 1913, the devel-opment of so-called ‘‘ineligible accept-ances.’’ (Although there is some indica-tion that Congress did contemplateState member banks’ making accept-ances of a type not described in section13 [remarks of Congressman Glass, 51Cong. Rec. 5064], the primary focus ofcongressional attention was on the ac-ceptance powers of national banks.) Inthe absence of an indication of congres-sional intent, we are left to reach aninterpretation that is in harmony withthe language of the statutory provi-sions and with the purposes of the Fed-eral Reserve Act.

(f) Section 13 authorizes acceptancesof two types. The seventh paragraph ofsection 13 (12 U.S.C. 372) authorizes cer-tain acceptances that arise out of spe-cific transactions in goods. (These ac-ceptances are sometimes referred to as‘‘commercial acceptances.’’) The 12thparagraph of section 13 authorizesmember banks to make acceptances‘‘for the purpose of furnishing dollarexchange as required by the usages oftrade’’ in foreign transactions. (Suchacceptances are referred to as ‘‘dollar


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12 CFR Ch. II (1–1–98 Edition)§ 250.164

exchange acceptances.’’) In the 12thparagraph, there is a 10 percent limiton the amount of dollar exchange ac-ceptances that may be accepted for anyone customer (unless adequately se-cured) and a limitation on the aggre-gate amount of dollar exchange accept-ances that a member bank may make.(The 12th paragraph, in imposing theselimitations, refers to the acceptance of‘‘such drafts or bills of exchange re-ferred to (in) this paragraph.’’) Simi-larly, the seventh paragraph imposeson commercial acceptances a parallel10 percent per-customer limitation, andlimitations on the aggregate amount ofcommercial acceptances. (In the caseof the aggregate limitations, the sev-enth paragraph states that ‘‘no bankshall accept such bills to an amount’’in excess of the aggregate limit; thereference to ‘‘such bills’’ makes clearthat the limitation is only in respect ofdrafts or bills of exchange of the spe-cific type described in the seventhparagraph.)

(g) Based on the language and par-allel structure of the 7th and 12th para-graphs of section 13, and in the absenceof a statement of congressional intentin the legislative history, the Boardconcludes that the per-customer andaggregate limitations of the 12th para-graph apply only to acceptances of thetype described in that paragraph (dol-lar exchange acceptances), and the per-customer and aggregate limitations ofthe 7th paragraph (12 U.S.C. 372) applyonly to acceptances of the type de-scribed in that paragraph.

(Interprets and applies 12 U.S.C. 372 and the12th paragraph of sec. 13 of the Federal Re-serve Act, which paragraph is omitted fromthe United States Code)

[38 FR 13728, May 25, 1973]

§ 250.164 Bankers’ acceptances.(a) Section 207 of the Bank Export

Services Act (title II of Pub. L. 97–290)(‘‘BESA’’) raised the limits on the ag-gregate amount of eligible bankers’ ac-ceptances (‘‘BAs’’) that may be createdby an individual member bank from 50per cent (or 100 per cent with the per-mission of the Board) of its paid up andunimpaired capital stock and surplus(‘‘capital’’) to 150 per cent (or 200 percent with the permission of the Board)of its capital. Section 207 also prohibits

a member bank from creating eligibleBAs for any one person in the aggre-gate in excess of 10 per cent of the in-stitution’s capital. This section of theBESA applies the same limits applica-ble to member banks to U.S. branchesand agencies of foreign banks that aresubject to reserve requirements undersection 7 of the International BankingAct of 1978 (12 U.S.C. 3105). The Board isclarifying the proper meaning of theseventh paragraph of section 13 of theFederal Reserve Act, as amended bythe BESA.

(b)(1) This section of the BESA pro-vides that any portion of an eligible BAcreated by an institution subject to theBA limitations contained therein(‘‘covered bank’’) that is conveyedthrough a participation to another cov-ered bank shall not be included in thecalculation of the creating bank’s BAlimits. The amount of the participationis to be applied to the calculation ofthe BA limits applicable to the coveredbank receiving the participation. Al-though a covered bank that hasreached its 150 or 200 percent limit cancontinue to create eligible acceptancesby conveying participations to othercovered banks, Congress has in effectimposed an aggregate limit on the eli-gible acceptances that may be createdby all covered banks equal to the sumof 150 or 200 percent of the capital of allcovered banks.

(2) The Board has clarified that underthe statute an eligible BA created by acovered bank that is conveyed througha participation to an institution that isnot subject to the limitations of thissection of the BESA continues to be in-cluded in the calculation of the limitsapplicable to the creating coveredbank. This will ensure that the totalamount of eligible BAs that may becreated by covered banks does not ex-ceed the limitations established byCongress. In addition, this ensures thatparticipations in acceptances are notused as a device for the avoidance of re-serve requirements. Finally, this pro-motes the Congressional intent, withrespect to covered banks, that foreignand domestic banks be on an equalfooting and under the same legal re-quirements.

(3) In addition, the amount of a par-ticipation received by a covered bank


605


from an institution not covered by thelimitations of the Act is to be includedin the calculation of the limits applica-ble to the covered bank receiving theparticipation. This result is based uponthe language of the statute which in-cludes within a covered bank’s limitson eligible BAs outstanding theamount of participations received bythe covered bank. This provision re-flects Congressional intent that a cov-ered bank not be obligated on eligiblebankers’ acceptances, and participa-tions therein, for an amount in excessof 150 or 200 percent of the institution’scapital.

(c) The statute also provides that eli-gible acceptances growing out of do-mestic transactions are not to exceed50 percent of the aggregate of all eligi-ble acceptances authorized for coveredbanks. The Board has clarified thatthis 50 percent limitation is applicableto the maximum permissible amount ofeligible BAs (150 or 200 percent of cap-ital), regardless of the bank’s amountof eligible acceptances outstanding.The statutory language prior to theBESA amendment made clear that cov-ered banks could issue eligible accept-ances growing out of domestic trans-actions up to 50 percent of the amountof the total permissible eligible accept-ances the bank could issue. The legisla-tive history of the BESA indicates nointent to change this domestic accept-ance limitation.

(d) The statute also provides that forthe purpose of the limitations applica-ble to U.S. branches and agencies offoreign banks, a branch’s or agency’scapital is to be calculated as the dollarequivalent of the capital stock and sur-plus of the parent foreign bank as de-termined by the Board. The Board hasclarified that for purposes of calculat-ing the BA limits applicable to U.S.branches and agencies of foreign banks,the identity of the parent foreign bankis generally the same as for reserve re-quirement purposes; that is, the bankentity that owns the branch or agencymost directly. The Board has alsoclarified that the procedures currentlyused for purposes of reporting to theBoard on the Annual Report of ForeignBanking Organizations, Form FR Y–7,are also to be used in the calculation of

the acceptance limits applicable toU.S. branches and agencies of foreignbanks. (The FR Y–7 generally requiresfinancial statements prepared in ac-cordance with local accounting prac-tices and an explanation of the ac-counting terminology and the majorfeatures of the accounting standardsused in the preparation of the financialstatements.) Conversions to the dollarequivalent of the worldwide capital ofthe foreign bank should be made peri-odically, but in no event less fre-quently than quarterly. In this regard,the Board recognizes the need to beflexible in dealing with the effect offoreign exchange rate fluctuations onthe calculation of the worldwide cap-ital of the parent foreign bank. Eachforeign bank is to be responsible for co-ordinating the BA activity of its U.S.branches and agencies (including theaggregation of such activity) and es-tablishing procedures that ensure thatexaminers will be able readily to deter-mine compliance with the BESA lim-its.

(Sec. 13, Federal Reserve Act (12 U.S.C. 372))

[48 FR 28975, June 24, 1983]

§ 250.165 Bankers’ acceptances: defini-tion of participations.

(a)(1) Section 207 of the Bank ExportServices Act (Title II of Pub. L. 97–290)(‘‘BESA’’) raised the limits on the ag-gregate amount of eligible bankers’ ac-ceptances (‘‘BAs’’) that may be createdby a member bank from 50 percent (or100 percent with the permission of theBoard) of its paid up and unimpairedcapital stock and surplus (‘‘capital’’) to150 percent (or 200 percent with the per-mission of the Board) of its capital.Section 207 also prohibits a memberbank from creating eligible BAs forany one person in the aggregate in ex-cess of 10 percent of the institution’scapital. Eligible BAs growing out of do-mestic transactions are not to exceed50 percent of the aggregate of all eligi-ble acceptances authorized for a mem-ber bank. This section of the BESA ap-plies the same limits applicable tomember banks to U.S. branches and


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12 CFR Ch. II (1–1–98 Edition)§ 250.165

1 The institutions subject to the BA limita-tions of BESA will hereinafter be referred toas ‘‘covered banks.’’

2 The use of the terms senior bank and jun-ior bank has no implications regarding prior-ity of claims. These terms merely representa shorthand method of identifying the depos-itory institution that has created the accept-ance and conveyed the participation (seniorbank) and the depository institution thathas received the participation (junior bank).

agencies of foreign banks that are sub-ject to reserve requirements under sec-tion 7 of the International Banking Actof 1978 (12 U.S.C. 3105).1

(2) This section of the BESA also pro-vides that any portion of an eligible BAcreated by a covered bank (‘‘seniorbank’’) that is conveyed through a‘‘participation agreement’’ to anothercovered bank (‘‘junior bank’’) shall notbe included in the calculation of thesenior bank’s bankers’ acceptance lim-its established by section 207 of BESA.2However, the amount of the participa-tion is to be included in the BA limitsapplicable to the junior bank. The lan-guage of the statute does not definewhat constitutes a participation agree-ment for purposes of the applicabilityof the BESA limitations. However, thestatute does authorize the Board tofurther define any of the terms used insection 207 of the BESA (12 U.S.C.372(g)). The Board is clarifying theterm participation for purposes of theBA limitations of the BESA.

(b) The legislative history of section207 of the BESA indicates that Con-gress intended that the junior bank beobligated to the senior bank in theevent that the account party defaultson its obligation to pay, but that thejunior bank need not also be obligatedto pay the holder of the acceptance atthe time the BA is presented for pay-ment. H. Rep. No. 97–629, 97th Cong.,2nd Sess. 15 (1982); 128 Cong. Rec. H 4647(daily ed. July 27, 1982) (remarks byRep. Barnard): and 128 Cong. Rec. H 8462(daily ed. October 1, 1982) (remarks byRep. Barnard). The legislative historyalso indicates that Congress intendedthat eligible BAs in which participa-tions had been conveyed not be re-quired to indicate the name(s) (or in-terest(s)) of the junior bank(s) on theacceptance in order for the BA to beexcluded from the BESA limitations

applicable to the senior bank. 128 Cong.Rec. S 12237 (daily ed. September 24,1982) (remarks of Senators Heinz andGarn): and 128 Cong. Rec. H 4647 (dailyed. July 27, 1982) (remarks of Rep. Bar-nard).

(c)(1) In view of Congressional intentwith regard to what constitutes a par-ticipation in an eligible BA, the Boardhas determined that, for purposes ofthe BESA limits, a participation mustsatisfy the following two minimum re-quirements:

(i) A written agreement entered intobetween the junior and senior bankunder which the junior bank acquiresthe senior bank’s claim against the ac-count party to the extent of theamount of the participation that is en-forceable in the event that the accountparty fails to perform in accordancewith the terms of the acceptance; and

(ii) The agreement between the jun-ior and senior bank provides that thesenior bank obtains a claim against thejunior bank to the extent of theamount of the participation that is en-forceable in the event the accountparty fails to perform in accordancewith the terms of the acceptance.

(2) Consistent with Congressional in-tent, the minimum requirements donot require the junior bank to be obli-gated to pay the holder of the accept-ance at the time the BA is presentedfor payment. Similarly, the minimumrequirements do not require thename(s) or interest(s) of the juniorbank(s) to appear on the face of the ac-ceptance.

(3) An eligible BA that is conveyedthrough a participation that does notsatisfy these minimum requirementswould continue to be included in theBA limits applicable to the seniorbank. Further, an eligible BA conveyedto a covered bank through a participa-tion that provided for additional rightsand obligations among the partieswould be excluded from the BESA limi-tations of the senior bank provided theminimum requirements were satisfied.

(4) A participation structured pursu-ant to these minimum requirementswould be as follows: Upon the convey-ance of the participation, the seniorbank retains its entire obligation topay the holder of the BA at maturity.The senior bank has a claim against


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1 The risk-based capital guidelines forbank holding companies state that bankholding company debt must be subordinatedto all senior indebtedness of the company.To meet this requirement, the debt should besubordinated to all general creditors.

the junior bank to the extent of theamount of the participation that is en-forceable in the event the accountparty fails to perform in accordancewith the terms of the acceptance.Similarly, the junior bank has a cor-responding claim against the accountparty to the extent of the amount ofthe participation that is enforceable inthe event the account party fails toperform in accordance with the termsof the acceptance.

(d)(1) The Board is not requiring thesenior bank and the account party spe-cifically to agree that the seniorbank’s rights are assignable becausethe Board believes such rights to be as-signable even in the absence of an ex-plicit agreement.

(2) The junior and senior banks maycontract among themselves as to whichparty(ies) have the responsibility foradministering the arrangement, en-forcing claims, or exercising remedies.

(e) The Board recognizes that boththe junior bank’s claim on the accountparty and the senior bank’s claim onthe junior bank involve risk. There-fore, it is essential that these risks beassessed by the banks involved in ac-cordance with prudent and sound bank-ing practices. The examiners will inthe normal course of the examinationprocess review the risk assessment pro-cedures instituted by the banks. Thejunior bank should review the credit-worthiness of each account party whenthe junior bank acquires a participa-tion and the senior bank should reviewon an ongoing basis the creditworthi-ness of the junior bank. Junior bankagreement to rely exclusively upon thecredit judgment of the senior bank andpurchase on an ongoing basis from thesenior bank all participations in BAsregardless of the identity of the ac-count party is not appropriate in viewof the risks involved. However, in thosecases involving a participation betweena parent bank and its Edge affiliatewhere the credit review for both enti-ties is performed by the parent bank,the Edge Corporation should maintaindocumentation indicating that it con-curs with the parent bank’s analysisand that the acceptance participationis appropriate for inclusion in the EdgeCorporation’s portfolio.

(f) Similarly, the Board has deter-mined that it is appropriate to includethe risks incurred by the senior bankin assessing the senior bank’s capitaland the risks incurred by the juniorbank in assessing the junior bank’scapital.

(g) In view of this clarification of theissues relating to participations inBAs, the Board encourages the privatesector to develop standardized formsfor BAs and participations therein thatclearly delineate the rights and respon-sibilities of the relevant parties.

(Sec. 13, Federal Reserve Act (12 U.S.C. 372))

[48 FR 57109, Dec. 28, 1983]

§ 250.166 Treatment of mandatory con-vertible debt and subordinatednotes of state member banks andbank holding companies as ‘‘cap-ital’’.

(a) General. Under the Board’s risk-based capital guidelines, state memberbanks and bank holding companiesmay include in Tier 2 capital subordi-nated debt and mandatory convertibledebt that meets certain criteria. Thepurpose of this interpretation is toclarify these criteria. This interpreta-tion should be read with those guide-lines, particularly with paragraphs II.c.through II.e. of appendix A of 12 CFRpart 208 if the issuer is a state memberbank and with paragraphs II.A.2.c. andII.A.2.d. of appendix A of 12 CFR part225 if the issuer is a bank holding com-pany.

(b) Criteria for subordinated debt in-cluded in capital—(1) Characteristics. Tobe included in Tier 2 capital under theBoard’s risk-based capital guidelinesfor state member banks and bank hold-ing companies, subordinated debt mustbe subordinated in right of payment tothe claims of the issuer’s general credi-tors1 and, for banks, to the claims ofdepositors as well; must be unsecured;must state clearly on its face that it isnot a deposit and is not insured by afederal agency; must have a minimum


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12 CFR Ch. II (1–1–98 Edition)§ 250.166

2 The ‘‘average maturity’’ of an obligationor issue repayable in scheduled periodic pay-ments shall be the weighted average of thematurities of all such scheduled payments.

average maturity of five years; 2 mustnot contain provisions that permitdebtholders to accelerate payment ofprincipal prior to maturity except inthe event of bankruptcy of or the ap-pointment of a receiver for the issuingorganization; must not contain or becovered by any covenants, terms, or re-strictions that are inconsistent withsafe and sound banking practice; andmust not be credit sensitive.

(2) Acceleration clauses—(i) In order tobe included in Tier 2 capital, the ap-pendices provide that subordinateddebt instruments must have an origi-nal weighted average maturity of atleast five years. For this purpose, ma-turity is defined as the earliest possibledate on which the holder can put theinstrument back to the issuing bank-ing organization. Since accelerationclauses permit the holder to put thedebt back upon the occurrence of cer-tain events, which could happen at anytime after the instrument is issued,subordinated debt that includes provi-sions permitting acceleration uponevents other than bankruptcy or reor-ganization under Chapters 7 (Liquida-tion) and 11 (Reorganization) of theBankruptcy Code, in the case of a bankholding company, or insolvency—i.e.,the appointment of a receiver—in thecase of a state member bank, does notqualify for inclusion in Tier 2 capital.

(ii) Further, subordinated debt whoseterms provide for acceleration upon theoccurrence of events other than bank-ruptcy or the appointment of a receiverdoes not qualify as Tier 2 capital. Forexample, the terms of some subordi-nated debt issues would permit debt-holders to accelerate repayment if theissuer failed to pay principal or inter-est on the subordinated debt issuewhen due (or within a certain time-frame after the due date), failed tomake mandatory sinking fund deposits,defaulted on any other debt, failed tohonor covenants, or if an institutionaffiliated with the issuer entered intobankruptcy or receivership. Somebanking organizations have also issued,or proposed to issue, subordinated debt

that would allow debtholders to accel-erate repayment if, for example, thebanking organization failed to main-tain certain prescribed minimum cap-ital ratios or rates of return, or if theamount of nonperforming assets orcharge-offs of the banking organizationexceeded a certain level.

(iii) These and other similar accel-eration clauses raise significant super-visory concerns because repayment ofthe debt could be accelerated at a timewhen an organization may be experi-encing financial difficulties. Accelera-tion of the debt could restrict the abil-ity of the organization to resolve itsproblems in the normal course of busi-ness and could cause the organizationinvoluntarily to enter into bankruptcyor receivership. Furthermore, sincesuch acceleration clauses could allowthe holders of subordinated debt to bepaid ahead of general creditors or de-positors, their inclusion in a debt issuethrows into question whether the debtis, in fact, subordinated.

(iv) Subordinated debt issues whoseterms state that the debtholders mayaccelerate the repayment of principalonly in the event of bankruptcy or re-ceivership of the issuer do not permitthe holders of the debt to be paid be-fore general creditors or depositors anddo not raise supervisory concerns be-cause the acceleration does not occuruntil the institution has failed. Accord-ingly, debt issues that permit accelera-tion of principal only in the event ofbankruptcy (liquidation or reorganiza-tion) in the case of bank holding com-panies and receivership in the case ofbanks may generally be classified ascapital.

(3) Provisions inconsistent with safeand sound banking practices—(i) Therisk-based capital guidelines state thatinstruments included in capital maynot contain or be covered by any cov-enants, terms, or restrictions that areinconsistent with safe and sound bank-ing practice. As a general matter, cap-ital instruments should not containterms that could adversely affect li-quidity or unduly restrict manage-ment’s flexibility to run the organiza-tion, particularly in times of financialdifficulty, or that could limit the regu-lator’s ability to resolve problem bank


609


3 This notice does not attempt to list oraddress all clauses included in subordinateddebt; rather, it is intended to give generalsupervisory guidance regarding the types ofclauses that could raise supervisory con-cerns. Issuers of subordinated debt may needto consult further with Federal Reserve staffabout other subordinated debt provisions notspecifically discussed above to determinewhether such provisions are appropriate in adebt capital instrument.

4 Although payments on debt whose inter-est rate increases over time on the surfacemay not appear to be directly linked to thefinancial condition of the issuing organiza-tion, such debt (sometimes referred to as ex-panding or exploding rate debt) has a strongpotential to be credit sensitive in substance.Organizations whose financial condition hasstrengthened are more likely to be able torefinance the debt at a rate lower than thatmandated by the preset increase, whereas in-stitutions whose condition has deterioratedare less likely to be able to do so. Moreover,just when these latter institutions would bein the most need of conserving capital, theywould be under strong pressure to redeemthe debt as an alternative to paying higherrates and, thus, would accelerate depletionof their resources.

5 While such terms may be acceptable inperpetual preferred stock qualifying as Tier2 capital, it would be inconsistent with safeand sound banking practice to include debtwith such terms in Tier 2 capital. The orga-nization does not have the option, as it doeswith auction rate preferred stock issues, ofeliminating the higher payments on the sub-ordinated debt without going into default.

situations. For example, some subordi-nated debt includes covenants thatwould not allow the banking organiza-tion to make additional secured or sen-ior borrowings. Other covenants wouldprohibit a banking organization fromdisposing of a major subsidiary or un-dergoing a change in control. Such cov-enants could restrict the banking orga-nization’s ability to raise funds tomeet its liquidity needs. In addition,such terms or conditions limit the abil-ity of bank supervisors to resolve prob-lem bank situations through a changein control.

(ii) Certain other provisions found insubordinated debt may provide protec-tion to investors in subordinated debtwithout adversely affecting the overallbenefits of the instrument to the orga-nization. For example, some instru-ments include covenants that may re-quire the banking organization to:

(A) Maintain an office or agencywhere securities may be presented,

(B) Hold payments on the securitiesin trust,

(C) Preserve the rights and franchisesof the company,

(D) Pay taxes and assessments beforethey become delinquent,

(E) Provide an annual statement ofcompliance on whether the companyhas observed all conditions of the debtagreement, or

(F) Maintain its properties in goodcondition. Such covenants, as long asthey do not unduly restrict the activ-ity of the banking organization, gen-erally would be acceptable in qualify-ing subordinated debt, provided thatfailure to meet them does not give theholders of the debt the right to acceler-ate the debt.3

(4) Credit sensitive features. Credit sen-sitive subordinated debt (includingmandatory convertible securities)where payments are tied to the finan-

cial condition of the borrower gen-erally do not qualify for inclusion incapital. Interest rate payments may belinked to the financial condition of aninstitution through various ways, suchas through an auction rate mechanism,a preset schedule that either mandatesinterest rate increases as the creditrating of the institution declines orautomatically increases them over thepassage of time,4 or that raises the in-terest rate if payment is not made in atimely fashion.5 As the financial condi-tion of an organization declines, it isfaced with higher and higher paymentson its credit sensitive subordinateddebt at a time when it most needs toconserve its resources. Thus, creditsensitive debt does not provide the sup-port expected of a capital instrumentto an institution whose financial condi-tion is deteriorating; rather, the creditsensitive feature can accelerate deple-tion of the institution’s resources andincrease the likelihood of default onthe debt.

(c) Criteria for mandatory convertibledebt included in capital. Mandatory con-vertible debt included in capital mustmeet all the criteria cited above forsubordinated debt with the exception


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12 CFR Ch. II (1–1–98 Edition)§ 250.166

6 Mandatory convertible debt is subordi-nated debt that contains provisions commit-ting the issuing organization to repay theprincipal from the proceeds of future equityissues.

of the minimum maturity require-ment.6 Since mandatory convertibledebt eventually converts to an equityinstrument, it has no minimum matu-rity requirement. Such debt, however,is subject to a maximum maturity re-quirement of 12 years.

(d) Previously issued subordinated debt.Subordinated debt including manda-tory convertible debt that has beenissued prior to the date of this inter-pretation and that contains provisionspermitting acceleration for reasonsother than bankruptcy or receivershipof the issuing institution; includesother questionable terms or conditions;or that is credit sensitive will notautomatically be excluded from cap-ital. Rather, such debt will be consid-ered on a case-by-case basis to deter-mine whether it qualifies as Tier 2 cap-ital. As a general matter, subordinateddebt issued prior to the release of thisinterpretation and containing suchprovisions or features may qualify asTier 2 capital so long as these terms:

(1) have been commonly used bybanking organizations,

(2) do not provide an unreasonablyhigh degree of protection to the holderin cases not involving bankruptcy orreceivership, and

(3) do not effectively allow the holderto stand ahead of the general creditorsof the issuing institution in cases ofbankruptcy or receivership.

Subordinated debt containing provi-sions that permit the holders of thedebt to accelerate payment of principalwhen the banking organization beginsto experience difficulties, for example,when it fails to meet certain financialratios, such as capital ratios or rates ofreturn, does not meet these three cri-teria. Consequently, subordinated debtissued prior to the release of this inter-pretation containing such provisionsmay not be included within Tier 2 cap-ital.

(e) Limitations on the amount of subor-dinated debt in capital—(1) Basic limita-tion. The amount of subordinated debtan institution may include in Tier 2capital is limited to 50 percent of the

amount of the institution’s Tier 1 cap-ital. The amount of a subordinateddebt issue that may be included in Tier2 capital is discounted as it approachesmaturity; one-fifth of the originalamount of the instrument, less any re-demptions, is excluded each year fromTier 2 capital during the last five yearsprior to maturity. If the instrumenthas a serial redemption feature suchthat, for example, half matures inseven years and half matures in tenyears, the issuing organization shouldbegin discounting the seven-year por-tion after two years and the ten-yearportion after five years.

(2) Treatment of debt with dedicatedproceeds. If a banking organization hasissued common or preferred stock anddedicated the proceeds to the redemp-tion of a mandatory convertible debtsecurity, that portion of the securitycovered by the amount of the proceedsso dedicated is considered to be ordi-nary subordinated debt for capital pur-poses, provided the proceeds are notplaced in a sinking fund, trust fund, orsimilar segregated account or are notused in the interim for some other pur-pose. Thus, dedicated portions of man-datory convertible debt securities aresubject, like other subordinated debt,to the 50 percent sublimit within Tier 2capital, as well as to discounting in thelast five years of life. Undedicated por-tions of mandatory convertible debtmay be included in Tier 2 capital with-out any sublimit and are not subject todiscounting.

(3) Treatment of debt with segregatedfunds. In some cases, the provisions inmandatory convertible debt issues mayrequire the issuing banking organiza-tion to set up a sinking fund, trustfund, or similar segregated account tohold the proceeds from the sale of eq-uity securities dedicated to pay off theprincipal of the mandatory convertibledebt at maturity. The portion of man-datory convertibles covered by theamount of proceeds deposited in such asegregated fund is considered securedand, thus, may not be included in cap-ital at all, let alone be treated as sub-ordinated debt that is subject to the 50percent sublimit within Tier 2 capital.The maintenance of such separate seg-regated funds for the redemption ofmandatory convertible debt exceeds


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7 Some agreements governing mandatoryconvertible debt issued prior to the risk-based capital guidelines provide that thebank may redeem the notes if they no longercount as primary capital as defined in appen-dix B to Regulation Y. Such a provision doesnot obviate the requirement to receive Fed-eral Reserve approval prior to redemption.

8 The guidance contained in this paragraphapplies to mandatory convertible debt issuedprior to the risk-based capital guidelinesthat state that the banking organizationmay redeem the notes if they no longercount as primary capital as defined in Ap-pendix B to Regulation Y. Such provisions donot obviate the need to consult with, or ob-tain approval from, the Federal Reserveprior to redemption of the debt.

the requirements of appendix B to Reg-ulation Y. Accordingly, if a banking or-ganization, with the agreement of itsdebtholders, seeks Federal Reserve ap-proval to eliminate such a fund, ap-proval normally would be given unlesssupervisory concerns warrant other-wise.

(f) Redemption of subordinated debtprior to maturity—(1) By state memberbanks. State member banks must ob-tain approval from the appropriate Re-serve Bank prior to redeeming beforematurity subordinated debt or manda-tory convertible debt included in cap-ital.7 A Reserve Bank will not approvesuch early redemption unless it is sat-isfied that the capital position of thebank will be adequate after the pro-posed redemption.

(2) By bank holding companies. Whilebank holding companies are not for-mally required to obtain approval priorto redeeming subordinated debt, therisk-based capital guidelines state thatbank holding companies should consultwith the Federal Reserve before re-deeming any capital instruments priorto stated maturity. This also applies toany redemption of mandatory convert-ible debt with proceeds of an equityissuance that were dedicated to the re-demption of that debt. Accordingly, abank holding company should consultwith its Reserve Bank prior to redeem-ing subordinated debt or dedicated por-tions of mandatory convertible debt in-cluded in capital. A Reserve Bank gen-erally will not acquiesce to such a re-demption unless it is satisfied that thecapital position of the bank holdingcompany would be adequate after theproposed redemption.

(3) Special concerns involving manda-tory convertible debt. Consistent withappendix B to Regulation Y, bank hold-ing companies wishing to redeem be-fore maturity undedicated portions ofmandatory convertible debt included incapital are required to receive priorFederal Reserve approval, unless the

redemption is effected with the pro-ceeds from the sale or common or per-petual preferred stock. An organizationplanning to effect such a redemptionwith the proceeds from the sale of com-mon or perpetual preferred stock is ad-vised to consult informally with its Re-serve Bank in order to avoid the possi-bility of taking an action that couldresult in weakening its capital posi-tion. A Reserve Bank will not approvethe redemption of mandatory convert-ible securities, or acquiesce in such aredemption effected with the sale ofcommon or perpetual preferred stock,unless it is satisfied that the capitalposition of the bank holding companywill be satisfactory after the redemp-tion.8

[57 FR 40598, Sept. 4, 1992]

§ 250.180 Reports of changes in controlof management.

(a) Under a statute enacted Septem-ber 12, 1964 (Pub. L. 88–593; 78 Stat. 940)all insured banks are required to reportpromptly (1) changes in the outstand-ing voting stock of the bank which willresult in control or in a change in con-trol of the bank and (2) any instanceswhere the bank makes a loan or loans,secured, or to be secured, by 25 percentor more of the outstanding votingstock of an insured bank.

(b) Reports concerning changes incontrol of a State member bank are tobe made by the president or other chiefexecutive officer of the bank, and shallbe submitted to the Federal ReserveBank of its district.

(c) Reports concerning loans by aninsured bank on the stock of a Statemember bank are to be made by thepresident or other chief executive offi-cer of the lending bank, and shall besubmitted to the Federal Reserve Bankof the State member bank on the stockof which the loan was made.


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12 CFR Ch. II (1–1–98 Edition)§ 250.181

(d) Paragraphs 3 and 4 of this legisla-tion specify the information requiredin the reports which, in cases involvingState member banks, should be ad-dressed to the Vice President in Chargeof Examinations of the appropriateFederal Reserve Bank.

(12 U.S.C. 1817)

§ 250.181 Reports of change in controlof bank management incident to amerger.

(a) A State member bank has in-quired whether Pub. L. 88–593 (78 Stat.940) requires reports of change in con-trol of bank management in situationswhere the change occurs as an incidentin a merger.

(b) Under the Bank Merger Act of1960 (12 U.S.C. 1828(c)), no bank withFederal deposit insurance may mergeor consolidate with, or acquire the as-sets of, or assume the liability to paydeposits in, any other insured bankwithout prior approval of the appro-priate Federal bank supervisory agen-cy. Where the bank resulting from anysuch transaction is a State memberbank, the Board of Governors is theagency that must pass on the trans-action. In the course of considerationof such an application, the Boardwould, of necessity, acquire knowledgeof any change in control of manage-ment that might result. Informationconcerning any such change in controlof management is supplied with eachmerger application and, in the cir-cumstances, it is the view of the Boardthat the receipt of such information inconnection with a merger applicationconstitutes compliance with Pub. L.88–593. However, once a merger hasbeen approved and completely effec-tuated, the resulting bank would there-after be subject to the reporting re-quirements of Pub. L. 88–593.

(12 U.S.C. 1817)

§ 250.182 Terms defining competitiveeffects of proposed mergers.

Under the Bank Merger Act (12U.S.C. 1828(c)), a Federal Banking agen-cy receiving a merger application mustrequest the views of the other twobanking agencies and the Departmentof Justice on the competitive factorsinvolved. Standard descriptive terms

are used by the Board, the Federal De-posit Insurance Corporation, and theComptroller of the Currency. Theterms and their definitions are as fol-lows:

(a) The term monopoly means thatthe proposed transaction must be dis-approved in accordance with 12 U.S.C.1828(c)(5)(A).

(b) The term substantially adversemeans that the proposed transactionwould have anticompetitive effectswhich preclude approval unless theanticompetitive effects are clearly out-weighed in the public interest by theprobable effect of the transaction inmeeting the convenience and needs ofthe community to be served as speci-fied in 12 U.S.C. 1828(c)(5)(B).

(c) The term adverse means that pro-posed transaction would have anti-competitive effects which would be ma-terial to the decision but which wouldnot preclude approval.

(d) The term no significant effectmeans that the anticompetitive effectsof the proposed transaction, if any,would not be material to the decision.

(12 U.S.C. 1828(c))

[45 FR 45257, July 3, 1980]

§ 250.200 Investment in bank premisesby holding company banks.

(a) The Board of Governors has beenasked whether, in determining undersection 24A of the Federal Reserve Act(12 U.S.C. 371d) how much may be in-vested in bank premises without priorBoard approval, a State member bank,which is owned by a registered bankholding company, is required to includeindebtedness of a corporation, whollyowned by the holding company, that isengaged in holding premises of banksin the holding company system.

(b) Section 24A provides, in part, asfollows:

Hereafter * * * no State member bank,without the approval of the Board of Gov-ernors of the Federal Reserve System, shall(1) invest in bank premises, or in the stock,bonds, debentures, or other such obligationsof any corporation holding the premises ofsuch bank or (2) make loans to or upon thesecurity of the stock of any such corpora-tion, if the aggregate of all such investmentsand loans, together with the amount of any


613


indebtedness incurred by any such corpora-tion which is an affiliate of the bank, as de-fined in section 2 of the Banking Act of 1933,as amended [12 U.S.C. 221a], will exceed theamount of the capital stock of such banks.

(c) A corporation that is owned by aholding company is an ‘‘affiliate ofeach of the holding company’s major-ity-owned banks as that term is de-fined in said section 2. Therefore, underthe explicit provisions of section 24A,each State member bank, any part ofwhose premises is owned by such an af-filiate, must include the affiliate’stotal indebtedness in determiningwhether a proposed premises invest-ment by the bank would cause the ag-gregate figure to exceed the amount ofthe bank’s capital stock, so that theBoard’s prior approval would be re-quired. Where the affiliate holds thepremises of a number of the holdingcompany’s banks, the amount of the af-filiate’s indebtedness may be so largethat Board approval is required forevery proposed investment in bankpremises by each majority-owned Statemember bank, to which the entire in-debtedness of the affiliate is requiredto be attributed. The Board believesthat, in these circumstances, individ-ual approvals are not essential to effec-tuate the purpose of section 24A, whichis to safeguard the soundness and li-quidity of member banks, and that theprotection sought by Congress can beachieved by a suitably circumscribedgeneral approval.

(d) Accordingly the Board herebygrants general approval for any invest-ment or loan (as described in section24A) by any State member bank, themajority of the stock of which is ownedby a registered bank holding company,if the proposed investment or loan willnot cause either (1) all such invest-ments and loans by the member bank(together with the indebtedness of anybank premises subsidiary thereof) toexceed 100 percent of the bank’s capitalstock, or (2) the aggregate of such in-vestments and loans by all of the hold-ing company’s subsidiary banks (to-gether with the indebtedness of anybank premises affiliates thereof) to ex-ceed 100 percent of the aggregate cap-ital stock of said banks.

(12 U.S.C. 221a, 371d)

§ 250.220 Whether member bank actingas trustee is prohibited by section20 of the Banking Act of 1933 fromacquiring majority of shares of mu-tual fund.

(a) The Board recently consideredwhether section 20 of the Banking Actof 1933 (12 U.S.C. 377) would prohibit amember bank, while acting as trusteeof a tax exempt employee benefit trustor trusts, from, under the following cir-cumstances, acquiring a majority ofthe shares of an open-end investmentcompany (‘‘Fund’’) registered under theInvestment Company Act of 1940, ormore than 50 percent of the number ofFund’s shares voted at the precedingelection of directors of the Fund.

(b) The bank has acted as trustee,since December 1963, pursuant to atrust agreement with a county medicalsociety to administer its group retire-ment program, under which individualmembers of the society could partici-pate in accordance with the provisionsof the Self-Employed Individuals TaxRetirement Act of 1962 (commonly re-ferred to as ‘‘H.R. 10’’).

(c) Under the trust agreement aspresently constituted, each employer,who is a participating member of themedical society, directs the bank to in-vest his contributions to the retire-ment plan in such proportions as hemay elect in insurance or annuity con-tracts or in a diversified portfolio of se-curities and other property. The diver-sified portfolio held by the bank is in-vested and administered by the banksolely at the direction of a committeeof the medical society.

(d) It has now been proposed that thetrust agreement be amended to providethat all investments constituting thetrust fund, apart from insurance andannuity contracts, will be made exclu-sively in shares of a single open-end in-vestment company to be named in thetrust agreement and that the assetsconstituting the diversified portfolionow held by the bank, as trustee, willbe exchanged for the Fund’s shares.The bank will, in addition to holdingthe shares of the Fund, allocate incomeand dividends to the accounts of thevarious participants in the retirementprogram, invest and reinvest incomeand dividends, and perform other min-isterial functions.


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12 CFR Ch. II (1–1–98 Edition)§ 250.221

(e) In addition, it is proposed toamend the trust agreement so that vot-ing of the shares held by the bank astrustee will be controlled exclusivelyby the participants. Under the pro-posed amendment, the bank will signall proxies prior to mailing them to theparticipants,

it being intended that the Participant(s)shall vote the proxies notwithstanding thefact that the Trustee is the owner of theshares * * *.

(f) The bank believes that amend-ments are now under considerationthat will also require investment of theassets of these plans exclusively in theFund’s shares. Accordingly, the bankmay eventually own the Fund’s sharesin several separate trust accounts andin an aggregate amount equal to a ma-jority of the Fund’s shares.

(g) Section 20 of the Banking Act of1933 provides in relevant part that

no member bank shall be affiliated in anymanner described in section 2(b) hereof withany corporation * * * engaged principally inthe issue, flotation, underwriting, publicsale, or distribution at wholesale or retail orthrough syndicate participation of stocks* * * or other securities: * * *.

(h) Section 2(b) defines the term affil-iate to include

any corporation, business trust, associa-tion or other similar organization (1) Ofwhich a member bank, directly or indirectly,owns or controls either a majority of thevoting shares or more than 50 per centum ofthe number of shares voted for the electionof its directors, trustees, or other persons ex-ercising similar functions at the precedingelection, or controls in any manner the elec-tion of a majority of its directors, trustees,or other persons exercising similar func-tions; * * *.

(i) The Board has previously takenthe position, in an interpretation in-volving the term affiliate under theBanking Act of 1933, that it would notrequire a member bank to obtain andpublish a report of a corporation themajority of the stock of which is heldby the member bank as executor ortrustee, provided that the memberbank holds such stock subject to con-trol by a court or by a beneficiary orother principal and that the memberbank may not lawfully exercise controlof such stock independently of anyorder or direction of a court, bene-

ficiary or other principal. 1933 FederalReserve Bulletin 651. The rationale ofthat interpretation—which was re-affirmed by the Board in 1957—wouldappear to be equally applicable to thefacts in the present case. In the cir-cumstances, and on the basis of theBoard’s understanding that the bankwill not vote any of Fund’s shares orcontrol in any manner the election ofany of its directors, trustees, or otherpersons exercising similar functions,the Board has concluded that the situa-tion in question would not fall withinthe purpose or coverage of section 20 ofthe Banking Act of 1933 and, therefore,would not involve a violation of thestatute.

§ 250.221 Issuance and sale of short-term debt obligations by bank hold-ing companies.

(a) The opinion of the Board of Gov-ernors of the Federal Reserve Systemhas been requested recently with re-spect to the proposed sale of ‘‘thriftnotes’’ by a bank holding company forthe purpose of supplying capital to itswholly-owned nonbanking subsidiaries.

(b) The thrift notes would bear thename of the holding company, which inthe case presented, was substantiallysimilar to the name of its affiliatedbanks. It was proposed that they beissued in denominations of $50 to $100and initially be of 12-month or less ma-turities. There would be no maximumamount of the issue. Interest rateswould be variable according to moneymarket conditions but would presum-ably be at rates somewhat above thosepermitted by Regulation Q ceilings.There would be no guarantee or indem-nity of the notes by any of the banks inthe holding company system and, if re-quired to do so, the holding companywould place on the face of the notes anegative representation that the pur-chase price was not a deposit, nor anindirect obligation of banks in theholding company system, nor coveredby deposit insurance.

(c) The notes would be generallyavailable for sale to members of thepublic, but only at offices of the hold-ing company and its nonbanking sub-sidiaries. Although offices of the hold-ing company may be in the same build-ing or quarters as its banking offices,


615


they would be physically separatedfrom the banking offices. Sales wouldbe made only by officers or employeesof the holding company and its non-banking subsidiaries. Initially, thenotes would only be offered in theState in which the holding companywas principally doing business, therebycomplying with the exemption pro-vided by section 3(a)(11) of the Securi-ties Act of 1933 (15 U.S.C. 77c) for‘‘intra-state’’ offerings. If it was de-cided to offer the notes on an inter-state basis, steps would be taken toregister the notes under the SecuritiesAct of 1933. Funds from the sale of thenotes would be used only to supply thefinancial needs of the nonbanking sub-sidiaries of the holding company. Thesenonbank subsidiaries are, at present, asmall loan company, a mortgage bank-ing company and a factoring company.In no instance would the proceeds fromthe sale of the notes be used in thebank subsidiaries of the holding com-pany nor to maintain the availabilityof funds in its bank subsidiaries.

(d) The sale of the thrift notes, in thespecific manner proposed, is an activ-ity described in section 20 of the Bank-ing Act of 1933 (12 U.S.C. 377), that is,‘‘the issue, flotation, underwriting,public sale or distribution * * * of * * *notes, or other securities’’. Brieflystated, this statute prohibits a memberbank to be affiliated with a company‘‘engaged principally’’ in such activity.Since the continued issuance and saleof such securities would be necessaryto permit maintenance of the holdingcompany’s activities without substan-tial contraction and would be an inte-gral part of its operations, the Boardconcluded that the issuance and sale ofsuch notes would constitute a principalactivity of a holding company withinthe spirit and purpose of the statute.(For prior Board decisions in this con-nection, see 1934 Federal Reserve Bul-letin 485, 12 CFR 218.104, 12 CFR 218.105and 12 CFR 218.101.)

(e) In reaching this conclusion, theBoard distinguished the proposed activ-ity from the sale of short-term notescommonly known as commercial paper,which is a recognized form of financingfor bank holding companies. For pur-poses of this interpretation, commercialpaper may be defined as notes, with

maturities not exceeding nine months,the proceeds of which are to be used forcurrent transactions, which are usuallysold to sophisticated institutional in-vestors, rather than to members of thegeneral public, in minimum denomina-tions of $10,000 (although sometimesthey may be sold in minimum denomi-nations of $5,000). Commercial paper isexempt from registration under the Se-curities Act of 1933 by reason of the ex-emption provided by section 3(a)(3)thereof (15 U.S.C. 77c). That exemptionis inapplicable where the securities aresold to the general public (17 CFR231.4412). The reasons for such exemp-tion, taken together with the abusesthat gave rise to the passage of theBanking Act of 1933 (‘‘the Glass-Steagall Act’’), have led the Board toconclude that the issuance of commer-cial paper by a bank holding companyis not an activity intended to be in-cluded within the scope of section 20.

(Interprets and applies 12 U.S.C. 377 and 1843)[Reg. Y, 38 FR 35231, Dec. 26, 1973]

§ 250.240 Applicability of section 23Aof the Federal Reserve Act to trans-actions between a member Statebank and its ‘‘operations subsidi-ary’’.

(a) The Board of Governors has re-cently considered whether section 23Aof the Federal Reserve Act (12 U.S.C.371c) applies to extensions of credit bya member State bank to its operationssubsidiary.

(b) Section 23A imposes limitations(in terms of security and amount) on afederally insured bank’s loans to andinvestments in its affiliates. The prin-cipal purpose of section 23A is to safe-guard the resources of a bank againstmisuse for the benefit of organizationsunder common control with the bank.It was designed to prevent a bank fromrisking too large an amount in affili-ated enterprises and to assure that ex-tensions of credit to affiliates will berepaid—out of marketable collateral, ifnecessary.

(c) Since 1968 the Board has per-mitted member banks to establish andown operations subsidiaries—that is,organizations designed to serve, in ef-fect, as separately incorporated depart-ments of the bank, performing, at loca-tions at which the bank is authorized


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12 CFR Ch. II (1–1–98 Edition)§250.241

to engage in business, functions thatthe bank is empowered to perform di-rectly (12 CFR 250.141). Since an oper-ations subsidiary is in effect a part of,and subject to the same restrictions as,its parent bank, there appears to be noreason to limit transactions betweenthe bank and such subsidiary any morethan transactions between depart-ments of a bank.

(d) Accordingly, the Board has con-cluded that a credit transaction by amember State bank with its operationssubsidiary (the authority for which isbased on the 1968 ruling) is not a ‘‘loanor * * * extension of credit’’ of the kindintended to be restricted and regulatedby section 23A and is, therefore, out-side the purview of that section.

[35 FR 10201, June 23, 1970]

§250.241 Exclusion from section 23A ofthe Federal Reserve Act for certaintransactions subject to reviewunder the Bank Merger Act.

(a) Grant of Exemption. Section 23A ofthe Federal Reserve Act shall notapply to a transaction between affili-ated insured depository institutions ifthe transaction has been approved bythe appropriate federal banking agencypursuant to the Bank Merger Act.

(b) Definitions. For purposes of thissection, the terms ‘‘appropriate federalbanking agency’’ and ‘‘insured deposi-tory institution’’ are defined as thoseterms are defined in section 3 of theFederal Deposit Insurance Act.

[57 FR 41644, Sept. 11, 1992]

§ 250.242 Section 23A of the FederalReserve Act—definition of capitalstock and surplus.

(a) An insured depository institu-tion’s capital stock and surplus forpurposes of section 23A of the FederalReserve Act (12 U.S.C. 371c) is:

(1) Tier 1 and Tier 2 capital includedin an institution’s risk-based capitalunder the capital guidelines of the ap-propriate Federal banking agency,based on the institution’s most recentconsolidated Report of Condition andIncome filed under 12 U.S.C. 1817(a)(3);and

(2) The balance of an institution’s al-lowance for loan and lease losses notincluded in its Tier 2 capital for pur-poses of the calculation of risk-based

capital by the appropriate Federalbanking agency, based on the institu-tion’s most recent consolidated Reportof Condition and Income filed under 12U.S.C. 1817(a)(3).

(b) For purposes of this section, theterms appropriate Federal banking agen-cy and insured depository institution aredefined as those terms are defined insection 3 of the Federal Deposit Insur-ance Act, 12 U.S.C. 1813.

[61 FR 19806, May 3, 1996]

§ 250.250 Applicability of section 23Aof the Federal Reserve Act to amember State bank’s purchase of,or participation in, a loan origi-nated by a mortgage banking affili-ate.

(a) A question has been raised as towhether a member bank’s purchase,without recourse, and at face value, ofany mortgage note, or participationtherein, from a mortgage banking sub-sidiary of its parent bank holding com-pany at the inception of the underlyingmortgage loan involves a ‘‘loan’’ or‘‘extension of credit’’ from the memberbank to the affiliate within the mean-ing of section 23A of the Federal Re-serve Act (12 U.S.C. 371c). In the givencircumstances, the affiliate originatedthe mortgage loans at premises otherthan an office of the member bank andhence was not a company furnishingservices to or performing services forthe holding company or its bankingsubsidiaries within the meaning of sec-tion 4(c)(1)(C) of the Bank HoldingCompany Act (12 U.S.C. 1843(c)(1)(C)).Loans or extensions of credit to the af-filiate were therefore not entitled toexemption from the provisions of sec-tion 23A by virtue of subsection (1) ofthe final paragraph thereof.

(b) Paragraph 4 of section 23A pro-vides that the term extension of creditshall be deemed to include the discountof promissory notes, bills of exchange,conditional sales contracts, or similarpaper, whether with or without re-course, excepting the acquisition ofsuch paper by a member bank from an-other bank without recourse. In pre-viously interpreting the statutory pro-vision from which this provision is de-rived (section 6 of the Bank HoldingCompany Act of 1956, repealed July 1,1966), the Board concluded that discount


617


in the context of the statute meantpurchase and that the purchase ofnotes, bills of exchange, conditionalsales contracts or similar paper froman affiliate was subject to the prohibi-tions of the statute. (1958 Federal Re-serve Bulletin 260.) Further, the Boardnotes that the definition in section 23Ais illustrative rather than exclusive.The Board believes that the purposes ofsection 23A justify a broad construc-tion of the definition of extension ofcredit to include certain purchases ofobligations, even though the purchasesare not made at a discount from facevalue. A bank’s financing of the work-ing capital needs of a mortgage bank-ing affiliate may occur through out-right purchases of obligations, and thetypes of abuses with which section 23Ais concerned are likewise possible insuch circumstances, since such trans-actions between affiliates could resultin an undue risk to the financial condi-tion of the purchasing bank.

(c) The Board is of the opinion thatthe purchase by a member State bankof a mortgage note, or participationtherein, from a mortgage banking affil-iate would involve a loan or extensionof credit to the affiliate if the latterhad either made, or committed itself tomake, the loan or extension of creditevidenced by the note prior to the timewhen the member bank first obligateditself, by commitment or otherwise, topurchase the loan or a participationtherein. However, there would be noloan or extension of credit by the mem-ber bank to its mortgage banking affil-iate if the member bank’s commitmentto purchase the loan, or a participationtherein, is obtained by the affiliatewithin the context of a proposed trans-action, or series of proposed trans-actions, in anticipation of the affili-ate’s commitment to make suchloan(s), and is based upon the bank’sindependent evaluation of the creditworthiness of the mortgagor(s). Inthese latter circumstances, the mem-ber bank would be taking advantage ofan investment opportunity rather thanbeing impelled by any improper incen-tive to alleviate working capital needsof the affiliate that are directly attrib-utable to excessive outstanding com-mitments.

(d) The Board cautions, however,that it would regard a blanket advancecommitment by a member State bankto purchase from its mortgage bankingaffiliate a stipulated amount of loans,or an amount thereof exceeding definedcredit lines of the affiliate, that bearsno reference to specific proposed trans-actions, as involving an unsound bank-ing practice, unless the commitment isconditioned upon compliance of loansmade thereunder with the require-ments of section 23A. It would not suf-fice to condition such a commitmentupon the bank’s ultimate approval ofthe credit standing of the variousmortgagors. That blanket commitmentwould have the inherent tendency, inthe context of an affiliate relationship,to cause the bank to relax sound creditjudgment concerning the individualloans involved when the affiliate was inneed of bank financing, thereby result-ing in an inappropriate risk to thesoundness of the bank.

(Interprets and applies 12 U.S.C. 371c)

[39 FR 28975, Aug. 13, 1974]

§ 250.260 Miscellaneous interpreta-tions; gold coin and bullion.

The Board has received numerous in-quiries from member banks relating tothe repeal of the bank on ownership ofgold by United States citizens. Listedbelow are questions and answers whichaffect member banks and relate to theresponsibilities of the Federal ReserveSystem.

(a) May gold in the form of coins orbullion be counted as vault cash inorder to satisfy reserve requirements?No. Section 19(c) of the Federal Re-serve Act requires that reserve bal-ances be satisfied either by a balancemaintained at the Federal ReserveBank or by vault cash, consisting ofUnited States currency and coin. Goldin bullion form is not United Statescurrency. Since the bullion value ofUnited States gold coins far exceedstheir face value, member banks wouldnot in practice distribute them overthe counter at face value to satisfycustomer demands.

(b) Will the Federal Reserve Banksperform services for member bankswith respect to gold, such as safekeep-ing or assaying? No.


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12 CFR Ch. II (1–1–98 Edition)§ 250.300

(c) Will a Federal Reserve Bank ac-cept gold as collateral for an advanceto a member bank under section 10(b)of the Federal Reserve Act? No.

[39 FR 45254, Dec. 31, 1974]

BANK SERVICE ARRANGEMENTS

§ 250.300 Kinds of bank servicers sub-ject to Board examination underthe Bank Service Corporation Act.

Summary. The performance of bankservices for State member banks issubject to the Board’s regulation andexamination, regardless of the natureof the bank servicer, includingservicers that are national banks;State nonmember insured banks; non-profit, no-stock credit card servicingorganizations; and servicing subsidi-aries of bank holding companies.

Text. (a) Since the enactment of theBank Service Corporation Act (the‘‘Act’’) (12 U.S.C. 1861–1865), the Boardhas on several occasions consideredwhether performance of ‘‘bank serv-ices’’ (as that term is defined in section1(b) of the Act) for State memberbanks is subject to regulation and ex-amination by the Board under section 5of the Act if—

(1) The bank servicer is not a ‘‘bankservice corporation’’ (as that term isdefined in the Act), or

(2) The bank servicer is a bank itself.In each instance, based on the reason-ing set forth below, the Board ex-pressed the view that section 5 of theAct applied to any organization thatperformed bank services for Statemember banks, including nationalbanks; another State member bank;State nonmember insured banks; serv-icing subsidiaries of bank holding com-panies; and non-profit, no stock creditcard servicing organizations.

(b) The Senate Committee on Bank-ing and Currency stated with regard tosection 5 of the Act, as enacted in 1962,that the Federal supervisory agencies‘‘must be able to examine all of thebanks’ records, and they must be ableto exercise proper supervision over allthe banks’ activities, whether per-formed by the banks’ employees ontheir premises or by anyone else on oroff the banks’ premises. This examina-tion and this supervision cannot befrustrated by a transfer of the banks’

records to some other organization orby having some other organizationcarry out all or part of the banks’ func-tions.’’ (S. Rep. No. 2105, 87th Cong. 3(1962)). Similarly, the Committee onBanking and Currency of the House ofRepresentatives stated that ‘‘it wouldobviously be unwise to permit banks toavoid the examination and supervisionof vital banking functions by the sim-ple expedient of farming out such func-tions.’’ (H.R. Rep. No. 2062, 87th Cong. 3(1962)).

(c) Section 5 of the Act is not limitedby its terms to bank service corporationsas defined in the Act; nor, in theBoard’s opinion based on the legisla-tive history of the Act, should such alimitation be implied. The Board con-cludes that the performance of bankservices for State member banks by or-ganizations that are not bank servicecorporations is also subject to Boardregulation and examination.

(d) If the bank servicer is a nationalbank or a State nonmember insuredbank, its performance of bank servicesfor State member banks is subject toBoard regulation and examination, de-spite the fact that the servicer is sub-ject primarily to regulation and exam-ination by one of the other Federalbanking agencies. By the same token,the performance of bank services by aState member bank for a national bankor State nonmember insured bank issubject to regulation and examinationby the Comptroller of the Currency orthe Federal Deposit Insurance Corpora-tion, respectively. The purpose of sec-tion 5 of the Act is to make certainthat the appropriate Federal bankingagency will be able effectively to exer-cise its responsibilities with respect toa bank subject primarily to its super-vision.

(e) It is important to note that thescope of the Board’s regulation and ex-amination under section 5 of the Actdoes not extend to all affairs of thebank servicer, but only to the bankservices performed for a State memberbank and only to the same extent as ifthe services were being performed bythe State member bank itself on itsown premises.

[44 FR 12969, Mar. 9, 1979]


619


§ 250.301 Scope of investment author-ity and notification requirementunder the Bank Service Corpora-tion Act.

Summary. (a) The authority of Statemember banks under the Bank ServiceCorporation Act to invest in bank serv-ice corporations is limited to invest-ments in corporations that perform‘‘bank services’’ solely.

(b) A State member bank is requiredby the Act to notify the Board only ofthe performance of ‘‘bank services’’ forit.

(c) ‘‘Bank services’’ will not usuallybe regarded as including legal, advi-sory, and administrative services, suchas transportation or guard services.

Text (a) Section 2(a) of the BankService Corporation Act (12 U.S.C.1861–65) provides that ‘‘no limitation orprohibition otherwise imposed by anyprovision of Federal law exclusively re-lating to banks shall prevent any twoor more banks from investing not morethan 10 per centum of the paid-in andunimpaired capital and unimpairedsurplus of each of them in a bank serv-ice corporation.’’ This 10 percent in-vestment ceiling applies to loans andother advances of funds, as well as thepurchase of stock. The Act, however,does not authorize a State bank to in-vest in a bank service corporation ifthe bank is not permitted to do sounder the applicable State law.

(b) Bank service corporation is definedin section 1(c) of the Act to mean ‘‘acorporation organized to perform bankservices for two or more banks, each ofwhich owns part of the capital stock ofsuch corporation, and at least one ofwhich is subject to examination by aFederal supervisory agency.’’ Section 4of the Act states that ‘‘no bank servicecorporation may engage in any activ-ity other than the performance of bankservices for banks.’’ Thus, the invest-ment authority created by section 2(a)is limited to corporations that are en-gaged solely in the provision of ‘‘bankservices’’ to banks, as that term is de-fined in the Act.

(c) In addition to its grant of invest-ment authority, the Act also requiresState member banks to notify theBoard within 30 days of the executionof a contract for ‘‘bank services’’ or theactual provision of such services,

whichever occurs first. Moreover, theAct authorizes the Board to regulateand examine the performance of ‘‘bankservices.’’ Thus, the scope of the Act’snotification and examination require-ments also is limited to ‘‘bank serv-ices.’’

(d) The term bank services is definedin section 1(b) of the Act to mean‘‘services such as check and depositsorting and posting, computation andposting of interest and other creditsand charges, preparation and mailingof checks, statements, notices, andsimilar items, or any other clerical,bookkeeping, accounting, statistical,or similar functions performed for abank.’’

(e) Bearing importantly upon themeaning of bank services is the follow-ing quotation from the Report of theSenate Committee on Banking andCurrency:

The authority to examine and supervisebanks is broad and must be vigorously exer-cised. At the same time sound discretionmust be used. Banks have always employedothers to do many things for them, and theywill have to continue to do so, and the bill isnot intended to prevent this or to make itmore difficult. For example, banks have em-ployed lawyers to prepare trust and estateaccounts and to prosecute judicial proceed-ings for the settlement of such accounts.Banks have employed accountants to prepareearnings statements and balance sheets.Banks have employed public relations andadvertising firms. And banks have employedindividuals or firms to perform all kinds ofadministrative activities, including armoredcar and other transportation services, guardservices and, in many cases, other mechani-cal services needed to run the bank’s build-ings. It is not expected that the bank super-visory agencies would find it necessary to ex-amine or regulate any of these agents or rep-resentatives of a bank, except under themost unusual circumstances. The authorityis intended to be limited to banking func-tions as such.

(S. Rep. No. 2105, 87th Cong. 3 (1962)).

(f) On the basis of the Act’s definitionof bank services, the limitation con-tained in section 4 of the Act, and thepreceding quotation from the Act’s leg-islative history, it is apparent that theterm bank services is essentially limitedto clerical and similar services. For ex-ample, the term would not usually beregarded as including legal, advisory,


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12 CFR Ch. II (1–1–98 Edition)§ 250.302

and administrative services, such astransportation or guard services.

(g) Thus, State member banks gen-erally may rely on the Act to justifyinvestment only in a corporation thatis engaged solely in performing one ormore of the services contained in thedefinition of bank services in section1(b), or a service similar to one of thoseservices, and only if those services areprovided solely to banks. Investment ina corporation providing any other serv-ices, such as the type of services de-scribed in the above quotation from theAct’s legislative history, generally isnot permitted on the basis of this Act,unless such services are legitimatelyincidental to the provision of bank serv-ices by that corporation.

(h) Since the notification required bysection 5 of the Act, as amended, alsois based on the provision of bank serv-ices, such notification need only be pro-vided with regard to the provision ofone or more of the services enumeratedin section 1(b) of the Act or a servicesimilar to one of those services.

[44 FR 12969, Mar. 9, 1979]

§ 250.302 Applicability of Bank ServiceCorporation Act to bank credit cardservice organization.

Summary. Although a non-profit, no-stock service organization in which nobank has made an investment is not abank service corporation as defined inthe Bank Service Corporation Act, thatorganization’s credit card servicing ac-tivities are bank services as defined inthe Act and thus subject to the notifi-cation requirement of section 5 of theAct.

Text. (a) The Board of Governors hasconsidered whether the Bank ServiceCorporation Act (12 U.S.C. 1861–1865), isapplicable where a bank credit cardplan of a State member bank and otherbanks used the facilities of a non-prof-it, no-stock service organization.

(b) The functions of the service orga-nization include the following: (1) Per-forming cardholder accounting for par-ticipating banks; (2) developing infor-mation concerning each credit card andholder, including such holder’s currentbalance owing to the card issuing bankand the amount of such balance that isdelinquent; (3) assisting in proceduresrelating to the presentation and settle-

ment of drafts and credit memoranda;(4) developing procedures relating tocredit card security control; (5) upontelephonic request, advising merchantsand participating banks respectingcredit authorizations above certainspecified limits; and (6) compiling listsof participating merchants.

(c) The Board expressed the view thatbecause the service organization has nostock and the State member bank doesnot otherwise invest therein by ‘‘themaking of a loan, or otherwise, excepta payment for rent earned, goods soldand delivered, or services renderedprior to the making of such payment’’(section 1(d) of the Act), the service or-ganization is not a ‘‘bank service cor-poration’’ within the meaning of sec-tion 1(c) of the Act.

(d) However, the Board concludedthat the functions described above doconstitute bank services as defined insection 1(b) of the Act. Accordingly,the State member bank is required tonotify the Board (through the appro-priate Federal Reserve Bank) of theperformance of the services for thebank in accordance with section 5 ofthe Act.

[44 FR 12970, Mar. 9, 1979]

INTERPRETATIONS OF SECTION 32 OF THEGLASS-STEAGALL ACT

§ 250.400 Service of open-end invest-ment company.

An open-end investment company isdefined in section 5(a)(1) of the Invest-ment Company Act of 1940 as a com-pany ‘‘which is offering for sale or hasoutstanding any redeemable security ofwhich it is the issuer.’’ Section 2(a)(31)of said act provides that a redeemablesecurity means ‘‘any security, otherthan short-term paper, under the termsof which the holder, upon its presen-tation to the issuer or to a person des-ignated by the issuer, is entitled(whether absolutely or only out of sur-plus) to receive approximately his pro-portionate share of the issuer’s currentnet assets, or the cash equivalentthereof.’’

It is customary for such companies tohave but one class of securities, name-ly, capital stock, and it is apparentthat the more or less continued processof redemption of the stock issued by


621


such a company would restrict andcontract its activities if it did not con-tinue to issue its stock. Thus, theissuance and sale of its stock is essen-tial to the maintenance of the compa-ny’s size and to the continuance of op-erations without substantial contrac-tion, and therefore the issue and sale ofits stock constitutes one of the pri-mary activities of such a company.

Accordingly, it is the opinion of theBoard that if such a company is issuingor offering its redeemable stock forsale, it is ‘‘primarily engaged in theissue * * * public sale, or distribution,* * * of securities’’ and that section 32of the Banking Act of 1933, as amended,prohibits an officer, director or em-ployee of any such company from serv-ing at the same time as an officer, di-rector or employee of any memberbank. It is the Board’s view that this istrue even though the shares are sold tothe public through independent organi-zations with the result that the invest-ment company does not derive any di-rect profit from the sales.

If, however, the company has ceased toissue or offer any of its stock for sale,the company would not be engaged inthe issue or distribution of its stock,and, therefore, the prohibition con-tained in section 32 would be inapplica-ble unless the company were primarilyengaged in the underwriting, publicsale or distribution of securities otherthan its own stock.

[16 FR 4963, May 26, 1951. Redesignated at 61FR 57289, Nov. 6, 1996]

§ 250.401 Director serving memberbank and closed-end investmentcompany being organized.

(a) The Board has previously ex-pressed the opinion (§ 218.101) that sec-tion 32 of the Banking Act of 1933 (12U.S.C. 78) is applicable to a director ofa member bank serving as a director ofan open-end investment company, be-cause the more or less continued proc-ess of redemption of the stock issuedby such company makes the issuanceand sale of its stock essential to themaintenance of the company’s size andto the continuance of operations, withthe result that the issuance and sale ofits stock constitutes one of the pri-mary activities of such a company. The

Board also stated that if the companyhad ceased to issue or offer any of itsstock for sale, the company would notbe engaged in the issuance or distribu-tion of its stock and therefore the pro-hibitions of section 32 would not be ap-plicable. Subsequently, the Board ex-pressed the opinion that section 32would not be applicable in the case of aclosed-end investment company.

(b) The Board has recently statedthat it believed that a closed-end com-pany which was in process of organiza-tion and was actively engaged inissuing and selling its shares was in thesame position relative to section 32 asan open-end company, and that the sec-tion would be applicable while this ac-tivity continued.

[25 FR 3464, Apr. 21, 1960. Redesignated at 61FR 57289, Nov. 6, 1996]

§ 250.402 Service as officer, director,or employee of licensee corporationunder the Small Business Invest-ment Act of 1958.

(a) The Board of Governors has beenrequested to express an opinion wheth-er § 218.1 would prohibit an officer, di-rector, or employee of a member bankfrom serving at the same time as an of-ficer, director, or employee of a Li-censee corporation under the SmallBusiness Investment Act of 1958 (15U.S.C. 661 et seq.). It is understood thata Licensee would be authorized to en-gage only in the activities set forth inthe statute, namely, to provide capitaland long-term loan funds to small busi-ness concerns.

(b) In the opinion of the Board, a cor-poration engaged exclusively in theenumerated activities would not be‘‘primarily engaged in the issue, flota-tion, underwriting, public sale, or dis-tribution, at wholesale or retail, orthrough syndicate participation, ofstocks, bonds, or other similar securi-ties.’’ Accordingly, the prohibition of§ 218.1 would not apply to serving as anofficer, director, or employee of eithera small business investment companyorganized under the Small Business In-vestment Act of 1958, or an investmentcompany chartered under the laws of a


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12 CFR Ch. II (1–1–98 Edition)§ 250.403

State solely for the purpose of operat-ing under the Small Business Invest-ment Act of 1958.

[25 FR 4427, May 19, 1960. Redesignated at 61FR 57289, Nov. 6, 1996]

§ 250.403 Service of member bank andreal estate investment company.

(a) The Board recently consideredtwo inquiries regarding the questionwhether proposed real estate invest-ment companies would be subject tothe provisions of sections 20 and 32 ofthe Banking Act of 1933 (12 U.S.C. 377and 78). These sections relate to affili-ations between member banks andcompanies engaged principally in theissue, flotation, underwriting, publicsale or distribution of stocks, bonds, orsimilar securities, and interlocking di-rectorates between member banks andcompanies primarily so engaged. Inboth instances the companies, aftertheir organization, would engage onlyin the business of financing real estatedevelopment or investing in real estateinterests, and not in the type of busi-ness described in the statute. However,each of the companies, in the process ofits organization, would issue its ownstock. In one instance, it appeared thatthe stock would be issued over a periodof from 30 to 60 days; in the other in-stance it was stated that the stockwould be sold by a firm of underwritersand that distribution was expected tobe completed in not more than a fewdays.

(b) On the basis of the facts stated,the Board concluded that the compa-nies involved would not be subject tosections 20 and 32 of the Banking Act of1933, since they would not be prin-cipally or primarily engaged in thebusiness of issuing or distributing secu-rities but would only be issuing theirown stock for a period ordinarily re-quired for corporate organization. TheBoard stated, however, that if either ofthe companies should subsequentlyissue additional shares frequently andin substantial amounts relative to thesize of the company’s capital structure,it would be necessary for the Board toreconsider the matter.

(c) Apart from the legal question, theBoard noted that an arrangement ofthe kind proposed could involve somedangers to an affiliated bank because

the relationship might tend to impairthe independent judgment that shouldbe exercised by the bank in appraisingits credits and might cause the com-pany to be so identified in the minds ofthe public with the bank that any fi-nancial reverses suffered by the com-pany might affect the confidence of thepublic in the bank.

(d) Because of the foregoing conclu-sion that the companies would not besubject to sections 20 and 32, it seemsadvisable to clarify § 218.102, in whichthe Board took the position that aclosed-end investment company whichwas in process of organization and wasactively engaged in issuing and sellingits shares was subject to section 32 aslong as this activity continued. Thatinterpretation should be regarded asapplicable only where the cir-cumstances are such as to indicatethat the issuance of the company’sstock is a primary or principal activityof the company. For example, such cir-cumstances might exist where the ini-tial stock of a company is activelyissued over a period of time longerthan that ordinarily required for cor-porate organization, or where, subse-quent to organization, the companyissues its own stock frequently and insubstantial amounts relative to thetotal amount of shares outstanding.

[26 FR 868, Jan. 28, 1961. Redesignated at 61FR 57289, Nov. 6, 1996]

§ 250.404 Serving as director of mem-ber bank and corporation sellingown stock.

(a) The Board recently considered thequestion whether section 32 of theBanking Act of 1933 (12 U.S.C. 78) wouldbe applicable to the service of a direc-tor of a corporation which planned toacquire or organize, as proceeds fromthe sale of stock became available, sub-sidiaries to operate in a wide variety offields, including manufacturing, for-eign trade, leasing of heavy equipment,and real estate development. The cor-poration had a paid-in capital of about$60,000 and planned to sell additionalshares at a price totaling $10 million,with the proviso that if less than $3million worth were sold by March 1962,the funds subscribed would be refunded.It thus appeared to be contemplatedthat the sale of stock would take at


623


least a year, and there appeared to beno reason for believing that, if the ven-ture proved successful, additionalshares would not be offered so that thecorporation could continue to expand.

(b) The Board concluded that section32 would be applicable, stating that al-though § 218.102, as clarified by § 218.104,related to closed-end investment com-panies, the rationale of that interpre-tation is applicable to corporationsgenerally.

[26 FR 2456, Mar. 23, 1961. Redesignated at 61FR 57289, Nov. 6, 1996]

§ 250.405 No exception granted a spe-cial or limited partner.

(a) The Board has been asked on sev-eral occasions whether section 32 of theBanking Act of 1933 (12 U.S.C. 78) is ap-plicable to a director, officer, or em-ployee of a member bank who is a spe-cial or limited partner in a firm pri-marily engaged in the business de-scribed in that section.

(b) Since the Board cannot issue anindividual permit, it can exempt a lim-ited or special partner only by amend-ing part 218 (Regulation R). After thestatute was amended in 1935 so as tomake it applicable to a partner, theBoard carefully considered the desir-ability of making such an exception.On several subsequent occasions it hasreconsidered the question. In each in-stance the Board has decided that inview of a limited partner’s interest inthe underwriting and distributing busi-ness, it should not make the exception.

[27 FR 7954, Aug. 10, 1962. Redesignated at 61FR 57289, Nov. 6, 1996]

§ 250.406 Serving member bank and in-vestment advisor with mutual fundaffiliation.

(a) The opinion of the Board of Gov-ernors of the Federal Reserve Systemhas been requested with respect toservice as vice president of a corpora-tion engaged in supplying investmentadvice and management services tomutual funds and others (‘‘Manager’’)and as director of a member bank.

(b) Section 32 of the Banking Act of1933 (12 U.S.C. 78), forbids any officer,director, or employee of any corpora-tion ‘‘primarily engaged in the issue,flotation, underwriting, public sale, ordistribution, at wholesale or retail, or

through syndicate participation, ofstocks, bonds, or other similar securi-ties * * *’’ to serve at the same time asan officer, director, or employee of amember bank.

(c) Manager has for several yearsserved a number of different open-endor mutual funds, as well as individuals,institutions, and other clients, as aninvestment advisor and manager. How-ever, it appears that Manager has aclose relationship with two of the mu-tual funds which it serves. A whollyowned subsidiary of Manager (‘‘Dis-tributors’’), serves as distributor forthe two mutual funds and has no otherfunction. In addition, the chairman andtreasurer of Manager, as well as thepresident, assistant treasurer, and a di-rector of Manager, are officers and di-rectors of Distributors and trustees ofboth funds. It appears also that a direc-tor of Manager is president and direc-tor of Distributors, while the clerk ofManager is also clerk of Distributors.Manager, Distributors and both fundsare listed at the same address in thelocal telephone directory.

(d) While the greater part of the totalannual income of Manager during thepast five years has derived from ‘‘indi-viduals, institutions, and other cli-ents’’, it appears that a substantialportion has been attributable to the in-volvement with the two funds in ques-tion. During each of the last fouryears, that portion has exceeded athird of the total income of Manager,and in 1962 it reached nearly 40 percent.

(e) The Board has consistently heldthat an open-end or mutual fund is en-gaged in the activities described in sec-tion 32, so long as it is issuing its secu-rities for sale, since it is apparent thatthe more or less continued process ofredemption of the stock issued by sucha company would restrict and contractits activities if it did not continue toissue the stock. Clearly, a corporationthat is engaged in underwriting or sell-ing open-end shares, is so engaged.

(f) In connection with incorporatedmanager-advisors to open-end or mu-tual funds, the Board has expressed theview in a number of cases that wherethe corporation served a number of dif-ferent clients, and the corporate struc-ture was not interlocked with that ofmutual fund and underwriter in such a


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way that it could be regarded as beingcontrolled by or substantially one withthem, it should not be held to be ‘‘pri-marily engaged’’ in section 32 activi-ties. On the other hand, where a man-ager-advisor was created for the solepurpose of serving a particular fund,and its activities were limited to thatfunction, the Board has regarded thegroup as a single entity for purposes ofsection 32.

(g) In the present case, the selling or-ganization is a wholly-owned subsidi-ary of the advisor-manager, hence sub-ject to the parent’s control. Stock ofthe subsidiary will be voted accordingto decisions by the parent’s board of di-rectors, and presumably will be votedfor a board of directors of the subsidi-ary which is responsive to policy lineslaid down by the parent. Financial in-terests of the parent are obviously bestserved by an aggressive selling policy,and, in fact, both the share and the ab-solute amount of the parent’s incomeprovided by the two funds have showna steady increase over recent years.The fact that dividends from Distribu-tors have represented a relativelysmall proportion of the income of Man-ager, and that there were, indeed, nodividends in 1961 or 1962, does not sup-port a contrary argument, in view ofthe steady increase in total income ofManager from the funds and Distribu-tors taken as a whole.

(h) In view of all these facts, theBoard has concluded that the separatecorporate entities of Manager and Dis-tributors should be disregarded andDistributors viewed as essentially aselling arm of Manager. As a result ofthis conclusion, section 32 would forbidinterlocking service as an officer ofManager and a director of a memberbank.

[28 FR 13437, Dec. 12, 1963. Redesignated at 61FR 57289, Nov. 6, 1996]

§ 250.407 Interlocking relationship in-volving securities affiliate of bro-kerage firm.

(a) The Board of Governors was askedrecently whether section 32 of theBanking Act of 1933 (‘‘section 32’’), 12U.S.C. 78, prohibits the interlockingservice of X as a director of a memberbank of the Federal Reserve Systemand as a partner in a New York City

brokerage firm (‘‘Partnership’’) havinga corporation affiliate (‘‘Corporation’’)engaged in business of the kinds de-scribed in section 32 (‘‘section 32 busi-ness’’).

(b) Section 32, subject to an excep-tion not applicable here, provides that

No officer, director, or employee of anycorporation or unincorporated association,no partner or employee of any partnership,and no individual, primarily engaged in theissue, flotation, underwriting, public sale, ordistribution, at wholesale or retail, orthrough syndicate participation, of stocks,bonds, or other similar securities, shall servethe same time as an officer, director, or em-ployee of any member bank * * *.

(c) From the information submittedit appears that Partnership, a memberfirm of the New York Stock Exchange,is the successor of two prior partner-ships, in one of which X had been apartner. This prior partnership hadbeen found not to be ‘‘primarily en-gaged’’ in section 32 business. Theother prior partnership, however, hadbeen so engaged. By arrangement be-tween the two prior firms, Corporationwas formed chiefly for the purpose ofcarrying on the section 32 business ofthe prior firm that had been ‘‘primarilyengaged’’ in that business, which busi-ness was transferred to Corporation.The two prior firms were then mergedand the stock of Corporation was ac-quired by all the partners of Partner-ship, other than X, in proportion to therespective partnership interests of thestockholding partners. The informa-tion submitted indicated also that twoof the three directors and ‘‘some’’ ofthe principal officers of Corporationare partners in Partnership, althoughX is not a director or officer of Cor-poration.

(d) It is understood that the practiceof forming corporate affiliates of bro-kerage firms, in order that the affiliatemay carry on the securities business(such as section 32 business) with lim-ited liability and other advantages, hasbecome rather widespread in recentyears. Accordingly, other cases mayarise where a partner in such a firmmay desire to serve at the same timeas director of a member bank.

(e) On the basis of the informationpresented the Board concluded that Xin his capacity as an ‘‘individual’’, was


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not engaged in section 32 business.However, as that information showedCorporation to be ‘‘primarily engaged’’in section 32 business, the Board statedthat a finding that Partnership andCorporation were one entity for thepurposes of the statute would meanthat X would be forbidden to serve boththe member bank and Partnership, ifthe one entity were so engaged.

(f) Paragraph .15 of Rule 321 of theNew York Stock Exchange governingthe formation and conduct of affiliatedcompanies of member organizationsstates that:

Since Rule 314 provides that each memberand allied member in a member organizationmust have a fixed interest in its entire busi-ness, it follows that the fixed interest ofeach member and allied member must extendto the member organization’s corporate affil-iate. When any of the corporate affiliate’sparticipating stock is owned by the membersand allied members in the member organiza-tion, such holdings must at all times be dis-tributed among such members and alliedmembers in approximately the same propor-tions as their respective interests in theprofits of the member organization. When amember or allied member’s interest in themember organization is changed, a cor-responding change must be made in his par-ticipating interest in the affiliate.

(g) Although it was understood thatX had received special permission fromthe Exchange not to own any of thestock of Corporation, it appeared tothe Board that Rule 321.15 would applyto the remaining partners. Moreover,other paragraphs of the rule forbidtransfers of the stock, except undercertain circumstances to limited class-es of persons, such as employees of theorganization or estates of decedentpartners, without permission of the Ex-change.

(h) The information supplied to theBoard clearly indicated that Corpora-tion was formed in order to providePartnership with an ‘‘underwritingarm’’. Under Rule 321 of the Exchange,the partners (other than X) are re-quired to own stock in Corporation be-cause of their partnership interest,would be required to surrender thatstock on leaving the partnership, andincoming partners would be required toacquire such stock. Furthermore, Rule321 speaks of a corporate affiliate, such

as Corporation, as a part of the ‘‘entirebusiness’’ of a member organization.

(i) On the basis of the foregoing, theBoard concluded that Partnership andCorporation must be regarded as a sin-gle entity or enterprise for purposes ofsection 32.

(j) The remaining question waswhether the enterprise, as a whole,should be regarded as ‘‘primarily en-gaged’’ in section 32 business. The In-formation presented stated that thetotal dollar volume of section 32 busi-ness of Corporation during the firsteleven months of its operation was $89million. The gross income from section32 business was less than half a million,and represented about 7.9 percent ofthe income of Partnership. The Boardwas advised that the relatively lowamount of income from section 32 busi-ness of Corporation as due to specialcosts, and to the condition of the mar-ket for municipal and State bonds dur-ing the past year, a field in which Cor-poration specializes. Corporation islisted in a standard directory of securi-ties dealers, and holds itself out as hav-ing separate departments to deal withthe principal underwriting areas inwhich it functions.

(k) In view of the above information,the Board concluded that the enter-prise consisting of Partnership andCorporation was ‘‘primarily engaged’’in section 32 business. Accordingly, theBoard stated that the partners in Part-nership, including X, were forbidden bythat section and by this part 218 (Reg.R), issued pursuant to the statute, toserve as officers, directors, or employ-ees of any member banks.

[29 FR 5315, Apr. 18, 1964. Redesignated at 61FR 57289, Nov. 6, 1996]

§ 250.408 Short-term negotiable notesof banks not securities under sec-tion 32, Banking Act of 1933.

(a) The Board of Governors has beenasked whether short-term unsecurednegotiable notes of the kinds issued bysome of the large banks in this countryas a means of obtaining funds are‘‘other similar securities’’ within themeaning of section 32, Banking Act of1933 (12 U.S.C. 78) and this part.

(b) Section 32 forbids certain inter-locking relationships between banks


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12 CFR Ch. II (1–1–98 Edition)§ 250.409

which are members of the Federal Re-serve System and individuals or orga-nizations ‘‘primarily engaged in theissue, flotation, underwriting, publicsale, or distribution, at wholesale orretail, or through syndicate participa-tion, of stocks, bonds, or other similarsecurities * * *.’’ Therefore, if suchnotes are securities similar to stocksor bonds, any dealing therein would bean activity covered in section 32 andwould have to be taken into consider-ation in determining whether the indi-vidual or organization involved was‘‘primarily engaged’’ in such activities.

(c) The Board has concluded thatsuch short-term notes of the kind de-scribed above are not ‘‘other similar se-curities’’ within the meaning of section32 and this part.

[29 FR 16065, Dec. 2, 1964. Redesignated at 61FR 57289, Nov. 6, 1996]

§ 250.409 Investment for own accountaffects applicability of section 32.

(a) The Board of Governors has beenpresented with the question whether acertain firm is primarily engaged inthe activities described in section 32 ofthe Banking Act of 1933. If the firm isso engaged, then the prohibitions ofsection 32 forbids a limited partner toserve as employee of a member bank.

(b) The firm describes the bulk of itsbusiness, producing roughly 60 percentof its income, as ‘‘investing for its ownaccount.’’ However, it has a seat on thelocal stock exchange, and acts as spe-cialist and odd-lot dealer on the floorof the exchange, an activity respon-sible for some 30 percent of its volumeand profits. The firm’s ‘‘off-post trad-ing,’’ apart from the investment ac-count, gives rise to about 5 percent ofits total volume and 10 percent of itsprofits. Gross volume has risen from $4to $10 million over the past 3 years, butunderwriting has accounted for nomore than one-half of 1 percent of thatamount.

(c) Section 32 provides that

No officer, director, or employee of anycorporation or unincorporated association,no partner, or employee of any partnership,and no individual, primarily engaged in theissue, flotation, underwriting, public sale, ordistribution, at wholesale, or retail, orthrough syndicate participation, of stocks,bonds, or other similar securities, shall serve

the same time (sic) as an officer, director, oremployee of any member bank * * *

(d) In interpreting this language, theBoard has consistently held that un-derwriting, acting as a dealer, or gen-erally speaking, selling, or distributingsecurities as a principal, is covered bythe section, while acting as broker oragent is not.

(e) In one type of situation, however,although a firm was engaged in sellingsecurities as principal, on its own be-half, the Board held that section 32 didnot apply. In these cases, the firm al-leged that it bought and sold securitiespurely for investment purposes. Typi-cally, those cases involved personalholding companies or small family in-vestment companies. Securities hadbeen purchased only for members of arestricted family group, and had beenheld for relatively long periods of time.

(f) The question now before the Boardis whether a similar exception canapply in the case of the investment ac-count of a professional dealer. In orderto answer this question, it is necessaryto analyze, in the light of applicableprinciples under the statute, the threemain types of activity in which thefirm has been engaged, (1) acting asspecialist and odd-lot dealer, (2) off-post trading as an ordinary dealer, and(3) investing for its own account.

(g) On several occasions, the Boardhas held that, to the extent the tradingof a specialist or odd-lot dealer is lim-ited to that required for him to per-form his function on the floor of theexchange, he is acting essentially in anagency capacity. In a letter of Septem-ber 13, 1934, the Board held that thebusiness of a specialist was not of thekind described in the (unamended) sec-tion on the understanding that

* * * in acting as specialists on the NewYork Curb Exchange, it is necessary for thefirm to buy and sell odd lots and * * * inorder to protect its position after such trans-actions have been made, the firm sells orbuys shares in lots of 100 or multiples thereofin order to reduce its position in the stock inquestion to the smallest amount possible bythis method. It appears therefore that, inconnection with these transactions, the firmis neither trading in the stock in question ortaking a position in it except to the extentmade necessary by the fact that it deals inodd lots and cannot complete the trans-actions by purchases and sales on the floor of


627


the exchange except to the nearest 100 shareamount.

(h) While subsequent amendments tosection 32 to some extent changed thedefinition of the kinds of securitiesbusiness that would be covered by thesection, the amendments were designedso far as is relevant to the presentquestion, to embody existing interpre-tations of the Board. Accordingly, tothe extent that the firm’s business isdescribed by the above letter of theBoard, it should not be considered to beof a kind described in section 32.

(i) Turning to the firm’s off-posttrading, the Board is inclined to agreewith the view that this is sufficient tomake the case a borderline one underthe statute. In the circumstances, theBoard might prefer to postpone makinga determination until figures for 1965could be reviewed, particularly in thelight of the recent increase in totalvolume, if it were not for the third cat-egory, the firm’s own investment ac-count.

(j) While this question has not beensquarely presented to it in the past,the Board is of the opinion that when afirm is doing any significant amount ofbusiness as a dealer or underwriter,then investments for the firm’s own ac-count should be taken into consider-ation in determining whether the firmis ‘‘primarily engaged’’ in the activi-ties described in section 32. The divi-sion into dealing for one’s own ac-count, and dealing with customers, is ahighly subjective one, and although aparticular firm or individual may bequite scrupulous in separating the two,the opportunity necessarily exists forthe kind of abuse at which the statuteis directed. The Act is designed to pre-vent situations from arising in which abank director, officer, or employeecould influence the bank or its cus-tomers to invest in securities in whichhis firm has an interest, regardless ofwhether he, as an individual, is likelyto do so. In the present case, whenthese activities are added to the firm’s‘‘off-post trading’’, the firm clearlyfalls within the statutory definition.

(k) For the reasons just discussed,the Board concludes that the firm mustbe considered to be primarily engagedin activities described in section 32,and that the prohibitions of the section

forbid a limited partner in that firm toserve as employee of a member bank.

(12 U.S.C. 248(i))

[30 FR 7743, June 16, 1965. Redesignated at 61FR 57289, Nov. 6, 1996]

§ 250.410 Interlocking relationships be-tween bank and its commingled in-vestment account.

(a) The Board of Governors was askedrecently whether the establishment ofa proposed ‘‘Commingled InvestmentAccount’’ (‘‘Account’’) by a nationalbank would involve a violation of sec-tion 32 of the Banking Act of 1933 inview of the interlocking relationshipsthat would exist between the bank andAccount.

(b) From the information submitted,it was understood that Account wouldcomprise a commingled fund, to be op-erated under the effective control ofthe bank, for the collective investmentof sums of money that might otherwisebe handled individually by the bank asmanaging agent. It was understood fur-ther that the Comptroller of the Cur-rency had taken the position that Ac-count would be an eligible operationfor a national bank under his Regula-tion 9, ‘‘Fiduciary Powers of NationalBanks and Collective InvestmentFunds’’ (part 9 of this title). The bankhad advised the Board that the Securi-ties and Exchange Commission was ofthe view that Account would be a ‘‘reg-istered investment company’’ withinthe meaning of the Investment Com-pany Act of 1940, and that participatinginterests in Account would be ‘‘securi-ties’’ subject to the registration re-quirements of the Securities Act of1933.

(c) The information submittedshowed also that the minimum individ-ual participation that would be per-mitted in Account would be $10,000,while the maximum acceptable individ-ual investment would be half a milliondollars; that there would be no ‘‘load’’or payment by customers for the privi-lege of investing in Account; and that:

The availability of the Commingled Ac-count would not be given publicity by theBank except in connection with the pro-motion of its fiduciary services in generaland the Bank would not advertise or pub-licize the Commingled Account as such. Par-ticipations in the Commingled Account are


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12 CFR Ch. II (1–1–98 Edition)§ 250.410

to be made available only on the premises ofthe Bank (including its branches), or to per-sons who are already customers of the Bankin other connections, or in response to unso-licited requests.

(d) Such information indicated fur-ther that participations would be re-ceived by the bank as agent, under abroad authorization signed by the cus-tomer, substantially equivalent to thepower of attorney under which cus-tomers currently deposit their fundsfor individual investment, and that theparticipations would not be received‘‘in trust.’’

(e) The Board understood that Ac-count would be required to complywith certain requirements of the Fed-eral securities laws not applicable toan ordinary common trust fund oper-ated by a bank. In particular, super-vision of Account would be in thehands of a committee to be initiallyappointed by the bank, but subse-quently elected by participants havinga majority of the units of participationin Account. At least one member of thecommittee would be entirely independ-ent of the bank, but the remainingmembers would be officers in the trustdepartment of the bank.

(f) The committee would make amanagement agreement with the bankunder which the bank would be respon-sible for managing Account’s invest-ments, have custody of its assets, andmaintain its books and records. Themanagement agreement would be re-newed annually if approved by thecommittee, including a ‘‘majority’’ ofthe independent members, or by a voteof participants having a majority ofthe units of participation. The agree-ment would be terminable on 60 days’notice by the committee, by such a ma-jority of the participants, or by thebank, and would terminate automati-cally if assigned by the bank.

(g) It was understood also that thebank would receive as annual com-pensation for its services one-half ofone percent of Account’s average netassets. Account would also pay for itsown independent professional services,including legal, auditing, and account-ing services, as well as the cost ofmaintaining its registration and quali-fication under the Federal securitieslaws.

(h) Initially, the assets of Accountwould be divided into units of partici-pation of an arbitrary value, and eachcustomer would be credited with anumber of units proportionate to hisinvestment. Subsequently, the assetsof Account would be valued at regularintervals, and divided by the number ofunits outstanding. New investors wouldreceive units at their current value, de-termined in this way, according to theamount invested. Each customer wouldreceive a receipt evidencing the num-ber of units to which he was entitled.The receipts themselves would be non-transferable, but it would be possiblefor a customer to arrange with Ac-count for the transfer of his units tosomeone else. A customer could termi-nate his participation at any time andwithdraw the current value of hisunits.

(i) Section 32 of the Banking Act of1933 provides in relevant part that:

No officer, director, or employee of anycorporation or unincorporated association,no partner or employee of any partnership,and no individual, primarily engaged in theissue, flotation, underwriting, public sale, ordistribution, at wholesale or retail, orthrough syndicate participation, of stocks,bonds, or other similar securities, shall serve[at] the same time as an officer, director, oremployee of any member bank * * *.

(j) The Board concluded, based on itsunderstanding of the proposal and onthe general principles that have beendeveloped in respect to the applicationof section 32, that the bank and Ac-count would constitute a single entityfor the purposes of section 32, at leastso long as the operation of Accountconformed to the representations madeby the bank and outlined herein. Ac-cordingly, the Board said that section32 would not forbid officers of the bankto serve on Account’s committee, sinceAccount would be regarded as nothingmore than an arm or department of thebank.

(k) In conclusion, the Board calledattention to section 21 of the BankingAct of 1933 which, briefly, forbids a se-curities firm or organization to engagein the business of receiving deposits,subject to certain exceptions. However,since section 21 is a criminal statute,the Board has followed the policy ofnot expressing views as to its meaning.


629


(1934 Federal Reserve Bulletin 41, 543.)The Board, therefore, expressed no po-sition with respect to whether the sec-tion might be held applicable to the es-tablishment and operation of the pro-posed ‘‘Commingled Investment Ac-count.’’

(12 U.S.C. 248(i))

[30 FR 12836, Oct. 8, 1965. Redesignated at 61FR 57289, Nov. 6, 1996]

§ 250.411 Interlocking relationships be-tween member bank and variableannuity insurance company.

(a) The Board has recently beenasked to consider whether section 32 ofthe Banking Act of 1933 (12 U.S.C. 78)and this part prohibit interlockingservice between member banks and (1)the board of managers of an accumula-tion fund, registered under the Invest-ment Company Act of 1940 (15 U.S.C.80), that sells variable annuities and (2)the board of directors of the insurancecompany, of which the accumulationfund is a ‘‘separate account,’’ but as towhich the insurance company is thesponsor, investment advisor, under-writer, and distributor. Briefly, a vari-able annuity is one providing for annu-ity payment varying in accordancewith the changing values of a portfolioof securities.

(b) Section 32 provides in relevantpart that:

No officer, director, or employee of anycorporation or unincorporated association,no partner or employee of any partnership,and no individual, primarily engaged in theissue, flotation, underwriting, public sale, ordistribution, at wholesale or retail, orthrough syndicate participation, of stocks,bonds, or other similar securities, shall serve[at] the same time as an officer, director, oremployee of any member bank * * *.

(c) For many years, the Board’s posi-tion has been that an open-end invest-ment company (or mutual fund) is‘‘primarily engaged in the issue * * *public sale, or distribution * * * of se-curities’’ since the issuance and sale ofits stock is essential to the mainte-nance of the company’s size and to thecontinuance of its operations withoutsubstantial contraction, and that sec-tion 32 of the Banking Act of 1933 pro-hibits an officer, director, or employeeof any such company from serving atthe same time as an officer, director,

or employee of any member bank. (1951Federal Reserve Bulletin 645; § 218.101.)

(d) For reasons similar to those stat-ed by the U.S. Supreme Court in Secu-rities and Exchange Commission v.Variable Annuity Life Insurance Com-pany of America, 359 U.S. 65 (1959), theBoard concluded that there is no mean-ingful basis for distinguishing a vari-able annuity interest from a mutualfund share for section 32 purposes andthat, therefore, variable annuity inter-ests should also be regarded as ‘‘othersimilar securities’’ within the prohibi-tion of the statute and regulation.

(e) The Board concluded also that,since the accumulation fund, like amutual fund, must continually issueand sell its investment units in orderto avoid the inevitable contraction ofits activities as it makes annuity pay-ments or redeems variable annuityunits, the accumulation fund is ‘‘pri-marily engaged’’ for section 32 pur-poses. The Board further concludedthat the insurance company was like-wise ‘‘primarily engaged’’ for the pur-poses of the statute since it had no sig-nificant revenue producing operationsother than as underwriter and distribu-tor of the accumulation fund’s unitsand investment advisor to the fund.

(f) Although it was clear, therefore,that section 32 prohibits any officers,directors, and employees of memberbanks from serving in any such capac-ity with the insurance company or ac-cumulation fund, the Board also con-sidered whether members of the boardof managers of the accumulation fundare ‘‘officers, directors, or employees’’within such prohibition. The functionsof the board of managers, who areelected by the variable annuity con-tract owners, are, with the approval ofthe variable annuity contract owners,to select annually an independent pub-lic accountant, execute annually anagreement providing for investmentadvisory services, and recommend anychanges in the fundamental investmentpolicy of the accumulation fund. In ad-dition, the Board of managers has soleauthority to execute an agreement pro-viding for sales and administrativeservices and to authorize all invest-ments of the assets of the accumula-tion fund in accordance with its fun-damental investment policy. In the


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opinion of the Board of Governors, theboard of managers of the accumulationfund performs functions essentially thesame as those performed by classes ofpersons as to whom the prohibition ofsection 32 was specifically directedand, accordingly, are within the prohi-bitions of the statute.

(12 U.S.C. 248(i))

[33 FR 12886, Sept. 12, 1968. Redesignated at61 FR 57289, Nov. 6, 1996]

§ 250.412 Interlocking relationships be-tween member bank and insurancecompany-mutual fund complex.

(a) The Board has been asked wheth-er section 32 of the Banking Act of 1933and this part prohibited interlockingservice between member banks and (1)the advisory board of a newly orga-nized open-end investment company(mutual fund), (2) the fund’s incor-porated investment manager-advisor,(3) the insurance company sponsoringand apparently controlling the fund.

(b) X Fund, Inc. (‘‘Fund’’), the mu-tual fund, was closely related to X LifeInsurance Company (‘‘Insurance Com-pany’’), as well as to the incorporatedmanager and investment advisor toFund (‘‘Advisors’’), and the corporationserving as underwriter for Fund (‘‘Un-derwriters’’). The same persons servedas principal officers and directors of In-surance Company, Fund, Advisors, andUnderwriters. In addition, several di-rectors of member banks served as di-rectors of Insurance Company and ofAdvisors and as members of the Advi-sory Board of Fund, and additional di-rectors of member banks had beennamed only as members of the Advi-sory Board. All outstanding shares ofAdvisors and of Underwriters were ap-parently owned by Insurance Company.

(c) Section 32 provides in relevantpart that:

No officer, director, or employee of anycorporation * * * primarily engaged in theissue, flotation, underwriting, public sale, ordistribution at wholesale or retail, orthrough syndicate participation, of stocks,bonds, or other similar securities, shall serve[at] the same time as an officer, director, oremployee of any member bank * * *.

(d) The Board of Governors re-affirmed its earlier position that anopen-end investment company is ‘‘pri-marily engaged’’ in activities described

in section 32 ‘‘even though the sharesare sold to the public through inde-pendent organizations with the resultthat the investment company does notderive any direct profit from thesales.’’ (1951 Federal Reserve Bulletin654, § 218.101.) Accordingly, the Boardconcluded that Fund must be regardedas so engaged, even though its shareswere underwritten and distributed byUnderwriters.

(e) As directors of the member banksinvolved in the inquiry were not offi-cers, directors, or employees of eitherFund or Underwriters, the relevantquestions were whether—(1) Advisors,and (2) Insurance Company, should beregarded as being functionally andstructurally so closely allied withFund that they should be treated asone with it in determining the applica-bility of section 32. An additional ques-tion was whether members of the Advi-sory Board are ‘‘officers, directors, oremployees’’ of Fund within the prohibi-tion of the statute.

(f) Interlocking service with AdvisoryBoard: The function of the AdvisoryBoard was merely to make suggestionsand to counsel with Fund’s Board ofDirectors in regard to investment pol-icy. The Advisory Board had no author-ity to make binding recommendationsin any area, and it did not serve in anysense as a check on the authority ofthe Board of Directors. Indeed, theFund’s bylaws provided that the Advi-sory Board ‘‘shall have no power or au-thority to make any contract or incurany liability whatever or to take anyaction binding upon the Corporation,the Officers, the Board of Directors orthe Stockholders.’’ Members of the Ad-visory Board were appointed by theBoard of Directors of Fund, whichcould remove any member of the Advi-sory Board at any time. None of theprincipal officers of Fund or of Under-writers were members of the AdvisoryBoard; and the compensation of itsmembers was expected to be nominal.

(g) The Board of Governors concludedthat members of the Advisory Boardneed not be regarded as ‘‘officers, di-rectors, or employees’’ of Fund or ofUnderwriters for purposes of section 32,and that the statute, therefore, did not


631


prohibit officers, directors, or employ-ees of member banks from serving asmembers of the Advisory Board.

(h) Interlocking service with Advi-sors: The principal officers and severalof the directors of Advisors were iden-tical with both those of Fund and ofUnderwriters. Entire management andinvestment responsibility for Fund hadbeen placed, by contract, with Advi-sors, subject only to a review authorityin the Board of Directors of Fund. Ad-visors also supplied office space for theconduct of Fund’s affairs, and com-pensated members of the AdvisoryBoard who are also officers or directorsof Advisors. Moreover, it appeared thatAdvisors was created for the sole pur-pose of servicing Fund, and its activi-ties were to be limited to that func-tion.

(i) In the view of the Board of Gov-ernors, the structural and functionalidentity of Fund and Advisors was suchthat they were to be regarded as a sin-gle entity for purposes of section 32,and, accordingly, officers, directors,and employees of member banks wereprohibited by section 32 from serving inany such capacity with such entity.

(j) Interlocking service with Insur-ance Company: It was clear that Insur-ance Company was not as yet ‘‘pri-marily engaged’’ in business of a kinddescribed in section 32 with respect tothe shares of the newly created Fundsponsored by Insurance Company, sincethe issue and sale of such shares hadnot yet commenced. Nor did it appearthat Insurance Company would be soengaged in the preliminary stages ofFund’s existence, when the dispropor-tion between the insurance business ofInsurance Company and the sale ofFund shares would be very great. How-ever, it was also clear that if Fund wassuccessfully launched, its activitieswould rather quickly reach a stagewhere a serious question would arise asto the applicability of the section 32prohibition.

(k) An estimate supplied to the Boardindicated that 100,000 shares of Fundmight be sold annually to produce,based on then current values, annualgross sales receipts of over $1 million.Insurance Company’s total gross in-come for its last fiscal year was almost$10 million. On this basis, about one-

tenth of the annual gross income of theInsurance Company-Fund complex(more than one-tenth, if income frominvestments of Insurance Company waseliminated) would be derived fromsales of Fund shares. Although totalsales of shares of Fund during the firstyear might not approximate expecta-tions, it was assumed that if the esti-mate or projection was correct, the an-nual rate of sale might well rise to thatlevel before the end of the first year ofoperation.

(l) It appeared that net income of In-surance Company from Fund’s oper-ations would be minimal for the fore-seeable future. However, it was under-stood that Insurance Company’s chiefreason for launching Fund was to pro-vide salesmen for Insurance Company(who were to be the only sellers ofshares of Fund, and most of whom, In-surance Company hoped, would qualifyto sell those shares), with a ‘‘package’’of mutual fund shares and life insur-ance policies that would provide in-creased competitive strength in a high-ly competitive field.

(m) The Board concluded that Insur-ance Company would be ‘‘primarily en-gaged’’ in issuing or distributing sharesof Fund within the meaning of section32 by not later than the time of realiza-tion of the aforementioned estimatedannual rate of sale, and possibly before.As indicated in Board of Governors v.Agnew, 329 U.S. 441 at 446, the prohibi-tion of the statute applies if the sec-tion 32 business involved is a ‘‘substan-tial’’ activity of the company.

(n) This, the Board observed, was notto suggest that officers, directors, oremployees of Insurance Company whoare also directors of member bankswould be likely, as individuals, to usetheir positions with the banks to fur-ther sales of Fund’s shares. However,as the Supreme Court pointed out inthe Agnew case, section 32 is a ‘‘pre-ventive or prophylactic measure.’’ Thefact that the individuals involved‘‘have been scrupulous in their rela-tionships’’ to the banks in question ‘‘isimmaterial.’’

(12 U.S.C. 248(i))

[33 FR 13001, Sept. 14, 1968. Redesignated at61 FR 57289, Nov. 6, 1996]


632

12 CFR Ch. II (1–1–98 Edition)§ 250.413

§ 250.413 ‘‘Bank-eligible’’ securities ac-tivities.

Section 32 of the Glass-Steagall Act(12 U.S.C. 78) prohibits any officer, di-rector, or employee of any corporationor unincorporated association, anypartner or employee of any partner-ship, and any individual, primarily en-gaged in the issue, flotation, under-writing, public sale, or distribution, atwholesale or retail, or through syn-dicate participation, of stocks, bonds,or other similar securities, from serv-ing at the same time as an officer, di-rector, or employee of any memberbank of the Federal Reserve System.The Board is of the opinion that to theextent that a company, other entity orperson is engaged in securities activi-ties that are expressly authorized for astate member bank under section 16 ofthe Glass-Steagall Act (12 U.S.C. 24(7),335), the company, other entity or indi-vidual is not engaged in the types ofactivities described in section 32. In ad-dition, a securities broker who is en-gaged solely in executing orders for thepurchase and sale of securities on be-half of others in the open market is notengaged in the business referred to insection 32.

[Reg. R, 61 FR 57289, Nov. 6, 1996]

PART 261—RULES REGARDINGAVAILABILITY OF INFORMATION

Subpart A—General Provisions

Sec.261.1 Authority, purpose, and scope.261.2 Definitions.261.3 Custodian of records; certification;

service; alternative authority.

Subpart B—Published Information andRecords Available to Public; Proce-dures for Requests

261.10 Published information.261.11 Records available for public inspec-

tion and copying.261.12 Records available to public upon re-

quest.261.13 Processing requests.261.14 Exemptions from disclosure.261.15 Request for confidential treatment.261.16 Request for access to confidential

commercial or financial information.261.17 Fee schedules; waiver of fees.

Subpart C—Confidential Information MadeAvailable to Supervised Institutions, Fi-nancial Institution Supervisory Agen-cies, Law Enforcement Agencies, andOthers in Certain Circumstances

261.20 Confidential supervisory informationmade available to supervised financialinstitutions and financial institution su-pervisory agencies.

261.21 Confidential information made avail-able to law enforcement agencies andother nonfinancial institution super-visory agencies.

261.22 Other disclosure of confidential su-pervisory information.

261.23 Subpoenas, orders compelling produc-tion and other process.

AUTHORITY: 5 U.S.C. 552; 12 U.S.C. 248(i) and(k), 321 et seq., 611 et seq., 1442, 1817(a)(2)(A),1817(a)(8), 1818(u) and (v), 1821(o), 1821(t), 1830,1844, 1951 et seq., 2601, 2801 et seq., 2901 et seq.,3101 et seq., 3401 et seq.; 15 U.S.C. 77uuu(b),78q(c)(3); 29 U.S.C. 1204; 31 U.S.C. 5301 et seq.;42 U.S.C. 3601; 44 U.S.C. 3510.

SOURCE: 53 FR 20815, June 7, 1988, unlessotherwise noted.

Subpart A—General Provisions

SOURCE: 62 FR 54359, Oct. 20, 1997, unlessotherwise noted.

§ 261.1 Authority, purpose, and scope.(a) Authority. (1) This part is issued

by the Board of Governors of the Fed-eral Reserve System (the Board) pursu-ant to the Freedom of Information Act,5 U.S.C. 552; Sections 9, 11, and 25A ofthe Federal Reserve Act, 12 U.S.C.248(i) and (k), 321 et seq., (including 326),611 et seq.; Section 22 of the FederalHome Loan Bank Act, 12 U.S.C 1442;the Federal Deposit Insurance Act, 12U.S.C. 1817(a)(2)(A), 1817(a)(8), 1818(u)and (v), 1821(o); section 5 of the BankHolding Company Act, 12 U.S.C. 1844;the Bank Secrecy Act, 12 U.S.C. 1951 etseq., and Chapter 53 of Title 31; theHome Mortgage Disclosure Act, 12U.S.C. 2801 et seq.; the Community Re-investment Act, 12 U.S.C. 2901 et seq.;the International Banking Act, 12U.S.C. 3101 et seq.; the Right to Finan-cial Privacy Act, 12 U.S.C. 3401 et seq.;the Securities and Exchange Commis-sion Authorization Act, 15 U.S.C.77uuu(b), 78q(c)(3); the Employee Re-tirement Income Security Act, 29U.S.C. 1204; the Money LaunderingSuppression Act, 31 U.S.C. 5301, the


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